The importance of managers investing cold hard cash - 15 July 2009

The importance of managers investing cold hard cash

The worst principal-agent scenario is one where the agent (management team) has no equity interest
in the investee. The second worst principal-agent scenario is one where
management have an equity interest in the investee, but haven’t had to part with any cash for that interest (e.g. stock option plans). The only principal-agent scenario that a private equiteer should ever entertain is one in which the management team invests cold hard cash into the business for an equity share.

Now, you may say the founders have invested enough cash and effort
over the years to excuse them. And, you may find that the founders even
want to withdraw cash from the business in concert with your
investment. But, if the founders are at that stage (i.e. taking money
out and winding down), you need another champion to
work alongside the founders. That is, a champion willing to invest cash
with enthusiasm and with the energy to facilitate exponential growth.

The fact is, private equiteers have their interests spread across a
portfolio of investees. So, they really do need someone working within
the business on a full-time basis whom feels the same urgency. Stock
options without an initial investment are better than no equity
interest, but

more...http://www.theprivateequiteer.com/the-importance-of-management-investing-cold-hard-cash/