All Tied Up
When does owning too much of your own company get to be a conflict of interest?
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.
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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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