You know that cliché about putting all your eggs in one basket? Entrepreneurs should take it to heart when it comes to stock ownership, says John E. Core and David F. Larcker, two Wharton School of Business accounting professors. Based on their study of executive compensation in 1999 and 2000, Core and Larcker suggest that CEOs who own too much stock are less likely to take the risks necessary for growing their companies. Though their study focused on publicly traded companies, they believe levels of stock ownership can influence privately held businesses as well.
How much stock is too much? According to the latest research from Watson Wyatt, a human-capital consulting firm in Washington, DC, the optimal amount of stock options an individual should own ranges from 6 to 25 percent, depending on the industry. Anything over that amount could negatively affect the company.
A less mathematical measure: "If you're up every night, terrified when the business changes a little bit, you own too much stock," says Alan Johnson, a compensation consultant in New York City. Johnson believes having all your net worth tied up in your company prevents you from taking prudent risks designed to grow your business.
While the easy answer for owners of public companies is diversification, owners of private firms may fear resorting to this solution. "Our private clients typically assume once you sell a share of your company, you've lost control," Johnson explains. "That's not true. You can separate voting from ownership stock." Sell stock to employees, which has the added bonus of offering them incentives to stay with you, or sell a portion to an investor.
Whatever approach suits you, don't consider the result losing ownership-think of it as gaining perspective.
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- Wharton School of Business