Incentive Structures

During scale-up, there are several ways to incentivise your teams. For the founding team, there is an analysis by Wasserman (2012). He finds that the following variables matter:

  • Valuation able to achieve
  • Time taken to achieve valuation
  • Relative shares between founders 
  • Possibly: readiness to sell

He writes: “The degree of uncertainty for a founding team will typically be incomparably higher than that for an innovation team in an established business. Founders need to come up with a good idea (typically after exploring and discarding many others), define the vision and goals, identify and persuade suitable participants to join, find the necessary financial resources to make it possible, create their own rules and context, while also completing the project tasks and facing a realistic prospect that it will fail and leave them with nothing to show for their efforts and investment. Not surprisingly, this combination is likely to stretch even the most capable team.”

Wasserman also found that teams which ended up with even splits after short discussions received lower valuations at the first round of funding when compared to teams that ended up with unequal splits or teams with equal splits but more extensive discussions.  Investing the time necessary initially to discuss an equity split is crucial. Moreover, postponing the discussion about equity as long as possible is key for Wasserman.

According to Wasserman, the time spent on deciding on how to split the equity should be extended as much as possible. It should be extended until one of the following events is given or occurs later on:

  • Significant experience of having worked together
  • Identifying early hires in which equity splits decides success
  • Need to raise cash early

Concerning the fairness of equity splits, Wasserman intelligently sates:

“In fact, there is usually no objective basis for allocating equity, let alone re-allocating it. There are simply too many difficult-to-quantify factors involved, quite apart from the inevitable emotion.”

In his article, the very first mistake most startup founders make, Wasserman (2016) finds several interesting facts: Founders are 2,5x more likely to state they’re unhappy with their equity split as startups matured. The amount of time that goes into discussing equity split is positively related with success. The longer people discuss, the more likely an uneven split is. Companies that have equal splits have more difficulty raising outside finance, especially venture capital.

After having read the topics of this lesson, please reflect on the following:

  • How will you motivate and incentivise your employees? Come up with a short checklist that encompasses both how you intend to increase motivation, but also how this will manifest tangibly in your organisation. For instance, you might motivate employees through ‘a fun environment’. But how will you actually ensure working with you is fun? Are there any mechanisms in place, such as team calls etc.?
  • How will you go about splitting the equity? What do you consider important for the discussion?

Note that there will be further discussion on this topic in lesson team structure.

Please reflect here with your peers

This forum is restricted to members of the associated course(s).

This forum is restricted to members of the associated course(s).

Resources

  • Wasserman’s article on first-time founder mistakes summarises the main flaws you want to avoid when designing your initial incentive structures.
  • Wasserman, N. (2012). The founder’s dilemmas: Anticipating and avoiding the pitfalls that can sink a startup. Princeton, N.J: Princeton University Press.
  • Blumberg, M. (2013). Startup CEO: A Field Guide to Scaling Up Your Business (1 edition). Wiley.