Keys to Structuring Your Board and Advisors

Hey, this is Hector Santia Steban. Welcome to today's episode of Business Lunch. Before we get into today's episode, we have to thank everyone who has left reviews on all the various platforms. And a big thanks to Chai46, who said they love this podcast. Quality content and very entertaining hosts I would very much recommend to anyone. Chai, thanks so much for the kind words and if you want a chance to be featured on the show, leave us a review on your favorite podcast app and we'll try and read it on a future episode. Now, today's Snackable episode with Roland is taken from a session at the first ever Scalable Impact Live this past November in Austin. It was Scalable's first live event and was a wild success that featured celebrity entrepreneurs like Marcus Lemonis, Emmett Smith, and Kendra Scott. This year's event sold out, but keep an eye out for some of those interviews as they'll be coming out here on the podcast in the coming weeks. Now let's get into today's Snackable episode with Roland.

You're listening to Business Lunch with Roland Fraz. This is your seat at the table.

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We're gonna talk about building your board. There are two boards that are going to be important to you. One is going to be your board of directors, and I'll explain when I have some charts up here in a second how that fits into the scheme of things and the other is gonna be the board of advisors. Both of those are really important for you. And, and they are very different things. So let's talk a little bit about building your board. The very first thing is you want to have a board friendly structure to your business. You want to have your business structured in the best way. There are lots of different objectives that you might have when you're setting up a company. If you've got questions, you can hit me up. But basically there are a few main types of entities that you might have. The most popular in the United States are corporations and limited liability companies or LLCs. There are other entities like limited liability partnerships or LLPs and limited partnerships or LPs that you might also see. The most common are going to be LLC and corporation. I've got eight different objectives that you want to consider. The eight objectives are limiting liability and then having a different cap table. Cap table is who the owners of the company are. Also you may, you may want a different entity to save taxes and you might choose an LLC or a corporation. Depending on where you, whether you want income to pass through to you personally or not, you might have preferential law. There are a lot of people that like to incorporate in Delaware, in the United States because the corporate law is very favorable to the owners and management, excuse me, to the management of the company and not necessarily to the owners. So when you're having a public company and you give up control as management, you might want to have those laws in your geographic diversity. You might set up separate companies just so you can have geographic diversity to, to do a different line or to approach a different market. Also funding friendly. Corporations are very funding friendly. They are something that the investment banking community banks and private equity companies and people like that very. Though a lot of times if you've got an llc, they'll ask you to reincorporate or to change it to a different type of entity that they understand and last but not least to prep to prepare for sale. Same thing. It's much easier to sell and in the public or the institutional investment world corporations than it Is to sell LLCs. Because there's a lot of advantages to corporations that LLC don't have. On the left side we've got what is the value Cash. And you'll see when I go through the chart here in a second. Where do you want to hold value? We typically don't leave all the value in one place. In a company we put the value of a profit center or an operational unit that's making money in one entity. And then we'll put tangible assets, things that are physical assets that we've got, like computers, desks, cars, equipment. In another company. We'll take intangible assets like trademarks, copyrights, intellectual property, that kind of stuff, and put those in a separate company. And then intellectual property, which is a subtype of intellectual, of intangible, we'll put in a separate company as well, mainly because we then create license relationships back to the profit centers, which I'll show you on a chart that'll make more sense. But basically, whatever the value cache that you're looking at and whatever your objectives are, this will help you pick what kind of entity you want. You probably want an LLC or a corporation more than any of the other types, unless you have a. Unless you're like a fund or something like that. And then there's another one that you can take a picture of if you happen to be from the EU or uk. I don't think most of you are at this point because of all the problems in getting in, but generally the PLC or the LTD are going to be your preferred choice there. Now, how this all shapes up is what we call the goose and eggs structure. And our goal is in exiting, because we like to be able to exit parts of companies or the whole company. That's the whole level 7. We want to set things up so that you can keep momentum. And this is something that I got from living in the neighborhood I live in. There's. I'm one of the younger people in the neighborhood. A lot of people there have sold businesses and retired and. And so they're playing golf and you get with them and they're just like, desperate to get back in business. They're like, man, I wish I was still in business. And they've sold their companies for, you know, billions or hundreds of millions of dollars, and they're just bored. And getting back in business, though, is really hard because the businesses most of them sold, they built up over 5, 10, 15, 20 or more years. And then they sold it. And now once you sell, this is something that's interesting. Once you sell, they don't really want you around anymore. It's kind of weird. Like, you sell it even if you still have part of the business. It's like they're just like, yeah, you know, hey, you guys need any help? No, no, we're good, we're good. You know, you just stay over there. And so you get kind of excluded from your social, from your routine of going into the business, from calling in, from checking Your dashboards, all that kind of stuff. And so the thing that you lose is the momentum to start again. But what you can do if you structure properly, you can keep the momentum but still sell the thing that makes the money and have the momentum to point someplace else. A case in point would be the sale of Traffic and Conversion Summit. We sold Traffic and Conversion Summit, but it was birthed from having media, an email list. It was started before Digital Marketer and Digital Marketer actually came about right after that. But. But then Digital Marketer ended up being the primary media channel that filled Traffic and Conversion Summit. So when we sold Traffic and Conversion Summit, because we had that in a separate entity, we didn't lose the media. They got the list of people, did Traffic and Conversion Summit, but they didn't get all of the people that were on the Digital Marketer list. They got a list of, I think about 68,000 people, as opposed to a million that we had. And we're building more and more people in Digital Marketer all the time. And we can still fill events, right? We can still fill events. We didn't lose that. We didn't lose the team because the team's in a separate company as well. So I use a structure called the goose and egg structure to do this. And a graphic will help you kind of see it. But basically you've got you. And whatever way you own your business, I would recommend that none of you own your business individually because there's a whole bunch of planning you can do when you own it through other entities. You'll see it says trust. FLP is family limited partnership or family limited, limited liability company or corporation. But I don't own anything in my name. I have. I have no net worth, but. But I have money, right? And then partners, if you have any, or investors if you have any of those. And then that's basically in your. That's kind of who owns your primary holding company. And I would recommend that you have a holding company that owns all of the assets that you've got for whatever business that you've got, okay. Whether that's stock or assets. Have a holding company. It just gives you so many planning options. Then you've got your primary operating entity. Okay? That to me is the OPS one. And what we do is we have a separate company that we put all of our shared resources in. So shared resources might mean. It might mean our media properties, it might mean our finance team, it could be our sales team. We put pretty much all of our employees in one company, even though we've got dozens of companies in. Unless under a single holding company, all of our employees are in one company because otherwise we'd have to have multiple payrolls, multiple benefits. Right? All of that. And we use the employees across several of the entities. So when they're doing the same thing, like a media buying team, we don't need to have a separate media buying team for 22 companies. Right? We just have one for all of them. Service that gets shared so that. So having a company that has your people and your shared resources, then if you sell one of your companies, you still have that shared resource company. You don't lose your people. Now, if your people need to go. If some of your people need to go with the company as part of the sale, it's fine. But like with tnc, they didn't want anybody. They just wanted the trademark, the, the content history and the customer list. That was it. They're they. It's a Blackstone company, Clarion, that bought it. Right. They've got 350 events. We're the smallest event they've ever bought, the highest. Then you want to have your intellectual property put in a separate company that's a holding company for your intellectual property. Well, I did this long ago and accidentally realized that it was a wonderful thing. I did it because I owned a motorcycle helmet manufacturing company. And every time anybody has a wreck on a motorcycle, the attorneys sue everybody. They're like, what kind of helmet were you wearing? What kind of gloves were you wearing? What was the body outfit that you were wearing? What was the motorcycle? All of those things, they sue everybody. So what I realized was, because we manufactured our helmets in China and Vietnam, is that if we had a company that was not a US Company that owned the brands that we had, and our brands were made to race and we manufactured also for Bell and a bunch of the other big people. But what we realized was that if the brand was held in an offshore company separately and licensed to the company in the United States that was selling the helmets, we had no valuable assets for anybody to get. So when the attorney sent the letter saying, hey, we're going to sue you, we would say, well, that's cool, but we don't have any products, liability insurance, and we don't have any assets. And they're like, yeah, but you've got this brand, you've got a racing team, you know, everybody knows who you are. We said, well, that's true, but that's not our brand. That's the brand that's owned by the offshore Company, you're welcome to sue them, but you don't have any jurisdiction to do that, and you know you're not going to get anything. So then they said, yeah, but you've got the rights in the United States to do that. And they said, yeah, that's through a license agreement, but, you know, the license fees every month are pretty steep, and if the company doesn't pay those license fees, we cancel the license agreement and just license it to another entity. They were like, well, shit. They said, okay, so you probably want to settle this, we'll give you ten grand. And that was basically what happened time after time after time. So having your intellectual property is cool now. That was cool for liability. That's why I did it. But what turned out when we sold that company to a big private equity company was that I realized that having that IP separately could turn out to be an extra benefit because there was a license agreement. And so when we sold the company, we didn't sell the intellectual property, but the company had the intellectual property rights. So when that company then went public and was selling to another company to go public, the company that was going public said, yeah, but you don't have the. You've got the license rights, but you don't own them. And we want to own them. So then the company that we had sold to came back and said, hey, you know, we got the license and everything, so it's pretty much like, we own it. Can you just transfer that over to us? We were like, yeah, I mean, maybe. What's it worth to you? And we ended up getting paid more than what we got paid to sell the company to them the first time, just for the intellectual property rights. Right? That was pretty cool. So there's no. There's nothing like shady about it or anything. You're very. You know, all of the documents are there. They're available in due diligence. They know. But having that intellectual property and owning that brand does two things. One, it might give you another bite at the apple like it did for us. Two, that can be licensed in other categories. There are different classes that your trademark applies to. So if you're selling an operating unit that has. That's selling, let's say, helmets for a class called Helmets. But there's merch and T shirts and all that stuff that your racing team generates demand for, and you're not selling that because they're only buying the helmet company. That's something that's worth thinking about. You can keep an entire business segment. So the next thing that you want to think about then is, well, what if I want to have like a new product line and I want to separate the liability from that for my existing product line? Well, that's a good idea. You would do a separate company for that. If you use this structure, you can fund that from your existing company or you can transfer some of the risk to investors without giving them any ownership of your existing company. So your existing company, we've already got a company here that's making money and it's owned by the holding company. And we're going to start this new company up here. Let's have a new cap table, let's have these people come in and invest. But let's not give up part of the equity of this company. Let's give up some of the equity of the new company that's not yet proven. So and let's, by the way, the people that are going to run this new company, let's give them maybe some stock options and equity in that company, but not in the holding company. And definitely, definitely not in the holding company and not in the operating company that's already making money because they're not going to have any impact on that company. So you can set up separate operating companies that have separate cap tables each time you want to do some new thing. And that's a structure that we found that works really, really well. Now how does this relate to boards of advisors and boards of directors? Okay, I'll show you. So you have your holding company, your holding company typically is going to have a board of directors. And it looks like that's not displaying completely correctly, but it says owners and it says the owners vote to elect the board of directors and they vote to appoint advisors. So the owners are the people that have this ability to get these boards of advisors. That's you, right? So the board of directors actually is, is going to be meaningful. They have power. They are the people who if you lose control of the board can vote you out of your company like you've seen happen several times, right? Very publicly. But if you can keep control of the board, then you can stay in. You can be the CEO, you have control of the company. But the board of directors actually are the people who elect the officers of the company who run the day to day business. So you wanna be super, super careful who's on your board. You heard Kendra say basically she was the only person on her board of directors. In addition to that, the owners can have a board of advisors, which is what we strongly recommend you have. Legally you'll have to have a board of directors. But that, that can just be you. Okay. As you get bigger, there's reasons for you to have other people on, but for a long time it's probably okay for it just to be you. Then your board of advisors is who you want. They don't have any actual power. They can't vote you out. They can't vote you out as the person that runs the company because they don't elect the officers. They have no legal power. They're just people that you're asking for advice. That's why they're called the board of advisors. So they're advising your company. Now then your primary operating company we talked about, right, Your primary operating company, tangibles, that's the company that owns your intellectual property. It licenses those to your operating company. The shared services company licenses or leases those employees to your operating company. And then you might have reasons like these new companies that you're doing. One reason might be that you're gonna do a startup. You're gonna do a startup that's gonna be some new thing you wanna go into that's related to your company. It's not completely different or you wouldn't put it under this structure. But if your existing company has startup it wants to do, then it's gonna start like for a new business line or some new product or service. Well, that company can have, in addition to having its own cap table, like we talked about on the last slide, it can have its own board of directors and its own board of advisors. So you may end up kind of layering or maybe you acquire a company, as we'll talk about in my next session, we're talking about acquiring companies, right? If you acquire a company and that company doesn't get merged into your original company, it's its own cap table, it's going to have its own board of advisors and its own board of directors. Now, you might share them if you want, but you have the opportunity if it's doing something different or to get a new board of advisors or board of directors, or you just keep the ones that they had because maybe they've already got a good one. And then the last thing would be if you're going to do a spin off. So sometimes you'll have somebody that approaches you and they say, we want to buy your company, but we don't want to buy all of your company, we just want to buy the part of it that does this. Then there's a legal process that allows you to separate that part of your company into another entity and sell that and you'll typically keep an interest in that company and then that company will have its own board of directors or board of advisors. So, like when we sell some of our companies, we'll find that Ryan and I are on the board of directors of the new company. And so we've got board meetings on that. We've spun out a division of our company and it's acquired by a bigger company. But they want us to stay on the board because they, they want us to have some ability to help them with the new deal. So that's kind of a structure of how you might have boards of advisors and boards of directors. You've been listening to Business Lunch with Roland Fraser. If you're enjoying the show, let us know by subscribing and leaving a review. And for more information, go to businesslunchpodcast.com thank you for listening.

Hey business hunch listeners. We're going to get right back to the show, but Roland wanted me to invite you to a brand new training that he's doing on acquiring businesses with no money out of pocket. It's something that he's talked quite a bit about on the show, but he's doing a free training where he's going to walk through the entire process. So if you want to get access to that, go to businesslunchpodcast.com epic that's businesslunchpodcast.com epic and you can get signed up.

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