Bill Gross explains why equity ownership matters: at Knowledge Venture with 250 employees, top contributors could only own 0.4%, too small to motivate. He built Idealab to launch separate companies for each project, giving early employees meaningful stakes in their ventures. The model also kills failing ideas without firing people, so risk-taking doesn't cost jobs.
Chapters
One other thing I realized back from Knowledge Venture as well on motivation was that if— whenever we start a new division inside Knowledge Venture, it was very hard to come up with the incentive structure to not have that incentive for that particular group conflict with the incentives of the overall company. I really felt that equity is such a great driver of performance and such a great motivator that I really wanted to have the most equity available for someone. But at Knowledge Venture, once we had grown to 250 people, almost by definition, the maximum the number of equity someone could have is 0.4%, just taking the whole 100% and dividing evenly. You can't do that and you have investors and so on. So, there's a magic that happens when you can get people above 1% in a company. People really feel like they have a significant stake when they have that. So, one of the other ideas of Idealab was by starting these separate independent companies, it was sort of like manufacturing a new 100% equity pool for each project. Each new project that would form as a company, I have a new 100% to play with so I can start bringing in people with higher equity stakes, albeit of smaller companies, but of things they have more control and impact over. That was very motivating to them. So, we started Idealab and we came up with this process. We would start out and look for big problems and challenges that the world would face, try and brainstorm technological solutions to them, and then start prototyping the idea like crazy, and then kill a lot of things that don't work. The particular idea that I had at Idealab was to be able to kill things with no negative impact to people because as much as you say that you want to encourage risk and take chances and all that, if people see people getting fired or laid off when they take a risk that doesn't pay off, they won't do it. I mean, it doesn't matter what you say. Everybody sees what's going on. So, the structure of Idealab was I could hire a bunch of great people in Idealab who were always going to be working on new ideas. The ones that don't work out, we just shelve and work on a new idea. The ones that pass will form a company and that will get handed off to new people. Sometimes, the people who worked on the project might want to go with it, but new people would come to it. We'd have to recruit those new people to come to it. But in that way, it made it very easy for people to see that they can take chances on things and try new risky things and they're not going to get fired. And that's a really crucial thing if you want to really have some breakthrough new thing. You can't have someone worrying about their job being on the line about taking a risk to try something bold and new. So, that was one of the important structural things we realized and we set up for Idealab.
