The company I founded in 1981 was sold to Rupert Murdoch’s News America Corporation in 1993. When that happened, at least two of our very smart developers were pleasantly blindsided when they found that the options they had accumulated were actually worth something. One of them found himself suddenly able to buy a house and fund the launch of a nonprofit makerspace.
It was a nice feel-good moment for those of us in management (or former management – as the founder I had received the Steve Jobs treatment). But it also made it evident that those options had not served their purpose, which was to be an incentive for those developers to do their best to increase the value of the company. How could the options have been an incentive if the recipients didn't understand their value?
Since then I’ve come to the realization that there can be an inverse relationship between intellect and the effectiveness of equity incentives.
The effect of that phenomenon goes way beyond the bounds of the company offering the incentives. It is actually bad for the world’s economy and culture.
My explanation starts with the question, why are the rich getting richer?
Here’s one big overlooked reason: too many smart employees and contractors don’t understand equity, so they don’t ask for it. As a result the equity gets left in the hands of management. In my view the average person in management is less intelligent and frankly less worthy than the average coder or other information worker. (“Worthy” is a loaded word there I realize. Go ahead, ask me to defend it.) However, management does understand equity. Management cares about equity. Management values money.
Result: a bunch of narcissistic half wits have ended up controlling too much of the world’s wealth. Not that all people in such roles are narcissistic half wits, but you'll find a much higher concentration of NHWs in top management than among engineers.
Among the many reasons for that is that people with IQs over 128 – you know, the developers who who create much of the equity value value in software-driven companies these days – tend to have too much intellectual curiosity to be occupied with mundane matters such as equity.
Here I must pause for what should be an unnecessary definition of that word “equity.”
If you think that when I say “equity” I mean something like “economic justice” then, sadly, you are illustrating my point. Bluntly, you are part of the problem. And you’re probably handing money that should be yours to the fat cats.
If that’s the case, please stop. The world needs you to listen up. Literally, it’s your responsibility to become wealthy, even if you don’t care that much about wealth.
A company’s equity is its value. Not its value as presented by its costly PR campaigns to get you to believe they’re a value to the community because they’re really valuable good folks of great value in spite of their trashing the environment and their stakeholders, etc., etc.
No, the company value we’re talking about is its equity, that is, its assets minus its obligations. In dollars.
You should have a piece of that.
It should be as big a piece as you can get.
If you own some form of present equity (stock) or future equity (options) in the company then that should become money if everything works out. It can be lots of money. It can turn into millions of dollars.
It’s good to be paid “equitable” compensation while you’re adding value. But it’s also good to get a generous slice of the equity pie you’re creating.
The world would be better off if more wealth were owned and controlled by smart, thoughtful people who tend to be motivated by things other than money. The more that is the case, the less of the world’s wealth is in the hands of greedy, materialistic boors.
Those boors love to hear the noisy, rancorous chatter about fair wages and socialism. It tells them that the wage slaves are properly distracted and are not paying attention to the pieces of the equity pie that could be theirs.
When I brought this up recently an acquaintance said, “Yeah, kids should be taught about equity in school.” I responded with “Not going to happen. Soon as the teachers learn about equity they’ll quit their jobs.”
When the Soviet Union disintegrated, its citizens didn’t understand that they owned all those big industrial organizations with their factories and distribution facilities. And so they let the “communist” party leaders steal them, creating the new Russian oligarch class, which uses its assets to compete with the West by manipulating perceptions in social media, getting their debtors elected to positions of power. If only someone had grabbed the mic and announced to the Russian people, “Hey, you own these assets!” the world would be better off now.
With the polarization of wealth, it’s happening again. The oligarchs in the West have joined those in the East in working to distract you from learning how equity works.
Economists of every political stripe, left, right and center, tell us that the sign of a healthy economy is a growing middle class and that conversely a shrinking middle class signals economic trouble.
But they never mention the new route to that growing middle class. In the fifties the growing middle class came from the value creators of their day: small manufacturers, middle managers and workers, and single-store Main Street retailers. Now that those value creators have been disintermediated by technology, it’s time for the new value creators, the ones writing the code that does the disintermediating, to wake up and claim what’s theirs.
I’ll be working on a video that shows in a very simple way how equity works, and how dilution of your equity should be beneficial (because I find that dilution causes a lot of misunderstanding among sweat equity holders.) Look for it amongst our other videos at https://whatisauthenticity.com.