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 the human psyche is skewed toward a potential loss rather than a potential gain (see this post for more information). That means, a loss of $1m of equity value affects most people much more than the expiry of options with a potential value of $1m. So, get as many people writing checks as possible and you’ll be able to sleep just that little bit easier.