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iHub By Joseph / August 5, 2012

Who Owns Your Startup?

6 Comments

By Phares Kariuki

When your startup finally makes it big, who will own it? And when it comes to it, will you as the CEO acknowledge your loyal troops who’ve turned a one-man Startup into a successful company?
Founders generally give their partners equity, but not the employees who took a leap of faith with them in the business. The employees who did most of the work that lead to the eventual growth of the company. Most great (Apple/Google etc.) recognize this and hence go out of their way not only to motivate their employees but to give them equity, so that they have a sense of ownership and to stick to the company even when the startup is going through the dreaded valley of death.

Google made billionaires. Google made millionaires. Google made many people very wealthy. The same can be said of Facebook, Apple and Microsoft. These companies have all made a good number of their employees very wealthy when they went public. Why don’t we have similar success stories in Kenya? We typically have one ‘innovator or visionary’. None of them acknowledge the team on whose shoulders they stand when they are getting the glory.

Retaining Great Employees

Most of my professional life has been spent working for or in startups and one of the common themes that has resonated in all of them is employee/talent retention. Startups are oft faced with a challenge as they expand (especially if they are bootstrapping). Granted that this is generally a management issue (regardless of the company or organization you are running (the army, government, intelligence services etc. all struggle with this), but typically, the problem is compounded in startups. How so?

You need multi-talented employees.

Before you get funding/constant flow of business, you generally lack structure within your organization. Skills are split by need, not by preference. There is no bureaucratic structure to ensure that i’s are dotted and t’s crossed. All employees have to be versatile and hardworking. If you are running a software development outfit, the developer who is often phone shy has to answer the phone when it rings, as there is no one else to do so. Employees have to figure out the basics of accounting/customer relations/product development. No one is in a silo. Problem solving skills are often sharpened at this stage of a business. This has it’s benefits for the employees who work in this outfit as it is a sandbox for larger corporations, but it does pose a real challenge – people notice such great employees and are willing to hire them and pay them what they are worth.

Payroll

To compound matters, in startups, generally, payroll is an issue. Employees have to deal with the lack of trust from banks (they can’t get loans as they don’t have a reputable employer), delayed salaries (cash flow issues) and poor pay.  If you really think about it this should never be the case primarily because the employee is not the business owner, they did not take a risk, but often be it out of choice or lack of it thereof, they stick through it, believing in a dream or simply for the mortgage.

Stock options

Which brings me to the above point. There are two ‘general’ ways one can get equity in a firm, either through capital injection or sweat; the former is the ‘accepted’ way in Kenya, the latter, not really.

Founders generally give their partners equity, but not the employees who took a leap of faith with them in the business. The employees who did most of the work that lead to the eventual growth of the company. Most great (Apple/Google etc.) recognize this and hence go out of their way not only to motivate their employees but to give them equity, so that they have a sense of ownership and to stick to the company even when the startup is going through the dreaded valley of death.

I have seen one too many startups collapse after a larger corporation simply hires all the struggling employees who for a very long time were struggling to make ends meet, working long hours and sacrificing for a startup that did not appreciate the efforts that they made.

“Charisma”

Many times, charismatic CEO’s are able to urge their employees to stick around for a longer period, but this is only a tourniquet, doesn’t work in the long term.

What is needed in Kenya is an increase of employee stock options. This will allow the employees to:

  • Have a feeling of ownership – Employees will now go the extra mile, do more than they are already doing to ensure the company survives. Delayed salaries/reduced salaries for employees with stock options won’t be as painful as the same for employees without any options.
  • Generate Capital – Interestingly enough, some frugal employees may be able to inject capital into the startup should it be necessary.
  • Increases wealth/goodwill for the company.
  • A major employee ownership success story globally is Huawei, which is employee owned – which this week, officially overtook Ericson to become the largest communication equipment manufacturer in the world.

This is by no means a silver bullet to the problems that ail startups but it is one of the many options I believe should be explored in a deeper manner. It has it’s drawbacks (some employees may be toxic and it will be tricky to get rid of them, at times, share options make people lazy – they suddenly are guaranteed a small fortune and choose to reduce their work output significantly, all this notwithstanding though, I sincerely believe that the good outweighs the bad in this particular undertaking.

Phares Kariuki:  Twitter: @kaboro Blog: www.kaboro.com

 

 

Author : Joseph

A USIU trained journalist & an aspiring animator Joseph thrives behind the camera. He is a still photography and videography aficionado. Joe is currently the director/editor behind African Tech Bits, an iHub production that features start ups in the tech scene. This Canonite can mostly be seen at the iHub in the company of his Canon 550D.


6 Comments
  • Joshua at 13:17:00PM Monday, August 6, 2012

    True, sad but true. It’s human nature and a sad reminder that people change when they get money. So much that they forget those who were there for them when they had ‘no cash’. It is the same world over, get used to it. Start companies with people u can trust n most importantly people who are committed!!

    Reply
  • InnovationAfrica » Who Owns Your Startup? at 14:57:46PM Tuesday, August 7, 2012

    [...] Go to Source /* Tagged employee, equity, Google made, Phares Kariuki, startup [...]

    Reply
  • Joshua at 21:39:56PM Tuesday, August 7, 2012

    Wow Kariuki!!! This is more than can be thought (by me, of course). I read widely on business success stories and look for strategies but this information is not easily disclosed. It emphatically seals the notion that no man is an island and the best opportunities are always around us. I agree it is an assuring for start-ups to grow.
    However, with the shortfalls that it may come with, are there any measures of making the strategy work?
    I think I’m not just taking the advise but going to apply it as soon as I can. Thanks Kariuki, Thanks iHub.

    Reply
  • Tech In Kenya – Industry Woes | *iHub_ at 17:49:24PM Thursday, September 6, 2012

    [...] Phares Kariuki says in his guest post here, Who Owns Your Startup:  There are two ‘general’ ways one can get equity in a firm, either [...]

    Reply
  • Tech In Kenya: Growth and What Gov’t Can do - InnovationAfrica at 11:49:37AM Saturday, September 8, 2012

    [...] Phares Kariuki says in his guest post here, Who Owns Your Startup:  There are two ‘general’ ways one can get equity in a firm, either [...]

    Reply
  • Roy Makau at 17:05:51PM Monday, November 5, 2012

    Thanks for the post. I’ve been thinking about this for some time. I have a start-up (sort of). It’s fairly new and we haven\t even gotten a ‘money guy’ (investor) who would be willing to put up some of their money into the business. I bet when that happens, they’ll want a significant share of the company’s equity and they won’t be the only ones. How can I therefore, motivate my employees without necessarily giving them equity? I read somewhere about profit sharing but what if we’re not making an money (we are actually losing money right now)? Can preference shares work?

    Reply

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