How Smart Contractors Lock in Their Top Employees with Phantom Equity

Welcome to Successful Contractor powered by CertainPath, a show for residential contractors about residential contractors. We chronicle business journeys, share insights, and celebrate successes in this wonderful industry. I'm your host, Bob Houchin. For more information on how CertainPath can put your contracting company on a certain path to success, visit our website, www.mycertainpath.com. I hope you enjoy today's show. And take away a nugget or two.

In every conversation with those small business owners, we heard, I have a hard time retaining these, these folks. I have a hard time getting them to step up to the plate. I have a hard time aligning them with screaming into the wind about gross margin and net profit. How do I get them to care?

Yeah.

And that was really the inspiration behind Reigns. If you join any tech company, any large company, you're, you're gonna get a stock options package.

Yep.

So we kind of operate under the assumption that equity works, right? Why don't the millions of small independent businesses in this country that power this economy leverage those incentives? Well, I learned it's for innocent reasons. It's actually really difficult to do, right? And uniquely difficult for LLCs, S corp type independent businesses Which are all the amazing sort of tradespeople and, and service, service companies that, that you and I spend a lot of time talking with.

How have you seen, uh, companies respond once you implement what you guys offer and all of a sudden everyone's moving in, in rowing the boat in the same direction, if you will, right? What's the response been?

Oh, it's, it's amazing. Like the best contractors, like with or without Raines, are ones that are super transparent. We just tend to find one another because the folks that are talking about their company goals and talking about metrics and very transparent about what's under the hood are also, not so surprisingly, the customers that want to roll out something like Reigns. And so this just bolsters that, uh, that culture.

Yeah.

You know, some, some really cool things that we've seen, um, like sort of in the trenches with specific employees, they'll show their spouse and they'll say, oh wow, yeah, you have a career, like you have a, you have a real skin in the game here. 94% of employees who have been granted an incentive in Reigns are still employed.

Wow. Chris, thank you so much for being here. Greatly appreciate it. For those who have not had the pleasure of meeting you, can you share with everyone your name, your company name, and what you guys do?

Absolutely. Thanks for having me, Bob. My pleasure. So my name is Chris Buttonham. I'm one of the co-founders of a company called Reigns. We essentially simplify the process for contractors who want to share equity or profits with key employees in their business.

Yeah. Very good. And actually, I found about you guys through one of our members, been a long friend of mine. How did you guys first connect?

If you want the honest—

I would love it because Trent is a unique guy, so I'd love to hear the story.

My founding sales guy, Cold called him.

Is that right?

Yeah. And it was just right time, time and place.

Is that right?

And since then, Trent's become a friend and I flew out there to onboard his team in Colorado Springs. And, and it's been great to see, you know, him roll things out and us to get to get to know each other a bit better.

Yeah, he's a fun guy.

Yeah.

I always love learning people's genesis stories, how they got to where they are. Right. So how about you? How did you get into the space? Let's even go back. Get out of school. What were you doing right away?

Yeah. So, it's kind of the tale of two worlds. I'll try and keep it succinct.

No, that's all right. This podcast, I like them, you know, drag it out.

It's fine. Yeah, yeah. So, the best way to describe me is I'm an entrepreneur.

Okay.

Most days, it's a curse, not a badge of honor. I've never really known how to work for anyone.

Okay.

So when I was in college, um, I actually got kicked out of business school. And I think it was probably because I was focused too much on the business I was trying to, to start, uh, during, during college. And, um, when I graduated, um, I actually worked for my old man for a little while.

Okay.

He's a contractor.

Oh, interesting.

So I was on the trucks for about 5 years.

What kind of industry?

So he does like low voltage, uh, security systems and things like that.

Yeah.

And so he was in an interesting position that I hear a lot of contractors in where they're not really looking to sell. Maybe they're open to it in, in some number of years, but he was just really looking at how do you get the key folks in the business to take the reins, if you will, you know, so he doesn't have to be on a ladder at 4:00 PM on a Friday, or he can go golfing with me or something.

Yeah.

You know? And, and so anyways, it's kind of like that was a seed that was planted. Got it.

What led us to attend the event today, we've been watching the Certain Path podcast on YouTube for quite some time, and it just had a lot of good content. So we wanted to come and see what that content was live. Coming into this, I had no expectations of what it might be. I've never experienced anything like this before. But it proved to be a truly moving and engaging experience all the way around. My most powerful insight from this is that there are other contractors just like me, just struggling to make it, to figure it out, and it's wonderful to know that there's a network of people that can help support you and have your back. The most exciting thing to take home here, what we're going to implement, is going to be the call-taking and dispatching for profit. I can truly see from the coaches what the value of that is, and for us, that's going to be step one. I would recommend others come and experience so that they can find out what they don't know, to understand that they don't know what they don't know, and to be able to experience a community that's willing to help answer that question.

But I actually ended up starting another company after university, which eventually became what was called Obi.

Okay.

platform that made it easy for businesses or employees to find answers to common questions at work.

Interesting.

And it was wild. It was before like the LLM and like the AI craze that we know today. Yeah. Long story short, ended up selling that company in 2021.

Well, first of all, how did you find that space? Right?

Yeah. Well, so funny. my dad, if I'm gonna send him this and he'll say that I can credit all my success to him.

Yeah.

But I was also inspired by working with him when I started that business because what I learned was there's a lot of tacit knowledge built up in people's heads in these organizations, particularly service businesses. Right. And The solution was that these guys would just hang onto the information and as long as you knew who to call, like that's how you would get the information you needed to be productive at your service call or your installation or what have you.

Yeah.

And so I was like, so we gotta document this. Yeah. And that was kind of like the genesis of how we started that sort of knowledge management software.

Okay. Um, so that was '21 you sold it?

Yep. '21 we sold it. Um, just kind of peak bubble, honestly.

Yeah.

It was the right off-ramp. Someone smarter than me told me once, never miss the off-ramp. And that was certainly it. But like I said earlier, my only speed is entrepreneurship. So I knew I was going to start another thing. I had golden handcuffs at the acquirer. So I knew I had about 2 years to figure out what my next move was. And so it was really taking my time trying to think about what was next because I want— I didn't want to build a business to sell it. I wanted to, I wanted to cement a legacy. I wanted to do something really important. That sounds trite, but, but, you know, I'm young and I wanted to spend a number of years doing something I was really passionate about.

Yeah.

And kind of saw this opportunity with baby boomers. in that wealth transfer. They call it the silver tsunami.

Yep.

Yep. And so we were kind of looking for like a wedge problem to solve within that. Started talking to a lot of business owners, again, sort of seeded by this inspiration from my old man. And originally it was the thought of actually helping these business owners pass their business off, right? Sell it.

Right.

For a number of reasons, decided that wasn't the business that was right for me and my co-founder to build. But in every conversation with those small business owners, we heard, I have a hard time retaining these folks. I have a hard time getting them to step up to the plate. I have a hard time aligning them with screaming into the wind about gross margin and net profit. How do I get them to care?

Yeah.

And that was really the inspiration behind Reigns. And we kind of took a page off a book that we know really well with technology and big businesses, where if you join any tech company, any large company, you're gonna get a stock options package. So we kind of operate under the assumption that equity works, right? Why don't the millions of small independent businesses in this country that power this economy—

Right.

leverage those incentives? Well, I learned it's for innocent reasons. It's actually really difficult to do.

Right.

And uniquely difficult for LLCs, S corp type independent businesses, which are all the amazing sort of tradespeople and, and service, service companies that, that you and I spend a lot of time talking with.

Yeah. Yeah. Why the niche of contractors? Just 'cause your genesis story with your dad, or, or you just felt like that's just a market, there's a lot of opportunity and let's just specialize in that.

That's a good question. So if I'm being honest, it wasn't only the Genesis that helped.

Mm-hmm.

But it was really the opportunity. So to your, I think what you're alluding to is there's no reason why we need to verticalize in, in this niche. Um, but I think we saw an opportunity to go a little bit deeper and provide more specialized service. Yeah. Um, and that way we can integrate with the tools that folks use and we can speak the language that these contractors specifically speak and we can just dial the product in. in a way that we couldn't if we were horizontal.

Yeah.

And I think that the opportunity is unique because when you give incentives like equity, there has to be some promise of liquidity.

Yeah.

And so given that there are liquidity opportunities with contractors, perhaps greater than in other private, you know, business industries. Yep. That's a, that's a big reason we chose this vertical.

What you do is very unique. And I had never heard of it before. And we're going to get a lot of people that watch or listen to this that have no idea really what it is either. So, I mean, I'm sure you met some folks at the vendor show that didn't know. So how do you explain to people in the simplest forms of what you guys provide and what you do?

Yeah. So we specialize in a category of incentives called alternative equity. So if it's alternative equity, there must be traditional equity, right? Traditional equity is you want to give someone a piece of your company. Well, that comes with some challenges. One, it's probably control that you don't want to give up. Even if it's a minority stake, there's a vote hanging out there. Often, that employee isn't really looking for that liability either. They don't really understand that. And while the owner may want them to take on that liability—

Right, right.

The employee doesn't really understand the gravity of that situation. The biggest challenge with traditional equity is, uh, in, in most cases, there's a tax bill without any cash to pay the tax, right? You give any percentage of a business away, uh, that has any value.

Yeah.

The IRS wants, wants their cut.

Shocking how that works, right? Yeah.

So under the guise of alternative equity, we've created a really unique framework with the help of some of the top compensation and benefits attorneys in the country.

Okay.

It's kind of like a, a template, if you will.

Okay.

And the way this framework works is kind of the opposite. So if folks have heard of phantom stock or profit sharing, they're essentially fancy deferred bonuses and they fit into this really unique corner of the tax code that allows for the properties that are opposite to the traditional equity we just talked about.

Right.

So when you grant alternative equity, No tax bill upfront. It's deferred until cash is owed. That could be the sale of the business later on, or it could be some dividend-like bonus, profit share, some, somewhere along the way.

Right.

No ownership rights, no voting rights. You don't have to open the books and therefore no liability for those key employees. So it's kind of a win-win.

Yeah.

It's an incentive structure that allows folks to really align those employees with what matters most to the business and show them why they should care.

Absolutely. Right. How do most of your contractors deploy it? Like, it, it, you know, they award it just upfront cuz they like, they wanna hold onto this person. Do they do it if they hit certain benchmarks? Like, what have you seen?

Yeah, that's a really good question. Of course, it's very customizable. At least what Reigns does, we call ourselves curated, not custom. So I think historically one of the challenges with this stuff is that it's just so esoteric, so overly complicated. And even with the best intentions in mind, folks tend to overcomplicate it.

Right.

But the way I would say sort of like a down the fairway type of plan is the phantom stock. So the long-term incentive, we'll call it.

Yeah.

That is, you know, anywhere from 10 to 20% of the business set aside.

Yeah.

Granted to maybe 15 to 20% of your key folks.

Okay.

Top performers. So management, often lead technicians or really office staff that may not also have performance pay. There tends to be a gap there.

Yes.

Right. So it gets them to think long-term. Yeah. And then the way it's set up is it vests over a number of years and it gets paid if you sell.

Yeah.

Often forfeit if the employee leaves.

Right. Which is a nice benefit.

It is. It's safe. It's safer, right?

Yes.

For the contractor. And then we layer on a short-term incentive.

Okay.

So that could be the profit sharing piece. Now that tends to be anywhere from like 20% of the staff to 100%.

Yeah.

So that gets shared more widely. Not to say that the phantom stock couldn't be.

Right.

And the profit sharing is really cool because the, you know, the most popular setup we see is a pool model. And I think your audience will appreciate this. It's all performance-based, no entitlement. So the way it works is, let's say on a quarterly basis, the company sets a goal. Let's say we need to maintain a 15% net margin or 60% gross margin. If that goal is hit, we will unlock some percentage of profits to share amongst the employees. Then, beneath that, there may be individual KPIs those employees need to meet in order to earn their share.

That's very cool.

And then, it can be customized.

How does the employee— because you're like, I want to see this, right? We all want to check our investments. So, do you have some kind of a website or something that people can track that?

Absolutely. So, The way I kind of described our framework, right? Yeah. And we did a lot of work to create this templated legal framework. That's like half of what we do. The other half is that we have software.

Okay.

We're really first and foremost a technology company.

Yeah.

So the first half is like, if you, if you're familiar with like Trust and Will or LegalZoom, you go online, you get a will. We've created a very nice like dropdown menu type of system with the help of our human support to create and set up a plan.

Yeah.

But from there, now you've got these stakeholders, and like you said, they want to, you know, keep tabs on what their equity's worth, for sure, what they need to do in order to earn incentives.

Yeah.

So we have an app on, on your phone that you can log in, kind of like Robinhood. Yeah. Coinbase or something like that. You can log in and we connect with ServiceTitan and QuickBooks. So in real time, employees can see like how how close they are to goal.

Yeah.

And of course, what that translates to into dollars in their pocket or value in their equity that may turn into cash later on.

That's really cool. I mean, that's that immediate, you know, hey, we hit the number, boom, look at it, you know, I get that reward.

Exactly.

You mentioned that you onboard, right? You went to— what is that? That's intriguing to me. What is your onboarding? Like, what does that look like? Because again, I'm assuming you got to educate these people on what the heck this is, right? So I I won't take the words outta your mouth, but go ahead.

No, no. So we, yeah, we take a, like I said, it sounds like a service offering because that's how it's traditionally solved. You go to an attorney, you spend 30 grand, right? You get some fancy paperwork drawn up and then that's all it is. It's paper that collects dust in a filing cabinet. No one really understands it. No one really trusts it.

Sure.

So with us, that's where the, that framework Came in and we knew we had to layer on white glove human support. So, not only are we there helping you sort of design your programs, but in most cases, we'll actually come out to you in person and we will help roll this out in person to your employees.

Nice.

Yeah. And so, really, the way we like to describe it is we have the owners and the management of the company, whoever's involved in sort of setting this up, they explain the why. Get the employees excited about why you're doing this, right? Is it some exit that may be 5 years in the future? Is it we just want to hit these growth goals, maybe a combination of both? And then we come in and we explain the incentives, what they mean, how they work, and how folks can actually keep track of what's important.

Yeah.

What are a lot of the common questions you get from the folks when you're sitting there explaining this?

Hey, sorry to interrupt. Bob here.

Quick question: would you like a slice of the $10 million CertainPath helps contractors put back into their pockets every year? I talk to contractors all the time. Customers are spending less, margins are shrinking, so how do you protect your profits?

You buy better.

At CertainPath, we give you access to all sorts of things: world-class coaching, training for every single role in your company, the largest home services community in the industry, over 1,200 members, and most importantly, 120 vendor partners you already use. Equipment, financing, marketing, so much more. We negotiate exclusive discounts and rebates. Over $10 million in rebates alone, and it grows every single year. So if you want to compete with private equity, you have to buy like private equity, and that's where we come in. The best part? Savings and rebates can more than cover your membership. Everything else is icing on the cake. Want in? Click a link in the description, book your free discovery call with one of our coaches and my friends, Mike or Will. One conversation could save you tens of thousands of dollars every year. Now, let's get back to the show.

Well, from the employees?

Yeah.

From the employees, they're often quite quiet.

Yeah.

Right.

Processing.

Yeah. They're processing. We actually get a lot of folks that are very subtly excited and then we'll get some questions after we've left.

That makes sense.

Yeah. They just wanna understand like what do they need to do, right, to earn these things and how are they gonna be updated on it? Right. What happens if they leave? And, and in that case, it's often unique.

Yeah.

Like it's how the owner set it up.

It's right.

It's not one, one answer. And so that's another reason why it's important. We've done it so specific where we'll do a one-on-one with each employee, really, rollout, because the owner's wanting to, to specify, um, to customize the incentive for each person. For each person.

What's that process look like, that customization? So you work— let's say we meet at a vendor show and I'm like, Chris, I'm on board, I think this is a great thing, but how do you coach them through making the right decisions? Or how to get them— hey, have you thought about this person? Or what's that That look like?

Yeah, well, that's a good question. So, you know, when I asked employee or owner, the owner's questions are very, they're the same.

Yeah.

They're always—

All the same?

Yeah. So like number one question, how much do I give into who?

That's pretty straightforward. It makes sense.

Yeah. It makes sense. Um, so, you know, we, number one thing is we always tell folks, um, you don't have to have all those answers before signing up. I think folks think they do. Um, but that's what we're here to help with. Sure. Right. We, and that's why I hesitate to say we're a technology company because we don't just give you the, the, the software and then let you, you know, go on with your own devices. We have, um, well, we have a lot of AI that can leverage the data across the contractors in our system. Another reason why focusing on contractors is so important is we can say, well, in your industry, here's what folks at your size and stage are doing.

Oh.

So we use data and technology to help, and then it's a lot of consultation. So some exercises will walk the folks through. How much do you wanna sell for?

Yeah.

How much or when do you think you could sell? In that sale, what do you think you'd part way with? Yeah. And then who are the folks that you think are gonna help you get there?

Yeah.

Either the folks that you currently have employed in the business or folks that you need to bring on strategically to get you to that milestone.

Yeah. Yeah.

And that's, that's one of the exercises we'll walk folks through.

How have you seen companies respond to once you implement What you guys offer, and all of a sudden everyone's moving in, in rowing the boat in the same direction, if you will, right? What's the response then?

Oh, it's, it's amazing. Like the best contractors, like with or without Raines, are ones that are super transparent. We just tend to find one another because the folks that are talking about their company goals and talking about metrics and very transparent about what's under the hood are also, um, not so surprisingly, the customers that wanna roll out something like Raines. And so this just bolsters that, uh, that culture.

Yeah.

You know, some, some really cool things that, um, we've seen, um, like sort of in the trenches with specific employees, they'll show their spouse and they'll say, oh wow, you have a career. Like you have a, you have a real skin in the game here.

And you are fortunately that in the trades, a lot of people don't think of it that way.

No, that's exactly, that's exactly right. So it's, it's a real thing that, um, makes a small independent business look like a big company.

Yeah.

Or yeah, just, just things like that.

Yeah, that's great. Is it mostly the ones that have success setting quarterly goals or monthly goals, or how do you see people award it?

Yeah, you know, it's maybe a mix. The, it's definitely a mix. The long people sleep on the long-term incentive, I think, because they're afraid of the, the equity word. And, and I think historically it's been, it's been demonized and it's been very complicated to set up.

Right.

That's the one that provides the most impact.

Yeah.

The other thing I was gonna say was, um, there's so many folks that will set this up that aren't really planning to sell.

Right.

There's a lot of folks that are.

Yeah.

But there's a lot of folks that they don't have like a 5-year exit plan.

Right.

Um, in fact, some folks think that they'll never sell.

Right.

But the employees don't know that.

Right.

Even if you said it, the employees don't know it. We did an, um, A rollout for a customer in Georgia. And the owner was explaining his why, and he was saying how he doesn't— just wants everyone to be assured that he's not planning to sell. And then I asked the room, I said, anyone work for a business where the owner said that they weren't planning to sell? And a couple people raised their hand. One woman in particular, she had just joined this company from a company that sold to PE. And I asked her, I said, did your owner say that they weren't going to sell? She said, absolutely. So it's an insurance policy, if anything, if nothing else. And so that's a huge point of impact for— I love it.

I love it. What's the response been to the market? Is it getting a lot of interest at shows like these?

It is. It is. CertainPath has been incredible. Contractors in this group are super engaged. Yeah. Um, the Partner Expo here.

Yeah.

Um, in Cabo was amazing. The thing we, and, and this is why I'm so grateful, uh, for folks like you for having me on. Our challenge is just getting the word out.

Right.

It's, it's about education, you know? It's not, um, there, you know, not, this isn't to be derogatory against other vendors, but like everyone knows about SEO and like marketing agencies. Like, you know what I mean? Like everyone knows.

That was where it is.

The problem is in awareness.

Right.

Our challenge is awareness.

Right.

And getting folks to know that these amazing incentives.

Yeah.

Um, are out there. And so we're just here to spread the good word and, um, we know that it'll come back to us if we just provide value through education. That's what we're here to do.

Yeah, absolutely. Have you noticed, uh, your contractors' retention levels have gone up?

Ah, that's a really good, uh, question. So we just pulled some data the other day and it actually shocked the shit out of us. Um, so, uh, now I'm intrigued. Yeah. 94%. Of employees who have been granted an incentive in Reigns are still employed. Wow.

I mean, the turnover in the trades, it's like 2 and a half years, I wanna say.

Yes. So that's, yeah. And the, the sort of like whatever it is, Harvard stat is something in the neighborhood of 40, 40 to 50% increase in retention with equity or profit sharing incentives. But the, the cooler one is the real data that we have.

Yeah. That's really cool.

Yeah.

Um, do you have any neat success stories or, you know, members or contractors? You don't have to name names. They're like, hey, I was worried about keeping key people and all of a sudden, like everyone's pulling in the right direction. We're hitting goals.

Yeah. You know, I feel like it's, um, so our number one use case, if you will, is contractors will call us because they have like a back of the napkin Agreement with someone, you know, or a handshake.

Right.

And so to see those get solidified and the excitement and then have, have it kind of inspire the owner to expand, right, broader than that one or two folks that they've promised to, because now they understand how to do it and that it's not that complicated and it's not that scary. And it's actually really good for their business. Yeah. That's just kind of like the common story. And that's true for a lot of the CertainPath folks that have joined Reigns.

That's cool. So if I, if I can come to you today and go, I wanna start this, how long's the process? What does it look like just from a 30,000-foot view?

Yeah, so this is a huge common misconception because I think historically, what you'd have to get set up with an attorney, right? It's, it's very costly.

Sure.

To your point, or what you're alluding to is like months of planning and prep.

Yeah.

Yeah. I almost say it hesitantly because it's so simple. So, um, you basically, you can hit us up, go to our website, myrains.com.

Yeah.

And you book a call with us. And if you sign up over the course of 2, maybe 3 Zoom calls at most.

Yeah.

We've got your plan designed, your stakeholders set up. Nice. And we're ready to click like the big go button.

Yeah.

Big go button is like in Raines, we actually do all of the paperwork and legal documentation. And so that usually coincides with the employee rollout.

Yeah.

And so everything's signed electronically and stored within the Raines platform.

Yeah.

And so, you know, however long it takes you to do those 2 or 3 calls with us, that's, that's as long as it takes. We've had it done in a week. You know, we've had it take 3 months if folks want to take 3 months.

Sure. Correct.

Yes.

Right.

And then from there, we do the employee rollout, and then on an annual basis, we'll help you rejig your programs to the extent that you need to for the short-term incentives.

Very good. So, there's that continuing support.

Yeah.

I love it. I love it. Okay. One more time. How do people find you?

myrains.com.

Awesome. Chris, thank you so much. This was a lot of fun.

Yeah. Thank you.

I hope you've enjoyed today's show. If so, please like and subscribe on YouTube. If you're on your favorite podcast player, please leave us a 5-star review. The 2 seconds you take to leave a review will help other success-minded contractors like you find us and hopefully get a little bit better, which elevates our entire industry. And please join me for future episodes. This has been The Successful Contractor powered by CertainPath.

The Successful Contractor Podcast is part of the CertainPath family. CertainPath builds successful home service businesses and has for 25 years. We do it by providing contractors with a proven path to success. Professional coaching, software solutions, and a member community of 1,000+ strong. Doubling your sales with a 20% net profit and an inspiring company culture is all possible. Let us show you the way. With CertainPath, success is made certain. Visit www.mycertainpath.com for more information.