by Ryan Blair
You can also do vesting based on deferring market rate wages, which can be a prime way to hire top wage earners if you’re not quite in a place to afford them. If someone is worth $100,000 but you can only pay $75,000, you can offer deferred compensation wherein you draw up a contract guaranteeing that when the company hits $50 million (or whatever your goal is), the employee will make ten times his deferred income for each year he has stayed with you. This means, for example, that for the employee who defers $25,000 per year and stays with your company for, let’s say, four years (when you meet your goal), he could potentially earn $25,000 × 10 × 4 years = $1 million! I used this technique at both SkyPipeline and ViSalus. In fact, I once used this deferred compensation plan with my entire start-up team. One executive earned more than $300,000 by deferring a mere $25,000 in wages.
There are three forms of compensation that all employees should earn. The first is money, the second is recognition, and the third is contribution. To have a strong team, you need to be paying your employees with all three.
My first taste of compensation through contribution was at a SkyPipeline holiday dinner, when I looked around at all the children who were laughing and playing and having a wonderful time. And then it hit me—I have a responsibility to them. I have a personal responsibility to keep this company up and running and generating business because that is what is putting food on their tables at home, what is buying them school supplies and warm clothes for the winter. Reminders like that can be tremendous motivators that give perspective and meaning to the other forms of compensation you’ll receive while building your business. I receive compensation from contributing to my employees, and you will want your employees to receive the same feeling of contribution as a result of their service to their customers.
Just remember that your product is more than simply the goods or services you have to sell. Your product is your people—how they represent your company, how they interact with clients, how they view their own professional lives. And this is a direct result of whom you recruit and how you treat your people. You want the highest-quality product you can offer to give your customers the best value. Be sure you think about your employees in the same way by offering them a solid team of peers within the company and the right kind of incentives to keep them excited, active, and content. The only thing that separates you from greatness is the people you hire. No great company has ever been created without great people. And when you come across a great potential person for your team, get creative and start selling. The following is the e-mail I used to close the deal when I hire the former president of Herbalife to be the president of ViSalus. The problem was he was rich and happily retired. I needed to find another way to get him to join our company.
After a few e-mails and an in-person meeting, I really liked John. I thought he was the perfect fit for what we were looking for. When the perfect fit shows up, you need to sell that person on your company, just as you would an investor, and as you’ll see below, I was selling:Subject: Re: Vi-President-Job Description
Date: Wed, 6 Jan 2010 19:54:22-0800
From: [email protected]
To: john-purdy
Thanks for the reply John. I think you’re the right fit.... 5 years from now if we do what I think we can, . . . you’ll be sending your daughter off to a school . . . Where dad’s on the board :).
I’ll be coaching little league for my 6 year old.... We’ll both be happy we made the decision. My personal opinion is you’ve got this in you. Done selling. Ryan
His response was:From: John Purdy
Sent: Thursday, January 07, 2010 7:17 AM
To: Ryan Blair
Subject: RE: Vi-President-Job Description
I love your style!! I like the picture.
John
ps She wants to go to Juilliard in NYC!!!!!!! I guess I had better
go back to work
He did go back to work and has provided a significant value to ViSalus. As your company grows, you’re going to need a number of key hires. So I ask you: Who’s the one person you need to take your company to new heights? Who’s your perfect recruit?
18
CASHING OUT
There will come a point in your company’s life when you are faced with a tough decision: Should you stay on with the business you’ve built, or is it time to move on and cash out?
It is a serious and deeply personal decision that no one else can make for you. In this chapter, I want to lay out the various scenarios and possibilities to consider when you do find yourself faced with this choice, and I will suggest things you should consider if you find yourself inclined toward making an exit. I’ve made and sold lots of stock in my time and have been on both sides of the deal—the guy writing the check and the guy getting one written to him. Here are some key things to think about before you take money off the table.
Phil Jackson, coach of the Los Angeles Lakers, loved to say, “Every life has a cycle, and too many people stay on longer than they should, and they actually reduce the value of what it is they’ve accomplished.” Now that you have gone from being unemployed or unhappy in your job, how do you know when the time is right for you to finish the game and celebrate what you’ve accomplished—and how do you exit the court gracefully?
As you begin considering the future, you will need to evaluate the various options open to you. The three most important are timing (Is this the best time for me to leave the company?), direction (In what direction do I see both my company and the industry headed?), and opportunity (What options are out there right now that are worth more examination as potential means for an exit?).
Timing can be both a subjective issue and an objective one. In the first case, consider your health and energy, other dreams you want to pursue, family issues, a desire to retire to another part of the country—any one of these could affect how you view the issue.
When the thrill of the entrepreneurial spirit is gone from your company, and you’ve maximized the potential of your industry because you have a comfortable and solid market share, you may be interested in selling to pursue other business ventures. Maybe you want to explore a different industry, or you find yourself intrigued by new ideas. Green business, for example, is highly valuable right now, and perhaps you are interested in trying your hand at developing a technology that reduces carbon footprints while the timing is right. Whatever the case, this kind of restlessness is very common among entrepreneurs because of the innate competitive nature that drives many of us to this field in the first place. My venture capitalist friends call this founder’s syndrome, when it’s time for the founder(s) to move on.
On the other hand, the timing might be right or less than ideal. For example, a person looking to sell his home construction business in Southern California would have made a killing if he had sold it in 2007. If you know that the market is at a high in your field, that might affect your decision. Conversely, that same individual would have a much more difficult time selling his business in 2009, simply because of the downturn in the market. If your industry is currently in a slump, that can also alter your perspective on whether now is the right time to leave.
This also points to the next factor you need to consider: direction. Are you in tune with the markets? Do you have a sense of which way the trends are starting to point? For example, after several years of growing and developing SkyPipeline, it became clear to me that cell phone companies were going to give us a run for our money. I didn’t want to be in the business of trying to fight that, and neither did my investors. I know that there are some people who relish that kind of challenge, but I felt that I wanted to explore other options to go along with the new direction of the industry rather than carve out a niche contrary to it, so I began looking for buyers. We reached out to a few of our competitors and asked whether there was an interest in combining our businesses. Two emerged, and we successfully sold the company to the higher-bidding competitor.
Even if the industry itself is not headed in a directi
on you want to avoid, you may find that it is time for the company to take a new direction—and that you are not the person best suited to do that. Perhaps you no longer feel you can contribute as a founder the way you once did or that your research indicates that it is better for your company to diversify or specialize. Maybe that type of shift doesn’t play to your strongest skills, but you have a person in mind who would be an ideal leader. It could be that now is the time to hand over control to a new CEO who can take what you’ve established and build and grow your company to new heights.
Finally, you will want to consider the various opportunities that are out there. If you have someone with a generous buyout offer right now, you may want to take a serious look. Do you want to hand over the company to someone who cares about it, knows the business, and is willing to pay you a premium that will make the years you invested in it seem worth it?
You should also be looking ahead toward other opportunities that may be coming down the pike so you can prepare your company. For example, if you know that Microsoft will probably begin trending toward a certain area over the next twenty-four to forty-eight months, and your company has an effective product in that market, you may want to begin to position your company to be appealing to Microsoft as they look to absorb smaller businesses that can meet that particular need. We will discuss in the following pages how to begin aligning your company so you are poised for an offer.
If you do determine that the time is right for you to leave, you can’t simply walk out the door one day and be done with it, though. You need to have an exit strategy that sets your business up for a smooth transition and a successful future. If nothing else, you owe that to your stakeholders.
The first way to exit is probably the most appealing to a majority of people, and that is to retire while maintaining an interest that continues to earn you money. It’s commonly referred to as golden handcuffs—a play on the golden parachute idea for big-name CEOs leaving with huge severance packages. Whether you have a home-based business or twentyfive franchise locations, golden handcuffs are a permanent tie to your company that bring you residual profits while keeping you close enough to the business for you to give advice, meet with shareholders, and go over corporate affairs as the need arises.
In many cases this isn’t an exit but is rather a method for getting a good team to run the company under your supervision for the long term. To some people, this isn’t appealing—when they retire, they want a clean separation. For other people, this is the perfect arrangement that allows them to enjoy the benefits of what they’ve created while also allowing them to stay active in the business they love. This is also a good system for maintaining the confidence of investors or shareholders, who are often spooked by a complete handover of power. By retaining a presence within the company, albeit a limited one, you can help ease fears of the unknown and still add value to the enterprise.
For this kind of exit to be successful, though, you have to make sure that you have left the books in order and that you have appointed the right people to whom you will hand over the reins of leadership as you move toward a lesser role. We’ll discuss more about this later on.
The second way to exit is through a merger or acquisition. In other words, if there is an interested person or group who wishes to purchase the business from you at a fair price, it may be an offer worth considering. Likewise, if another company makes an offer to fold yours into its own operations, you may also have a good opportunity to leave, while knowing that your years of effort will carry on, and your employees will have continued stability. A merger or an acquisition can be a very complicated transaction. I’ve been on the buying side a few times as well as on the selling side. SkyPipeline merged with NextWeb, which was bought by Covad Communications. Fusion merged with ViSalus and was bought by Blyth. PathConnect was merged with Solution X and the code we wrote went on to become the core behind Solution X’s Unity product. We then sold Solution X to Icentrix and now our technology powers five hundred thousand direct sellers and is a $15 million-plus business. I have been a part of several merger and acquisition deals and, fingers crossed, might one day find myself on the buyer or seller side again.
Your final option is to take the company public so that shareholders—in addition to you—become the owners. In this scenario, rather than selling to one party, you are selling part of the company to anyone who wants to own a share, and you are allowing it to be traded on the stock exchange. In the interest of full disclosure, I should tell you that I have never taken a company public. At ViSalus, we were seriously considering taking our company public on the London Stock Exchange in late 2007. We had a term sheet from a billion-dollar hedge fund to help with that move, but after careful consideration, we decided to sell to Blyth. As a young CEO, I thought the idea of going public was exciting. I dreamed of billions in market capitalization and hundred-dollar stock; however, that wasn’t the reality I was facing, and I must admit, I’m glad I’m not running a public company in today’s economy. In fact, we dodged a bullet by not doing that deal.
When I was leaving SkyPipeline, we first merged with another small company called NextWeb, then sold our combined equity to Covad, which was a public company. At the time I made my exit, the stock was trading at about $0.70 a share, and when I sold my shares, they were about $2.60 each. Many of my investors followed suit and made up to five or six times their initial investment because of our exit plan and strategy; others chose to remain invested in the company and saw the company go through some difficult times before it was eventually bought for $1.05 per share. Those investors didn’t yield the same return as those of us who took our money off the table. My responsibility was to get them liquidity so they could determine how much money they wanted to make, and that was exactly what we did. It ended up being a good strategy for the business because I couldn’t develop it the way it needed to be developed, but NextWeb/Covad had the means and the interest to do just that. My investors could then decide for themselves whether they wanted to align with the new company or move their interests elsewhere.
From a financial point of view, the golden handcuffs solution is almost always the most preferable because it leaves the greatest number of assets in your name, which translates to greater profits—not just during your lifetime but as part of your estate. Mergers and acquisitions are never easy, with their legal wranglings and contract terms. They also can potentially endanger the jobs of some of your employees who may be let go because their positions duplicate those that already exist in the other company. This is called consolidated savings, and it is a common practice to buy a company with an eye toward consolidation. Also, a company’s bid to go public may not be successful if it is not large enough and profitable enough to generate sufficient public interest in purchasing it. I know many public company CEOs who wish that they were with private companies because of the challenges that a public company brings.
But each situation is different, and if a merger will open new markets for your product, it may end up being the wisest option. Or if you feel that the investment potential of a publicly traded company is what your business needs to reach the next level, then these might be the right choices for you after all. Seek counsel from board members and advisers who have been through these very complex processes and . . .
LAWYER UP
If you want to take the route of offering your company for sale, you will probably have a number of different options for marketing your company. There are business brokers and investment bankers who specialize in how to approach the potential buyers for your business. You may also find yourself talking to local competitors, as we will discuss a little later on. Whatever the case, when you are involved in selling your company, the most important thing you can possibly do is hire a good lawyer to pore over the details and negotiate the best possible contract. In the ViSalus/Blyth transaction, we spent more than a million dollars on attorneys to ensure that the right deal was reached for both parties.
When ViSalus merg
ed with Blyth, the contract was ninety-six pages of legalese. I remember spending hours on the phone reviewing every line of every page with all of the deal’s team: our attorneys, our executive board, and our management team. We had people on the line from New York, Philadelphia, Miami, and Los Angeles, and we read over every single word of that contract. That is what we had to do, because it literally meant millions to each of us. And it turned out that one term, flex year, was the most important term in the entire contract. (It gives us the option to push the buyout back a year, and we used it to get through the recession.)
Unfortunately, many entrepreneurs make the mistake of thinking, I hired the lawyer to write that contract for me; I’m not going to read every word of it. That’s the biggest mistake you can possibly make in an exit. During the ViSalus transaction, I was trying to push through the agreement when Todd Goergen stopped me and, almost yelling, said, “Ryan, we are going to read every single word, every word, on this call.” There were ninety-six pages, one hundred words a page, and six people on the call—it took more than four hours. But that was an important lesson for which I am grateful, because I learned that you have to make sure you understand every bit and piece of the deal so you know where you stand, where your employees stand, and where your company stands after the deal is finalized. Don’t be afraid to stop the meetings and ask questions. Sometimes the concepts are very complex, and only the pros in the room will fully grasp them. Make sure you understand everything, and don’t be too intimidated to ask, “What does that mean to me, specifically?” In one deal, I stopped the meeting several times to ask questions, saying, “I am not familiar with this concept and how it applies. Will you please explain it to me in detail?” Truth be told, sometimes I knew exactly what they were talking about, but I wanted to make sure everyone in the room understood it, too. Either way, it is your job to make sure you and your team fully understand everything to which you are agreeing.