Another post inspired by some tweets…
I agree with Tim that equity can be a good incentive at any size of business but that it is easier in larger or fast growing firms. But attracting isn’t the only thing. Once you attract you have to retain. At a smaller company with a longer term growth trajectory (i.e. not a startup) there can be a lot of value to be accrued. But the owners must be willing to be patient and withstand a lot of variability.
As a fund, we can lower our dividend or even inject cash in a single company and not be critically hurt even if it still stings. But for the individual owner to lower their dividend and also likely their bonus or even base salary, it can be a critical move that causes them to eject out of the business. We simply have different time horizons and resources to work with.
If you incentivize employees with equity you are now business partners. If that equity was earned or bought (preferred) you need to make sure you are equally aligned with your business partners.
Daryl and I own different amounts of LEV. But we both have significant parts of our net worth in this thing and we have also made it the top priorities in our lives, outside of service to our families and church. So when things go wrong we both feel pain.
If you’re going to use equity as an incentive for an employee, you better make sure you’re aligned as owners and have a shared understanding of ownership.