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