Published in the San Diego Union-Tribune, December 11, 2017
At our Thanksgiving dinner, my 3-year-old grandson exclaimed, “That’s not fair.” The subject at hand was the disbursements of both slices of pumpkin pie and little homemade cheesecakes. There were not enough of both to go around equally.
Ah — the magic word — equally. I considered explaining to my grandson that the world is not fair. I could expostulate to him that at his tender age it is time to face the reality that very few things in life are fair — and yes, often you can pay money to skip ahead in some lines. (Disneyland, TSA) Truth be told — fair is a somewhat alien concept, but its first cousin — equity, well that is an even more intriguing concept, ranging from stock options and working hours to perceptions of value and worth.
Equity is the ultimate blend of ownership and fairness. We all think we have a well-defined sense of equity, but it is a very nuanced concept for your family, your career and your startup. I am currently working with two young entrepreneurs who have decided to share their wealth with some of their employees in exchange for more personal free time — they are going to “give up some equity.”
In the first case, the concept is a profit participation. His team needs to “cover the nut,” to do enough good and profitable work so that the basic cost of doing business — the “burn rate” — is met. After that, the next dollar is called “net profit,” and the question is how that should be allocated. At the end of the day, however, the founder still retains 100 percent ownership.
In the second case (and in all my own current startups) there is real shared equity — stock ownership — being disbursed. How much it should be, vesting over what period of time is the crux of all disputes, and as to transparency, should everyone know what the other person owns? Who should get to see the infamous capitalization table?
For some insight into how people think about equity, I have turned to Christine Exley, assistant professor at Harvard Business School, and Judd Kessler, assistant professor at Wharton, who have done extensive research in this area. What they have found is that individuals do not think about overall equity — the “we are all in this together and let’s go forward as a team” concept (something that is taught in the military).
Rather, the majority of individuals “narrowly bracket” their equity concerns — meaning they want both time and money to be equitable. In general, we are not very good at netting it out — making allowances for someone working from home three days a week versus someone doing 80 hours per week in the office. The one that rises to the top, the bête noire, the sticking point in every deal is time.
Your employees watch the clock. They really know about time — and inequality in time spent — perceived or real — is what makes people crazy, regardless of the quality and value of the effort. Your team does not easily think about “overall budgets,” but rather they tend to parse each item — they want self-serving fairness, not in the aggregate, but in the specific item by item.
Your employee tends to think like a lawyer — billable hours — versus thinking like an investment banker — the right phone call to the right person could be worth $10 million even though the call lasted only 20 minutes.
But “transactions that turn money into time are often deemed repugnant.” In other words, you need to stand in the line, dude — no buying the upgrade. Think about adoptions or buying early access to a kidney transplant — these are perceived as outrageous behavior that unfairly favors privilege. Not fair.
Think about the marriage contract. Sure, we both promise that we will equally shop and do the dishes, but the truth is we don’t. One of the factors is who is the major breadwinner. Would our marital happiness increase if we splurged on a cleaning service?
The study indicates that people are most incensed when other people “get away with not having to stand in line.” It is why road rage occurs when someone cuts in front of you. It is all about the measure of time — not money. But when the Maserati cuts, it does make us all a bit more crazy.
Rule No. 541: “Time waits for no one.” – Rolling Stones