5. Equity
The people magnet. The motivator.

Stock motivates both people and capital. Startup stock can and has turned secretaries into millionaires, and produced annual capital returns measured in hundreds of percent rather than tens. While stock is behind the scenes, it is the central force that pulls startup ingredients together and motivates them to do the impossible. Startups need capital, and stock, of course, is the way to get it. It is the ultimate unfair advantage against incumbents, as no matter what they do, their stock is never as valuable as startup stock.

Equity is also a key lever in accomplishing our primary mission – attracting good people into your franchise. People are the primary means of startup success; equity is how get them. In the most celebrated example, Amazon lured key executives in 1996 and 1997 away from the biggest retail business in the universe – Wal-Mart – by offering them equity in a little Seattle-based startup and a soon-to-be Amazon partner, Drugstore.com. The moves triggered a lawsuit, eventually settled out of court, but Amazon emerged the clear winner.

As an incumbent player, what equity can you offer your employees? If you’re Fidelity or Merrill Lynch, what’s to be gained in offering your key people your own stock? A startup stock, on the other hand, is much more likely to increase many times over. Equity is not only what startups use to lure people from incumbent businesses into your new franchise, it is what will retain them long enough to achieve some measure of success. Most equity structures are set up for vesting periods – the time frame needed to take a company from idea to self-sustaining business.

This is a fundamental advantage of startups over incumbent players, and this is how the Internet takes what were assets in the old world and makes them liabilities in the new. The strong market valuation of an incumbent corporate player such as Merrill Lynch is actually one of its prime problems; not only can it not attract people with stock options, but it will lose people because of that.

Case in Point: Amazon and Drugstore.com’s brazen poaching of key Wal-Mart logistics executives proved the potency of equity as a prime advantage startups hold over their physical-world counterparts in attracting the best people. Businesses everywhere seem to be catching on: Early last year, Charles Schwab gave all 13,300 of its employees the right to buy company stock. Texas Instruments, meanwhile, has curbed turnover among technical staff by increasing the number of its options-eligible employees four-fold. And a recent study from William Mercer reveals that of 350 corporate proxy statements in 1998, 35 percent offered stock options for employees – double the figure from 1993. Stock motivates.

The “initiative” to startup success
Today’s entrepreneurs live in a great era: They are changing the world and are rewarded handsomely for doing so. Startups are not only proliferating, but have become the state of business itself. The newly appointed primacy of the startup makes this formula – the magical combination of people, innovation, focus, speed, and equity – all the more critical for entrepreneurs to understand and pursue.

It has inspired even more entrepreneurial initiative and creativity, which in turn raises the stakes of the game. Many are using the palate of the Internet to launch businesses and, via viral emailings and other means, catalyze tens of thousands of customers in less time than another entrepreneur can write a simple business plan.

Doing the impossible has become more common and more important than ever before. All the more, it points to the startup state that is increasingly commonplace rather than eccentric: Create an innovation, which in turn attracts customers. Use customers to attract capital, and then spend capital to hire people and attract more capital.

Perhaps the greatest irony of the digital age for startups is that it has made human initiative the most potent tool of all. Good luck.