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Distribution of Equity in Start-UpsThe outrageous control of inside information in the Enron pyramiding con game is the most recent and blatant example of executive shareholders' manipulation of earnings. The lawyering and accounting vocations have been only too happy to provide apparently legal but unscrupulous mechanisms such as "off balance sheet financing" to play out such confidence games, making heaps of ill-gotten winnings for their clients and future work for themselves, not least in carting off scraps from the resulting wrecks. Perhaps we need a massive re-evaluation and simplification of the rules of the game, starting at the beginning when companies form, which can provide a moment of intense self-interest as shares are allocated. In Start-Up, A Silicon Valley Adventure, Jerry Kaplan describes a common but arbitrary and unjust approach used when founding GO Corporation in 1987. After a serendipitous cross country flight together with Mitch Kapor, the executive split - three parts for CEO Kaplan to one for each of his VPs - was determined before any real work had been done. To such inequitable starts, lawyers are only too happy to add further constructions, such as non-voting shares and giveaways at a future date and fixed price known as stock vesting. These are justified as providing for better control and optimal incentives. Largely ignored or misunderstood is the fact that the sophisticated enterprise can also be built upon simple, transparent and verifiable procedures. Trust is a prerequisite for people to work together and it is possible, if not probable, that greater endeavors could be built with networks of especially transparent, accountable and therefore trustworthy entities. The focus could then turn away from overwrought control and compensation schemes to actual productive work. Do we really want to allow and therefore encourage people to operate within mazes of obfuscation or secrecy, when it might better to open up the decision making to more democratic and hopefully meritocratic processes? This question is not so easily answered. A certain amount of cabbalistic behavior by corporate chieftains is a tolerable, even desirable, manifestation of healthy self and national interest. Sales of Microsoft software in China helps to offset Wal-Mart's sales of inexpensive Chinese goods. Power and wealth is often accumulated by closed elites to a degree that is often a measure of the scale of their offenses. However, such concentrations of wealth also lead to substantial public good by creating an elite whose members endow the most civically minded of activities. Could similar benefits not better arise from without the intense concentration of wealth? The answer depends chiefly on the extent to which collective intelligence develops to guide public expenditure, a process that seems inexorable if halting over the course of human history, and which now has the best opportunity ever for rapid augmentation. While hierarchies are necessary for thoughtful coordinated action, they are also intrinsically corruptible. While the best guard against this rot is openness, it must not injure initiative by forcing disclosure without proper compensation. Full disclosure tends to come over time, so that the degree of openness is essentially a function of the time since the information was developed. This period limits the terms of offending politicians and corporate executives, abruptly when their dealings are deemed illegal, and more smoothly when disclosure determines that authority should simply devolve to people with greater expertise. The balance between private control and more publicly visible collective action derives much from the distribution of voting shares in the corporation. In a start-up, or the kind of collaboratively owned intellectual property or "document" that a knowledge operating system would support, this can be managed on a spreadsheet with balances in the accounts of its contributors for work done, cash paid, cash owed and shares acquired in a regular, internal market made by company and its stakeholders. Such a spreadsheet may contain allocations to the original founders representing their prior investment but these should be clearly justified and proportionate. A more just system of rewards will tend to increase the productivity of collaborative endeavor. Revision History
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