Clint Argyle, a friend of mine who is also a very successful entrepreneur shared a while back how he handles that awkward and inevitable moment when a key employee comes to him and asks for ownership in the company. Invariably, these employees feel like they have put a lot into making the company successful, and they want to have a piece of it.
Clint tells them, “You do not want ownership. What you want is ‘upside.’” They look at him funny and ask what he means. He asks, “If our company has it rough next month, are you willing to go off salary?” The employee invariably says, “No, I want to get paid for my work.” He then asks, “Are you willing to mortgage your house if we need help to cover the rent on the building? If things go bad, are you going to help do the layoffs? Are you willing to only be paid on the good months so that we can make sure our employees are taken care of?” The employee usually responds, “No!” Then Clint explains, “What you really want is upside. You don’t want ownership.”
Ownership involves ultimate responsibility. This responsibility is there through thick and thin. And as Clint went on to point out, there’s a vast difference between upside and ownership. Most people want rewards, not responsibilities. That’s why companies set plans up that give upside bonuses as they achieve success. Profit-sharing plans and goal-oriented rewards are great upside plans. However, those who are willing to sign the personal guarantees and put the money in up front are the ones who should be the ones that own the business.
Ownership or Upside?
- You must have an honest (and documented) conversation with all potential partners about ownership vs. upside. Who is willing to risk what? How will the tough decisions be resolved?
- Do not put yourself in a position to be responsible for one hundred percent of the downside and a smaller percent of the upside. Partners share upside and downside equally.
This post is a part of the book Bootstrap Business: A Step-by-Step Business Survival Guide. You can get the book at http://bootstrapbusiness.org/book.php