Equity for All: Revolutionizing Business with Employee Ownership

At the end of the transaction, that ultimately was sold for $3 billion to somebody else. And each of the employees, on average, got $175,000, which was incredibly meaningful to them, and it was a win.

How much more successful would you be if you had lunch once a week with insanely successful entrepreneurs who share their biggest secrets on how they think and achieve success? Grab your seat at the table, because this is Business Lunch with Roland Frazier and Ryan Deiss.

Welcome to another episode of Business Lunch, and today's a snackable episode with Roland where he's going to get into some more tactical strategies that you can start using to live a rich and happy life. If this is the first snackable episode you're hearing, I'd encourage you to go back and listen to some of the other episodes that Roland has put out. And if you want to get notified every time we release a new episode, go to the new businesslunchpodcast.com website and we'll send you detailed notes along with every episode. That's businesslunchpodcast.com www.businesslunchpodcast.com and you can sign up for the free email newsletter where you'll be able to get all the highlights and resources from the episodes.

Hey, everybody. Roland Frazier and Ryan Deiss here with another issue of the Business Lunch podcast.

Ryan, how you doing today?

I'm doing great. So is it an issue of it? Like it like we're. This is a print podcast.

Yeah, it's a.

We print podcast. Yeah. Or is it that we have issues?

Yeah, well, I mean, God knows we have issues. Yes. Personal, business.

So many.

But that's what makes this an interesting show, right?

Oh, yes. Oh, yes. No, I'm doing great. I actually just got back from doing another round of college visits with my oldest, who's going to be heading off to college next, you know, in the fall. And so that's always fun, but bittersweet. But, man, what a pain in the butt. All that stuff is just, man, I.

Keep trying to get my kids to go back to college and just stay somewhere far, far away, and it doesn't work. That's cool, though. It is a very exciting time. I remember when I was leaving for law school and moving across the country and my mom was crying, you know, as I was leaving with my U Haul truck piled full of all my stuff. It's a, you know, probably less for guys and more for. For moms, that separation, I would guess, but. But it's a. It's a thing. Other than that, life is good.

Life is good. How about you?

Yeah, everything's going well. Busy, but I feel like it's been busy since October and it's not stopped. And it's good and bad. Like it's great because it's busy and there's lots of stuff going on. But, you know, I'm, I'm looking forward to finding some little break in the, in the activities.

Yeah, yeah. Where is this like freaking laptop lifestyle that I was promised? I mean, I've seen the late night infomercials and the TikTok and Instagram influencers and man, we got like these companies and they're all doing really, really well. So, you know, I need my laptop on the beach kind of thing.

This is garbage. I think you would hate that. I'm actually pretty sure you would, but there are two answers to that. One is that I find that most of what I do is on a laptop. So technically, while I am on the laptop for, I don't know, 72 hours a day, it is a bit of a laptop lifestyle. It's just a question of the timing that needs to be adjusted. The second thing is I'm guessing that most people don't have not only a portfolio of companies that they're involved in, but also they're constantly doing new ones. I think if we said we're done and we were just going to let the existing portfolio go, then it would be kind of easy breezy and we'd get bored pretty quick. But, but the fact that we have so many things, you were just calling me earlier saying, you know, where's that agreement for that deal? Right? It's, it's because we're doing stuff, right? So I think that's it. If we just stopped doing so much stuff. But when you love what you do, it's really hard to do that, right?

Yeah, I'd be bored. I mean, you're right. I mean, I say all this completely sarcastically in tongue in cheek because I'd be bored out of my mind. I do think it's though, a lot of people have this image of entrepreneurs, especially for some reason now, because holding companies, I think you've largely popularized a lot of this stuff. Holding companies and doing acquisitions and everybody says, oh, you do this and then you don't have to work anymore. I never say that, by the way. No, I know you don't. I know you don't. But that is, it is said and I think unfortunately a lot of people believe it. And it's unfortunate for two reasons, because one, it's not true. And two, it's no frickin fun. So anyway, all that being said, life is good, things are busy. That's kind of the goal. That's, that's the plan. I love it. What are we talking about today?

So I sent you over, I don't know if you had a chance to look at it, but there was an article that came out in the news about what KKR is doing through one of their companies. They found.

Who's kkr? For those who don't know, I'm sorry.

KKR is Colbert Kravitz, Colbert Kravis and Roberts I think, or Robertson. Anyway, it's a big p. It's a big PE company. We've sold companies to them in the past. They're very well known in that world. PE being private equity. I'm jargon constrained today. Sorry about that. I was like been in this. So anyway, they buy and sell companies, right? And they're always trying to figure out how can they make more money. There, there was a lady who was working at a company called Project Equity and Project Equity was intended to. It was a nonprofit, the opposite of what private equity companies are interested in. But she was working at this nonprofit helping companies transition. I thought this was actually interesting because there's a, there's all these baby boomers who are aging out and companies that are passing. And so she was really kind of targeting those companies to help the employees of the companies acquire the interests of the owners that were retiring and anyway and doing it in a way that they would then be able to continue the legacy of the company, but also their employment and you know, keep it from going into the hands of somebody that maybe, you know, wouldn't treat them the same or whatever. And I.

So keep going in the hands of a mean, nasty private equity group, for example.

Yes, yes. And so she actually was a law school graduate and a smart person and everything and she was reading and there was a paper that was published by somebody from KKR that said, look, my theory is that we make more money if we give equity to the employees. And that's not something that private equity is typically very fond of because they, they're in and out, they're. They're there to flip the company. His thesis was I bet we make more money if we go in and we get buy in from all of the employees and we let them participate in some part of the equity and if we do and they work harder and the company sells for more, we'll actually make money. It'll be free to do that we'll be doing a good thing. Win, win, win all the way around. So they ended up working out a deal where she came to a new company. I want to say it's ownership works, something like that, but it's, it's its own company and the company is working to help this happen in private equity deals. But I believe it is for profit now. I don't know one way or the other. I don't think they said. So the idea is that if in deals that private equity and I think they said They've got about 25 firms that are private equity companies that are like now enrolled to participate with these guys. So. So there was a deal that they did, and the deal that they did was with just kind of a classic acquisition. It was, I think, an overhead door company. And in that deal, the employees, the hourly employees that were making less than $100,000 a year were given somewhere between 4 and 6% of the equity in the company. Now we'll talk about kind of split.

Up between them all that 4 to 6% was a pool split up between. They didn't get 4 to 6%. Yeah.

Each of the hundred and some employees got 4 to 6%. I'm not sure how they worked it out, but. Yeah, yeah, exactly. And so I wanted to make sure.

That we clarify these things for some of our listeners who may be like, oh, I'm gonna go and execute this right away. Everybody gets 4% business.

I have nothing left. So anyway, at the end of the transaction that ultimately it was sold for $3 billion to somebody else. And each of the employees on average got $175,000, which was incredibly meaningful to them. And, and it was a win. The return on investment for the private equity company and its investors was 10 times their investment. So I'm guessing they paid 300 million for it. And it was the best return that they had had on a deal since the heyday LBO, you know, salad days of the 1980s. So they were, they were happy with that. I was reading along here, the Venetian Resort, that I guess Apollo was another firm that purchased the company, said the equity for each employee, there's about 7,000 employees there. And each of those employees will end up with. With about $10,000. And then it looks like there's another one. Simon and Schuster was purchased by this same firm, kkr, last year and management is going to do. Do it the same deal there. And, and they're setting up websites where. And I think this is actually important. They're now setting up Websites so that the people can track the value based on a hypothetical exit of their shares. So it feels like they're getting stock in a publicly traded company even though it's private. So that's the, the overlay. What are your thoughts? Let's talk about your thoughts generally on equity for non executive team members and, and then what you think about something like this.

Yeah, so just if somebody wants to, if you're listening to this and you want to go read the article, it's in the New York Times and the headline is yeah, we'll drop a link. But it's. Private equity is starting to share with workers, comma, without taking a financial hit. And the reason I mention that is because I'm not sure I agree with the premise.

It's not true. Right.

They are taking.

Private equity is starting to share without taking a financial hit. You know, I just come back to the whole like, so my thoughts on this in general and we talked about this in previous episodes in practice and you and I have done this a number of times and we've seen it done a number of times across hundreds of different businesses. I've never seen nor have I ever experienced giving equity to non executive employees being anything that drove anything other than kind of confusion and entitlement. It certainly didn't drive growth, it certainly didn't motivate people. And I would argue that if they get a significant windfall at the end, it might even make it harder to sell the business if they realize, if the buyer realizes, holy crap, all these people are going to be gone. So I got a couple of problems. So that's my thoughts in general in terms of this article feels to me like classic New York Times communist propaganda. Just going to throw that out there. If you want to know my bias on things, I would also say number two, correlation does not equal causation. So when they're like, this company did this and they had this amazing result, well, that's great. I'm really happy for all involved. But we don't know the counterfactual. It's not like we can go and experience, you know, an alternate universe where they didn't do this to find out if the results, you know, were, you know, were any different. So my experience is that this kind of stuff doesn't work. The I think the example they use are correlations, not, you know, they don't prove any causation in any of this and the part. And it was at the bottom. But I was, I was skimming the article and they talked about how, you know, the message doesn't automatically resonate with employees. And the quote was, take Terry Andres, who worked for three years as a sales manager at Colson Group, a manufacturer of casters and wheels. When Blue Wolf Capital acquired him, the company announced the equity sharing plan. But Mr. Andreas found it difficult to discern how much it would be worth and when the employees would get their payout. It wasn't an effective way to motivate the people who supervised, he said, and wasn't enough to keep him from leaving when another company offered higher pay. It's very nice, I appreciate it, but for me, just tell me exactly what I can work towards.

Yeah.

And that to me, I think sums up the employee mentality. Like most of the people who work, and I don't mean this by the way, to disparage them, they've got these things called lives outside of work. And I think this is incredibly difficult for entrepreneurs and for top level executives who so much of their life and their identity is wrapped up in their work. We can't imagine what it is like to be someone who just wants to show up, who wants to do great work, work with great people, have a great experience, produce a great product or service, and then go home and live their lives. And what they're looking for is not these amazing upsides if something happens. What they're looking for is a greater degree of certainty and security. I do think what you said, my favorite part, if you're going to do this, the fact that they're gamifying it by being able to show people, here's a hypothetical of what it would be worth. I mean, I think that helps. I think there's two problems. One, it sounds like a liability to me too.

It really does.

Crap like this is hypothetically what we're worth. And now somebody is going to go and make a whole bunch of purchases based on that. It doesn't come true. And you want to talk about people hitting the freak out button and running to the exits, tell somebody, allow them to see like the, the value of this stock that they've been given in this private company. How do they respond when it tanks?

Because it will.

I mean, imagine all these companies that did that, did this type of structure back in 2001 and 2002. And then you go this year where just everything gets marked down because everything got marked down. And now they're seeing like, oh gosh, I thought that this was worth, you know, 220,000 and now it's only worth, know, 120,000. Well, that's still a lot of money and it was still just given to you, but all they saw is that they lost 100 grand. So I don't know, man. I'm not buying it. That's my take. I'm not buying it.

Yeah, and some of the things that, that, that you want to think about would be in, like, in an esop, there is government supervision of what's going on, looking after the. What's an esop, by the way, sorry, East. Employee stock ownership plan with, with those kinds of programs or with, you know, even when you have equity, you normally have voting rights and things like that. These employees don't have that. I believe that they lose it if they're not there. So you would also run the risk potentially of somebody terminating employees they didn't like before an exit. That's. These aren't issues that are novel, by the way. It's just things to think about. But yeah, I mean, ultimately you're making a bet with equity of the company. I believe the headline is deceptive because it clearly costs them. Ultimately, the argument is that the unproven case study tells us that possibly you might get more if you do this. That's a lot different than how to create a win for employees that doesn't cost you anything, in my opinion. So I think it's just, I think it's interesting. It'll be fun to see if there's some data that comes out about it. I don't think I'm going to rush to argue that we should do that in our portfolio companies. I know that you're a strong advocate for this, but I'm going to say I think that maybe you should change your mind and not do this.

Ryan, I'll tell you what I'm a strong advocate for. I'm a strong advocate for those who have the ability to move the needle and to directly, you know, add value and who are motivated by, by doing it. I'm. I'm all for allowing them to participate in some way, typically not direct equity. You know, you and I have talked about this in the past. We love phantom equity structures. We love profits only interest, you know, kind of structures where it's. It's not true equity, but they're compensated like that. But I think, I just think it's so important and I to acknowledge that not everybody's motivated in the same way. And where somebody might say that, you know, you know, oh, Ryan and Roland, you're just, you're just greedy. You know, you're. You're unwilling to Give, you know, equity and, you know, in your business to people. Well, number one, it's not greedy to say, I don't want to give away something that's mine. Like, that's not greedy. We don't ask other people to do that. We don't say, you know, if you do, we typically would call it charity. So the reason that you would do this in a business context is because it's going to drive a positive outcome for the business and its stakeholders. And so I think what it is, is it's. It's arrogant to assume that everybody is motivated the same way. And I would much rather come up with. With payment, with compensation structures that get people what they want, which is, I'm going to work really, really hard, do an amazing job, and I'm going to get a check today. Not some mystery Monopoly money down the road when and if we sell. That just, to me, feels like, again, I think you get. And they even said in here, I think the direct quote was, Mr. Stavros acknowledged that private equity has problems. This gives workers a rare chance. But is it a direct result of the program? It's hard to say. Helps with morale and involvement. Data.

We don't need perfect data to believe in this. Well, I mean, so, okay, so we, we just want to do this, and we're going to, we're going to, we're going to go with anecdotal evidence.

They. Yeah, they said that at the end of the day, the gist of it is that this is more of a PR play than it is anything else. So, you know what? I'm fine call it that. But let's not pretend like we're, you know, you know, like this some noble thing that you're doing. No, this is another PR move to try to get around all the, like, the bad PR that frankly, a lot of private equity companies rightfully have, which is when they swoop in, they do cut a lot of jobs. They create efficiencies in ways that aren't always popular. But I don't know that this is the way to get it done. So I pass. I mean, there's a great bit of PR on behalf of the job. Kudos to their PR team for getting this pushed through. I buy in it.

Yeah, I, I think I, I align.

With you on that.

Obviously, one of the reasons we're business partners, I, I feel like, reward people for the thing that they do that increases the value or profits of the company. Reward them with cash. Measure it not indirectly by some blanket plan that rewards everyone I just, I think that, like I said, that's communism. And it doesn't seem that it has been very successful most places. So. So that being the case, figure out a comp plan that says, here's the comp that you get if you do this. I know. I learned when I was long ago one of the first companies that I started out in California, I would give Nordstrom gift certificates to the employees as bonuses. And, and then one day I asked, I said, I said, how do you like that? Because I was very excited about it because I was shopping at Nordstrom and I was like, you know, cool. You know, maybe a chance to get something at a place that you wouldn't normally shop and all that. And I got basically told, and I was very disappointed, but I got it. We'd rather have the cash. And, you know, what you do is you're giving us, you know, a gift certificate for a place that has expensive stuff that we don't wear anyway. We can't afford it if it's more than the gift certificate. Most of the stuff we want is more than the gift certificate because these were 51, $200 gift certificates. And so thank you, but could we have the. Could just have the cash. And I was like, yeah, that makes sense. And that, that's, I think, what's going on here. I think you pointed out really, really well. And there are so many ways to compensate people for their direct contribution to the company that don't require blanket equity, things that create liability and loss of, you know, loss of ownership for you that I'm, I'm, I'm leaning against this one also for all those reasons. So what do you guys think? We would love to hear your feedback on this. So in the comments, if you're watching this on YouTube or if you're listening to this, feel free to reach out to us and let us know on the socials. And if you like this kind of stuff, share it with a friend and we'll see you next time on Business Lunch.

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