Sharing the Dream of Success Brings Top Talent for Less

November 21, 2005

Case categories include: Human Resources   Strategy & Planning   

Trying to sell his coffee at the swap meet was the only thing he could think of to make the past due rent payment in those trying early days.  It worked well, and now Ola’s Exotic Coffee and Tea is on its way to 12 million in sales this year.  I asked him how he made so much progress so fast, without any debt.  He talked about his coffee’s virtues a lot.  This man loves his product.  But he gave the credit to his top team.

Hiring Believers
With a retail outlet in Milpitas and three other cities, he got to know his customers as he looked for talent.  As he found it, Ola would offer a salary of around 25% of market, plus an ownership interest that vests over time as well as a hefty commission on any sales they personally brought in.

Every company executive has an equity stake.  After an impending first private placement is completed, Ola will own 60% of the company, his 4 executives 25 %, and the private placement, 10%.

Ola’s sales went from 1 million in the first year, to a forecast 12 million in year two.  With headquarters in the Silicon Valley, an equity share arrangement is understood and appreciated.  Plans showing a big future are often enough for top talent to invest most of their salary in the company.  The right owner, team, opportunity and passionate belief can make a powerful mix, as it has in Ola’s case.

Equity is Precious
I’ve said many times to many entrepreneurs that equity is precious, and should be shared only if there is a compelling reason.  The moment there are two owners, decision making can get complicated, and history is littered with partnership disasters.  But no cash to pay market salaries can qualify as compelling reason.

To offset the risk of giving the wrong person equity, carefully evaluate the candidates.  In Ola’s case, several of them were distributors, or bought exclusive territories from Ola’s before they were hired.  Ola had the chance to get to know them first and to assess how they fit.

Ola doesn’t hand them their shares immediately.  The five year vesting schedule ties their commitment and performance to the equity.  They’ve got to perform and stick around to earn the shares.

There should also be a written process whereby if an employee leaves the company for any reason, their shares are bought back at a fair price, and at a pace the company will likely be able to afford.  Realize that Ola’s business is still quite young.  In five to ten years, his top team’s lives and priorities will likely change, possibly causing a mismatch.  Further, if he grows as planned, he will be well over 100 million in revenues, and the skills needed at the top may exceed that which his current top team (and shareholders) can deliver.  What then?  I personally just spoke to a CEO of a 100 million dollar a year firm that is turning away orders because his top team, who are minority owners, aren’t up to the task of growing to the next level.

Down the Road
Also think about possible future needs for equity.  If a second round of funding occurs, would the founder fall below a 51% ownership?  Will the founder be able to maintain the first right to buy back shares given to attract talent, or could their shares be bought by the financial partners, who could then gain control?  These issues are not pressing at the start, but do have a way of making owners regret giving up equity down the line.  Think them all through carefully with legal advisors.

As much as giving away too much equity can be a problem, using debt instead can be a disaster for a small startup with uncertain cash flow.  Debt, unfortunately, must be paid back.  I’m sorry to say that for those that are not already independently wealthy, there is no easy answer for getting top talent and liquidity.

Without a doubt, people who feel like owners tend to work harder for less.  Ola has used this to great advantage.  But managing the attitudes of owners is critical, and is the founder’s job.  Just as first time supervisors can easily become mini-tyrants, new owners can catch the attitude of entitlement, thinking that because they are owners, the business should serve them.  Nothing is further than the truth.  Being an owner means that you serve the business and all its employees.  And if you serve well, you’ll get to share in the appreciation of your ownership equity.  That appreciation is realized upon selling the shares.

Takeaways:

  1. Give away equity only when there is a compelling reason.
  2. Executives with equity interests are highly motivated and will stay with you for much less salary.  Use equity to lock them in.
  3. Make sure the founder has a way to repurchase the shares when the executive leaves.

Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages.  He is the author of The Feel of the Deal; How I Built a Business through Acquisitions.  He may be reached at Robert@ceotoceo.biz.

Fact Box:

  • Company: Ola’s Exotic Coffee and Tea, Inc.
  • Person: Ola Robert Hassan
  • Alliance Member since: 2005
  • Business Founded: 2004
  • Annual Sales Volume: 12 million projected 2005
  • Growth Rate:900%  04-05
  • Head Count:24
  • Product: Gourmet Coffee and Tea, Custom Roasting, Green Beans Importer, Tea Importer, Coffee Equipment manufacturer
  • Typical Customer: Restaurants, Hotels, Casinos, Coffee shops,Supermarkets, Retail stores etc.
  • Written: November, 2005