Creating and sharing wealth

By K. Srikrishna

Could I come over this afternoon to meet you?" The caller was an old friend and colleague. At least once a week, I get a call from a friend, ex-colleague or relative seeking to discuss a business idea they have. Inevitably, I learn quite a bit from these meetings and I hope they at least get a sympathetic ear.

My friend continued, "It's about the business I am planning to start with my cousin. I would like to talk to you about company formation, shareholding and other related thoughts." We agreed to meet later that day.

Over the past several years, mainstream media and the blogosphere have done a tremendous job of covering venture-funded start-ups, particularly in the technology space.

While a certain breathlessness has marked the tone of the print media, particularly in India, entrepreneurs and even VCs, in India and overseas, have done much to educate others. However, for people like my friend, who are considering bootstrapping their start-ups, especially in the non-technology sector, there are few resources on how best to go about structuring their companies.

I refer not merely to the form, be it a partnership or a private limited company, but also to how best to structure equity or share other forms of wealth and value that will be created in a successful company.

While talking about this with my friend the other day, we were able to draw some insights pertinent to businesses that involve both white-collar salaried staff and blue-collar hourly labour.

While your own circumstances may be different, if you want to build an organisation where wealth creation for the greatest number of employees is a goal, you might want to read and reflect on how best to go about it. It is worth keeping in mind that sharing of wealth requires first the creation of wealth, and so building viable, profitable businesses should be our first goal.

Seek clarity

Jack Stack, CEO of Springfield Re-manufacturing Company, and author of the book A Stake in the Outcome states that ownership doesn't come merely out of owning equity. Much like citizenship, it's the individual's behaviour and not a document they possess that determines what true ownership is.

In his words, "To be an owner, a true owner, you have to care. Owners do not follow a job description. They don't just put in their time. They have something bigger they're working toward and they feel a sense of responsibility about accomplishing it." The only way to accomplish this is by educating yourself and your company about what ownership means.

Start with yourself - be clear what it is you are trying to accomplish when you articulate a desire to create or share wealth. What would constitute wealth? Commonly, there are two ways to think about it, especially if you want to communicate it easily to other folks. One is in absolute terms (which I'd never recommend).

Most commonly, this is how people think about wealth and themselves. "I'd like to have a million dollars, free and square," or "Own a house, two cars and have X rupees in the bank," while others may consider owning an aircraft or an island in the South Pacific. Another way is in terms of multiples of annual salary; "Put away 10 years of salary or 25 years of salary."

The most useful way is to balance the absolute and relative terms to arrive at what the employees would end up with relative to the founders or investors so that a shared sense of what is a fair outcome, regardless of absolute numbers, is achieved.

In either of these two terms, absolute or relative, answer the wealth question for yourself first and then for the others you plan to be in business with.

These answers are for the founding team's own clarity and not for anyone else, initially. These are only a starting point and are likely to evolve as you learn and grow with your business.

As with most plans, things will change. For example, four years into your business if you hire a second-in-command or a general manager, you would have to consider how much he will make relative to an average employee who's been there from day one. What if a founder leaves in year two? This is not reason enough to not plan but points to the need to have a plan that will accommodate changes and an underlying set of guiding principles that will allow the plan to evolve and grow.

Educate everyone

Most of us, as entrepreneurs, share a common aversion to laying-off or letting go of an employee. We find it hard and unpleasant. Little do we realise it is even more unpleasant to keep an employee who's unhappy because of mismatched expectations. All too often, this is due to wrong expectations that we have created through our talk of wealth creation without any education or context setting.

The most important thing we have to do as entrepreneurs looking to create wealth is educate everyone in our company, starting with the basics of our business. Such education is not an overnight activity and would require constant reinforcement and sustained effort on everyone's part.

When you have teams that are of diverse educational and work backgrounds or are geographically dispersed, you have to build cohesion and trust before your education takes hold. Jack Stack cites a study by the Center for Workforce Development, which found that "formal training programmes account for only about 30 per cent of what people know about their jobs."

Much of what they learn is picked up in their interactions with other employees, be it on the shop floor or during work breaks. It is therefore critical to build both formal and informal forums for continuous education.

What should you educate your company about? The basics - Why are you in business? What constitutes success? What do customers buy from you? Why? How much money do you make? What are your costs and expenses? What is your profit or loss?

In other words, walk them through your profit and loss account so that people implicitly understand your business, much as they would their own domestic budget. Teach them about a balance sheet (once you have educated yourself) so they understand assets and liabilities and when these are good or bad.

There will be many who doubt the benefit of this exercise and even its efficacy. By making this exercise fun, a game, you can ensure that everyone in your company understands the basics, including the numbers of your business.

This will let them figure out far more easily how they can directly contribute to the business and what expectations or demands of theirs are reasonable and fair. While this will not do away with unreal or, at times, unreasonable demands, it will make things a whole lot easier to handle.

Share cash

If seeking clarity for yourself and educating people seems like a multi-year project, it is. Accept that fact. However, it is unfair to expect people to thrive merely on adrenalin and the possibility of deferred gratification from wealth in the future. When you have clarity and everyone's expectations are aligned, you may be ready to hand out equity, be it stock options, share grants or other forms of an ownership stake. Until then, good old cash will work; many times it is much better for it is tangible and immediate. Bonuses and profit sharing are two ways to share cash even if you have equity ownership for your employees.

Profit sharing, by its very nature, requires you to have profit, which as a start-up, many times, you will not have. However, bonuses, be they cash or in kind, if managed right can be a great incentive mechanism. Here again, having a clear set of targets and rules, such as for sales people, helps. Even for others not directly in the path of revenue generation, timely recognition and cash rewards can reinforce the education they receive about the business and desired behaviour.

Thought, clarity and education on this aspect will make it easier to achieve true ownership within your company. Such ownership will make it easier to achieve your goals and generate the wealth you seek.

The writer is founder and minister for culture and finance at Zebu Group, a marketing start-up.

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