Sharing the Wealth in a Technology Startup: How Much Stock is Enough?
When I founded Science Applications International Corporation (SAIC) in 1969, I owned 100 percent of the company’s stock. However, I soon realized that to attract talented employees—and keep them—I would need to offer them real ownership in the business by allocating some of the stock I held. So, within a year after I founded the company, I had reduced my ownership stake to roughly 10 percent. The company continued to issue new stock every year (as well as recycling stock repurchased from departing employees) and by the time I retired in 2004, I owned less than 2 percent of SAIC’s stock.
There is no doubt that this approach to structuring SAIC’s ownership was an unqualified success. The prospect of owning and running a piece of the business attracted many extremely talented men and women to the company, and we were able to grow SAIC from nothing in 1969 to about $6 billion of annual revenues by 2004. Today SAIC’s annual revenues top $8.9 billion a year.
But for entrepreneurs and company owners, there is another question that I am sometimes asked: How much stock does the founder need to maintain control of the company?
I can only answer this question using my own example, as each situation is unique.
By 1970, as I mentioned above, my ownership stake of SAIC was diluted to 10 percent of the company’s stock—so trying to maintain majority ownership and control of the voting stock became a moot issue for me. Even so, the benefits of our employee ownership were tremendous, and nobody really questioned who was in charge.
Company management issued stock to employees who brought new business into the company, and to attract highly talented new employees while rewarding high-performing current employees. By 1990, I owned approximately 2 percent of SAIC’s total shares outstanding and that continued until I retired as chairman in 2004.
Lacking majority voting control, I was fully accountable to the SAIC employee-shareholders during the entire time I served as CEO. That fact, coupled with our broad-based employee ownership structure meant that in many respects SAIC operated as a publicly traded company (including registering our shares with the SEC). But that didn’t inhibit my ability to control the company from the perspective of setting the strategic direction and overseeing key decisions typically handled by any CEO. If you know anything about SAIC’s history, you are probably aware that the pressure to take the company public grew considerably in the several years immediately preceding my retirement. Unfortunately, as my own ownership stake declined below 2 percent, so too did my ability to control efforts—both inside and outside the company—to pursue an IPO and change our unique approach to employee ownership.
I personally believe my position within the organization would have been strengthened if I had held onto 8 percent or so of the company stock to the end. This would have helped to keep those pressing for the IPO at bay—at least until I retired.
So my advice to founders is to hold on to 8 to 10 percent of their company’s stock for as long as they possibly can. This will allow them to use a large portion of the remaining stock to incentivize their employees while at the same time retaining a sufficient balance for themselves to maintain firm control over the company’s direction. This will also make their negotiating position at retirement stronger than what I personally experienced.