Equity Dilution is Like Drinking Great Whisky
It is the holiday season and during this chilly time of the year many reach for a nip of whisky to create some warmth. Scotch is not a drink for everyone. But, for those who partake little else can replace it. Equity compensation is similar. It isn’t perfect for every company, or every situation, but when is done right it can be a game-changer.
Whisky and equity can be deceiving simple and decidedly overpowering. Whisky is a strong drink. It is also diverse. The best reflects its origin, the quality of its ingredients and, most importantly, the intent of its maker. Great whisky does not happen by accident. No great whisky was created by copying another. Equity compensation is much the same.
It usually takes less than you would guess to create a satisfied customer. The key is not volume, but quality. A dram of great whisky can be the highlight of an evening. A bottle of bad whisky can ruin a weekend (or more).
Someone once asked me if 100,000 shares of a new startup were a “good grant.” My question was whether the startup was a “good company.” All the bad equity in the world isn’t worth a small amount of great equity.
In the end, the key to a successful whisky experience and equity compensation experience is understanding the purpose, impact, and benefit of dilution.
Whisky opens up with dilution. The dilution allows the drinker to appreciate the smell and taste of the beverage more fully. Too little and it may be difficult to drink. Too much and it might as well be thrown away. In this sense, company equity follows the same rules.
The key to giving employees equity is to open up the company and give people the opportunity to explore its depth and quality. Too little and only a true acolyte will be able to appreciate it. Too much and those who value it the most will find it useless.
The key to successful dilution is to start slowly and carefully. Begin with a few drops of pure, simple, water. At a company, this usually translates to Founders Stock. Both the water and the stock have an immediate impact that can be measured in real time.
As you get more accustomed to the whisky, you may add a cube of ice or two. Care must be taken to ensure that you don’t add more than can be beneficial. The ice must be sufficiently cold so not to melt away quickly. It must be in big enough cubes to ensure that they last long enough to enjoy every drop in your glass. Like stock options and RSUs, the ice cubes dilute over time. The intent is to both enhance and extend your experience.
If you take too long to drink your whisky, the ice will eventually melt. The resulting dilution will require more whisky or, a new beverage. This is where companies are most frequently challenged. It takes more time (and more employees) to get to liquidity than most companies expect. Poor planning can mean there is not enough of the favorite to refill the glass (we are out of stock options, so we’re moving to RSUs.) Sometimes the cost of the favorite whisky is too high to make a refill an affordable solution (equity is so expensive that we no longer offer it to as many people.)
Dilution is the key to enjoying whisky and equity. Understanding it’s immediate and long-term impact can help you navigate a fantastic evening or total rewards program. Most importantly, what works for you, may be terrible for the person next to you, and vice versa. Success is based on worrying less about what everyone else is doing and focusing on your enjoyment.