Next Level Pros - #39: Powerful Partners, Massive Results

Episode Date: October 3, 2023

Welcome to another exciting episode of "The Founder Podcast" with your host, Chris Lee. In this installment, Chris reflects on the incredible journey of the podcast, approaching a million downloads since June. He shares the importance of leaving reviews on platforms like Apple Podcasts and Spotify, emphasizing the value of good feedback. Chris believes that everyone should treat their life like a business, whether you're an entrepreneur or an employee. You are the founder of your own corporation, and this podcast is here to provide invaluable business knowledge to help you succeed. In this episode, Chris dives into a critical aspect of entrepreneurship: partnerships. Drawing from his own experiences, he discusses the significance of cultivating a positive company culture and structuring partnerships to incentivize growth effectively. Chris distinguishes between good and bad partnerships, highlighting the role of culture and equity sharing. He explains the importance of a vesting schedule, ensuring that all partners, including founders, are committed for the long term. The honeymoon period, Chris notes, lasts at least six months, during which you'll discover if a partner is truly invested in your venture. Chris offers a 6-18-36-month vesting program as a structure to consider, explaining how it works to align interests and commitment. He underscores the power of equity in attracting partners who are willing to forego salary for a piece of the business's future success. Throughout the episode, Chris explores various equity-sharing methods, including cliffs, daily vesting, phantom equity, and profit shares. He emphasizes the role of equity in scaling a business and shares his own success story with private equity. Additionally, Chris introduces the concept of profits interest, a strategy for incentivizing employees with a strike price that has unique tax implications. Join Chris as he imparts his expertise on partnerships and equity-sharing, providing valuable insights to help you navigate the complex world of entrepreneurship. Whether you're an aspiring founder or an established business owner, this episode is packed with knowledge to guide your journey. Don't miss out on this opportunity to learn from a seasoned entrepreneur and take your business to the next level. Tune in now! HIGHLIGHTS “Everyone has to treat their own life like a business and be the founder of it." "Good culture is imperative, people will bleed for it." "Properly structured equity can bring in top talent even if you can't afford high salaries." TIMESTAMPS 00:00: Podcast Growth & Monetization 01:13: Culture Importance  03:05: Equity Structure  07:15: Growing Businesses  With Partnerships 09:27: Incentivizing Employees 🚀 Join my community - Founder Acceleration https://www.founderacceleration.com 🤯 Apply for our next Mastermind https://www.thefoundermastermind.com ⛳️ Golf with Chris https://www.golfwithchris.com 🎤 Watch my latest Podcast Apple - https://podcasts.apple.com/us/podcast/the-founder-podcast/id1687030281 Spotify - https://open.spotify.com/show/1e0cL2vI1JAtQrojSOA7D2?si=dc252f8540ee4b05 YouTube - https://www.youtube.com/@thefounderspodcast

So anybody that has listened to my story knows that I am a big believer in partners. I'm a big believer in good partners. And I know that bad partnerships exist out there. I've had good, bad, ugly. I've had it all. In fact, one of my very first business partners, he went on to run a Ponzi scheme, terrible business partner, nobody that I would ever go into business again with. And then my long time friend and business partner, Daryl Kelly, in which we've established several different businesses and we've been able to sell and get paid out for our equity.

And so I've seen it all. I've seen the top and the bottom. Yo, yo, yo, yo, what's up? Welcome to another episode of the Founder Podcast. I'm your host, Chris Lee. If this is your first time tuning in, welcome. We've had incredible subscriptions and downloads and stuff across the universe. I think we're approaching a million downloads since the beginning of June. It has been an incredible ride. If you haven't had a chance, please leave me a review either on Apple Podcasts or Spotify. Spotify just does ratings, one through five star ratings. Apple does ratings and reviews. So if you could please leave me a review over on

Apple, that would be absolutely fantastic. It helps me get good feedback, continue to push the show. I am not monetizing the show, which means I am not bringing on advertisers. In fact, I've had several, quite a bit, like big offers from big advertisers come in and say, Hey, we want you to push X product or service or whatnot. And to date, I've chosen to keep it free because I want to continue to push out incredible business knowledge to people that are striving to build their ink. And you know, it's interesting, the name of this podcast is called the founder podcast. This isn't just for people that own businesses, everybody has to treat their own life like a business and you are the founder of it and

what you are establishing, whether you're an employee, an entrepreneur or whatever it may be, has to be your own corporation, something that you're going to build off of, whether you're investing in a portfolio, you're investing in private equity, whatever it may be, you've got to look at your life as your own corporation in which you are founding. And hopefully some of the nuggets that you take from the show will help you get there. So today I want to talk about a very important, this one actually has everything to do with owning your own business and scaling your own business. And it is, what do I do with partners? How do I bring on partners, incentivize them properly so that I can grow? So anybody that has listened to my story knows that I am a big believer in partners. I'm a big believer in good

partners. And I know that bad partnerships exist out there. I've had good, bad, ugly. I've had it all. In fact, one of my very first business partners, he went on to run a Ponzi scheme, terrible business partner, nobody that I would ever go into business again with. And then my longtime friend and business partner, Daryl Kelly, in which we've established several different businesses and we've been able to sell and get paid out for our equity. And so I've seen it all.

I've seen the top and the bottom. And one, there are two things that I know that somebody will bleed for. One is great culture and establishing an incredible culture is absolutely vital, no matter whatever industry you're in, especially if you think that you're in a commoditized business, that your product isn't differentiated by anybody else. It is imperative that you have a culture for your end user, for your customers, and also for your employees. And people will bleed for good culture. The second one is a piece of the upside, a piece of equity. And it is imperative that you structure this properly so that you can help incentivize and grow. And it's a beautiful thing because when you properly use equity, you can bring in people that wouldn't normally work for

whatever you're willing to pay them because they have a potential piece of the upside. And they are bought in. They are with you. They can see the financials. They can look at different aspects of the business, even if it has nothing to do with their role. They can be bought in to whatever changes you're trying to implement and roll out within the business. And so I, once again, I am a big believer in partners and it's different when you set up partners from the beginning than if you bring them on later or whatnot. There's all different kinds of structures. One aspect of the structure is absolutely imperative is a vesting schedule.

And I don't care if you're a founder, co-founder or whatnot. You should have a vesting schedule, including yourself, right? So that people that you are going into business that you're partnering with know that you are bought into the long-term on this. And typically, when you're analyzing the structure that you want to use in your business, you got to understand that there is a honeymoon period. I always say that the honeymoon period is a minimum six months. And so if you're going to do anything regarding vesting, the minimum vesting period for a percentage of the equity that you're going to be giving out has to be at six months. Because in those first six months, you're going to find out real quick, is the person bought in? Are they organized? Are they structured? Are they disciplined?

Are they going to help build this thing long term? Are they willing to relocate? Whatever it may be. So you have an out within those first six months if they stop showing up, if they aren't the person that you thought they were. You find out a lot of person working day to day with somebody within six months. And so typically the structure I like to use is what's called a six, 18 and three year program. And what I do is say I'm going to give somebody, for example, two percent of my business. I'm going to give them them one percent at six months and I'm going to get them one percent at 18 months. And so it vests at those points. they are able to start participating in distributions, in the upside, whatever it may, if you go and sell the business, they're going to be able to participate in that.

And the three-year period is if they quit at any time before three years, you have the ability to claw back that total equity structure. So if they have gotten 2%, they leave at two and a half years, you claw that back. They participated in any distributions up to that point, but they're walking away from a transaction and future distributions. And so for those that don't know what I'm talking about, distributions is when you take profits from any given year, and you're not going to reinvest them back in the business and you want to give them to ownership, you distribute according to the percentage. And an equity piece would be if you went and sold the business, say for a hundred million,

and they have a 2% share, they're going to participate at $2 million if it's a hundred percent buyout. So these are, these are some of the, you know, uh, different ways in which you can structure. And there's a lot of different ways in which you can structure. And there's a lot of different ways that you can do it. You can do cliffs in where there isn't a vesting. Say they're getting 100% of their shares, 33% of those shares you can have vested at 12 months, like at 12 months. Anything before 12 months, if they leave before 12 months, they don't get anything. 12 months, it's good for them forever.

And then if you want to do it over three years, you can do a daily vesting after that. You know, it's interesting, the human psyche, once he's invested or she's invested into a business and has worked hard, they're more likely to stay. And that's the reason why I have the three-year timeline. And if someone chooses to walk away after three years, thank you. You participated. You did incredible in building this business. But chances are you're going to want to stick around. You're going to want to continue to build this.

And this is one of the ways that we were able to scale Solgen to the sixth fastest growing company, according to Financial Times in the United States. It was because we had so many people bought in to the structure. In fact, at the day of transaction, I had 10 others besides me that were made multimillionaires on our transaction with private equity in 2022. And for me, there's nothing greater than being able to participate and share in the upside with these type of people. Now, what you have to analyze is, do I want to give up equity or do I want to give up salary? Because early on, it's hard to afford salary and easy to afford equity. And later, it's easier to afford salary and really hard to afford equity because you're giving up a piece of the pie. Initially, the pie is nothing, right? Like it's just potential.

It's whatever could potentially work out. And so, you know, when somebody is willing to take less salary for a piece of the pie, you know, you have the right partner. They want to help build it. They want to help grow it. And so typically that kind of, those kind of balance each other out, right? You have to pay less in salary for more in equity or less in equity for more in salary early on in the business. And so these are definitely different things that you have to consider. There's phantom equity. There are profit shares where somebody can take a percentage of the profits, but they don't participate if the company sells. This is especially good in a cash cow business that you plan keeping around for a long time. Those type of profit share arrangements are incredible. You also have the ability to have subsidiary businesses. Say you have your main business, but you're starting up a subsidiary

business that does a little bit something different. You can give somebody in the organization a percentage of that and not in the overall hold co or in the main business. So there's ways to get creative and attract good partnerships and incentivize with proper equity. And I feel is one of the most important things, like I said, to scale. In fact, when you look at businesses that haven't grown for a long time and are just kind of steady eddies, good cash cows or whatnot, nine times out of 10, them or them and their spouse or them and their family members own 100% of the business. And there rarely is a profit share or an equity pool for employees. The other thing that is imperative

is, so those are how you attract in like high level talent and typically the earn out. The other type of earn out that you can do is what's called a profits interest. And a profits interest allows employees to participate in the business at a floor. So say, for example, you put a value on your business today at $100 million, or we'll call it $10 million. And you want to incentivize your sales force, or you want to incentivize your mid-level management, or whatever it may be, you can put together. Now you need to consult your legal team, right? Go and always spend good money on lawyers. They're worth their weight in gold. So make sure you do that. But you can bring in a legal team and you can create what's called a profits interest and you can set a strike price for the business.

Say it's $10 million. And so you say, hey, we're going to do 10% to our employees. And this is how you earn into it. I like to do a point structure where the points mean total points of the pool and the denominator continues to grow as people add more points. And so it's essentially a pool that continues to dilute, but also as it's growing, the dilution is, is, or the percentage is worth more. So I like to set it, say, at a 10% point structure. And at $10 million, if you go and you sell the business for $15 million, the first $10 million goes 100% to the original founders, the original ownership.

And that additional $5 million, everybody participates in. There's a 10% pool. So there's, at that point, would be $500,000 and which would be distributed to those that participated in the 10% employee pool. These are just some great ideas that you can go and utilize instruction in incentivizing your company properly. Now, it is important to note that there are different tax implications depending on what structure you do. If you decide to just give equity, they will actually have to pay taxes at that point. If you do a profits interest where it has a strike price, they don't have to pay anything until they cash out in which they would have to pay ordinary income on the gains that they receive. So these are just a few ideas. Hopefully this helps you in building your business and building your structure.

Remember, we are all about our own business. If you're not in your own business, in your own hustle, there are so many different ways to get involved, whether it's real estate, whether it's wholesaling. There's so many different ways in which you can become a capitalist as a side job and doesn't even have to be your main gig. So appreciate and love you. Thanks for joining us for another incredible episode until next time.