A: Less Equity = Greater Value
"Any way you cut it, neither the founders nor those who took the initial financial risk are solely responsible for 100% of the tangible worth of a growing organization," writes James X. Mullen in The Simple Art of Greatness: Building, Managing, and Motivating a Kick-Ass Workforce. "As the company expands, its appreciation in value increasingly results from the contributions of others." And so, he maintains, those "others" should reap the rewards of growth.
For nearly 20 years Jim Mullen has practiced a radical equity-and-profit-sharing strategy. We asked him about his thoughts on sharing the wealth of his $152-million advertising company.
Inc.: How do employees share in the financial success of your company?
Mullen: We have a profit-sharing plan for all employees, an employee stock ownership plan that begins vesting after two years and fully vests after seven years, and a stock-option plan that allows key staff to buy stock at about a third of fair market value. We're also working to create an internal market so that employees with stock or options may sell some portion of their holdings to the ESOP once a year.
Inc.: Why such a generous equity plan?
Mullen: Over a period of time, it gives people an incentive to want to stay with the organization -- that's the business reason. The social reason is that we're all going to age and retire, and I believe these equity programs can influence the long-term quality of employees' lives.
Inc.: Many CEOs balk at giving up equity. Aren't you afraid of diluting ownership?
Mullen: I think too many owners concentrate on percentage of ownership rather than the value of ownership. I can't spend a percent; I can spend only money. I'd rather have a small percentage of a large company than 100% of not very much. If the dollar value of my holdings in the company is going up, who cares if the percentage is going down?
Inc.: How much of your company do you still own?
Mullen: It depends on how you count it. If the company were fully diluted -- if all options were vested -- I'd own about 40%. I still control the voting stock because I don't want to chance getting voted out of the company.
Inc.: You seem determined to give it all away!
Mullen: I'm not giving anything away -- people earn it. They should own part of the equity they're creating.
Inc.: What happens if you decide to sell the company?
Mullen: I've created what's called a parallel exit. If I should sell my shares, everybody else's options would vest immediately. By having their interests tied to my interests, they have the security of knowing that I won't do anything foolish or exploitive. It's the same deal for everyone.* * *
The Simple Art of Greatness: Building, Managing, and Motivating a Kick-Ass Workforce, by James X. Mullen (Viking, 1995, $19.95)
DONNA FENN | Inc.com Contributing Editor
Donna Fenn is the author of Upstarts! How GenY Entrepreneurs Are Rocking the World of Business and 8 Ways You Can Profit From Their Success, an exploration of the ways Gen Y is changing the entrepreneurial landscape.