Equity Done Right (Equity Plus Distributions)
Equity you can't eat is worthless — pair it with distributions.
- Difficulty
- Easy
- Time to result
- ~ongoing to results
- Steps
- 4
- Confidence
- 87%
Sanchez argues your salary will never set you free — only ownership will, but only if equity is done right. Bare equity is a problem because 'you can't eat it'; many Silicon Valley employees discovered their equity was worth almost nothing. The fix is equity plus distributions: you own a percentage that can't be taken away absent fraud, and when the owner takes money out you receive your pro-rata share (own 5%, get 5% of a $100k distribution). She adds that equity should be vested over years with a first-year cliff, and should reward proven high performers since past behavior is the best predictor of future behavior.
Origin
Rooted in Sanchez's finance career and her observation of Silicon Valley employees who were 'compensated' in near-worthless equity, contrasted with private-equity distribution structures.
Core principles
- 01Equity alone is illiquid and often worth nothing
- 02Distributions give owners cash flow proportional to their stake
- 03Reward proven high performers, not hoped-for future behavior
- 04Vesting with a cliff protects the business while granting ownership over time
How to run it
- 1
Secure a defined equity percentage
Negotiate a clear ownership stake in the business that legally can't be stripped away unless you do something fraudulent.
Watch out Equity by itself is 'up in the ether' — you can't spend it.
- 2
Attach distributions
Ensure that when owners take money out of the business, you receive your pro-rata share, giving you cash today from future profits.
Pro tip Distributions are 'future profits tomorrow, cash today' — the part that lets you eat.
- 3
Vest over years with a cliff
Grant equity gradually over multiple years with nothing earned until the end of year one (the cliff), then portions each subsequent year.
- 4
Reward proven performers
Give equity to your fastest, highest-performing people to reward behavior you've already seen, not to try to fix an underperformer.
Pro tip The best predictor of future behavior is past behavior — bet on your greyhounds.
Watch out Dangling equity to motivate a flat or poor performer usually backfires.
In the wild
Host Hala describes Kate, who started as an intern four years ago and is now a partner vesting toward 10% of the business by managing the social side of the team.
→ A non-inventor became an entrepreneur-owner through vested equity earned by high performance.
Sanchez walks through owning 5% of a business where the owner takes a $100,000 distribution, so the 5% owner receives $5,000.
→ Illustrates how distributions convert paper equity into spendable cash.
Common mistakes
Chasing equity with no distributions
Employees accept illiquid equity that they can't spend and that may end up worthless, as many startup employees learned.
Using equity to fix underperformers
Offering equity as a carrot to a flat performer rewards hoped-for behavior; the best predictor of future performance is past performance.
Is it for you?
Best for
Employees negotiating ownership and owners structuring equity for team members.
Not ideal for
Situations needing immediate full liquidity or simple cash bonuses.
From the transcript
“the problem with Equity is you can't eat it”
“that is equity Done Right distributions today future profits tomorrow”
From the episode
Codie Sanchez: How to Make Extraordinary Wealth Buying Boring Businesses
Codie Sanchez