The Cash vs Equity Culture

I have been helping a young entrepreneur put a company together. In term negotiations it has been obvious that he values cash over equity. I have always found that there is a huge "cultural" clash between those that value cash vs those that value equity. In the go go days of the first internet boom, we witnessed the popularization of an equity culture. Employees of all ages valued stock over compensation and would gladly defer cash payment for equity in the form of options. Similarly, M & A activity displayed this preference for equity as well.

In recent years, the pendulum has swung the other way, and cash seems more important than equity to many people. In some ways, the cash versus equity debate can represent a simple difference between entrepreneurs and VCs. As an investor, I believe in equity as the number one currency for motivation and unification of all parties involved. It is essential to align employees and investors - it MUST be the most valuable currency of the startup. Everyone involved must do all they can do to increase the collective value of equity.

Corporate America and the world stock markets also believe in the value of equity. They are, after all, trading platforms that rely on the equity of companies. Within this equity lies a whole set of fiduciary responsibilities and legal terms that employees and officers must abide to. Within this equity lies the promise or security that the investor has paid for.

Whenever I see an entrepreneur more interested in cash vs equity, it makes me worry. I can understand it if an entry level employee is more concerned with cash to pay expenses, etc. But when one of the guys at the top is more concerned with extracting cash from the business versus working for more equity, I know I am dealing with someone who does not see the big picture.

Investors are looking for people that want to build equity value. When you sit down with your investor or VC, keep this in mind.

Comments

[Gerald Joseph]

I think you've written a very important post. Hopefully, many will read and understand it.

I will blog about cash vs. equity on my blog sometime next week.

Here are two other posts from Rick Segal's VC blog discussing similar issues:
My VC Nightmare - An Entrepreneur Brain Flip
http://ricksegal.typepad.com/pmv/2006/11/my_vc_nightmare.html

Founder Pay (or Welcome to Raw Nerve City)
http://ricksegal.typepad.com/pmv/2006/11/founder_pay_or_.html