Understanding Equity: What Employees Need to Know Before Asking for Ownership

Understanding Equity: What Employees Need to Know Before Asking for Ownership

In the dynamic landscape of boutique professional service firms, the prospect of equity ownership often entices employees to envision themselves as stakeholders in the firm’s success. However, the allure of equity can sometimes cloud the understanding of its implications. Many employees, when faced with the reality of what it truly means to be an equity holder, reconsider their initial desire for ownership. In this blog post, we’ll delve into eight critical aspects of equity that employees should grasp before pursuing ownership in their firms.

8 Things Employees Should Know About Equity:

    1. Personal Guarantee of Obligations: As an equity holder, you’re not just an investor; you’re a co-signer. This means personally guaranteeing all obligations of the firm. For instance, banks often require “jointly and severably liable” agreements, holding all equity holders accountable in case of default. When an employee becomes an equity holder in a firm, they risk everything they have with a personal guarantee.
    2. Fiduciary Responsibility: Equity ownership involves accepting fiduciary responsibility, particularly in government scrutinized events such as payroll and sales taxes. In case of tax issues, the IRS will pursue all equity holders, emphasizing a shared liability that many employees find discomforting. With equity comes accepting the risk of the tax man coming after you.
    3. Salary Cuts During Slow Times: In lean periods, equity holders may need to slash their salaries, sometimes even down to zero, to sustain the firm. This level of financial sacrifice may not be feasible for many employees who rely on consistent income streams. Equity holders ride the wave up, and down.
    4. Loan Obligations During Crises: During crises, equity holders may be required to loan the firm money to meet its obligations. However, employees often lack the financial means to provide such loans, let alone the comfort level to do so. Partners in the firm carry another title: banker. If you do not want to loan the firm money, don’t ask for equity in the firm.
    5. Stricter Non-compete Clauses: Equity holders are subjected to more stringent and enduring non-compete clauses, often extending up to five years. This contrasts with employees who typically sign shorter, less restrictive agreements, allowing them more flexibility in career choices. For example, an employee can quit, wait 12 months for a non-compete to run out, and start a competing firm. An equity holder can do the same but after ~5 years. The difference is similar to the difference between dating and getting married.
    6. Personal Credit Tied to Firm’s Credit: An equity holder’s personal credit becomes intertwined with the firm’s credit. For example, a firm’s bankruptcy can result in personal bankruptcy for the equity holder, a risk many employees are unwilling to accept.
    7. Spousal Involvement in Equity: Equity holders will need their significant others to sign documents regarding the valuation and payment terms in the event of a divorce. This intertwining of professional and personal relationships can create discomfort for employees who prefer to keep these spheres separate. An ownership stake in a private company is an asset. In a divorce, the assets get divided up, including the equity stake in the firm. This means when you become an equity holder so does your spouse. To avoid this messy situation, you can ask your spouse to sign a post-nuptial agreement that excludes the equity stake in the firm, or, you can ask the firm to include your spouse in the partnership agreement. A post nuptial agreement and/or a modified partnership agreement is often a deal killer.
    8. Financial Obligation to Acquire Shares: Unlike receiving stock options, becoming an equity holder often requires purchasing shares. Many employees may lack the financial resources to afford such acquisitions.

If after reading these 8 items you do not want to become an equity holder, you are probably wondering if there are alternatives. And the good news is there are.

Alternatives to Equity

Here are two alternatives to equity that allow employees to participate in the upside of the firm without the downside.

    1. Exit Bonus for Executive Team Members: Executive team members can receive an exit bonus, a percentage of the purchase price in the event of a firm sale. This simplifies reward structures, offering incentives for successful exits without the complexities of equity ownership.
    2. Profit Sharing for Top Performers: Non-executive top performers can participate in a profit-sharing pool, earning a percentage of excess profits generated by the firm. This rewards individual contributions to the firm’s success without the legal and financial commitments of equity ownership.


Understanding the intricacies of equity ownership is crucial for employees considering ownership in boutique professional service firms. While the allure of equity may initially seem appealing, it’s essential to weigh the associated risks and responsibilities. For those seeking further guidance and insights on navigating the complexities of ownership structures, we encourage joining Collective 54’s mastermind community, where industry leaders share invaluable expertise and support in professional growth and development.

Eight Key Questions to Ask and Answer When Structuring Ownership: A Perspective from Three Co-Founders

Eight Key Questions to Ask and Answer When Structuring Ownership: A Perspective from Three Co-Founders

Starting a boutique professional service firm is an exciting journey. Here, we’ve distilled our collective experiences into eight key questions every founder team should ask and answer when structuring ownership:

    1. Who owns what percentage?

Answer: Ownership stakes reflect the value each founder brings. When deciding percentages, consider factors like capital investment, skills, connections, and previous experience. It is crucial to have candid discussions about these elements and recognize where each founder adds unique value. The ownership distribution should be based on a mix of these attributes and future commitments.

    1. Who is in control?

Answer: Control can be different from ownership percentage. In most firms, co-founders opt for a unanimous decision-making model for major decisions. This way, despite any differences in ownership percentages, each co-founder feels their voice is heard and respected.

    1. Who has contributed money, how much, and when?

Answer: Keeping transparent records is paramount. Document every monetary contribution and link it to specific milestones or business needs. This approach makes it easy to see who contributed, when, and why, fostering trust and clarity among co-founders.

    1. Who is going to contribute time, how much, and when?

Answer: Not every founder can commit full-time initially. Discuss your individual commitments, both present and future, and noted any anticipated changes (e.g., moving from part-time to full-time). Clear agreements prevent potential resentment or misunderstandings.

    1. What is the incentive compensation plan for each co-founder?

Answer: Besides equity, it’s essential to consider salaries or other compensation, especially if founders have varying levels of financial commitments outside of the business. Adopt a model where early salaries are modest but are combined with performance bonuses and future equity vesting.

    1. What happens when a co-founder quits?

Answer: A founder leaving can be unsettling. Agree that if a founder decides to quit, their shares would undergo a vesting schedule, allowing them to retain only a portion of their equity based on the time committed. This strategy ensures that founders are incentivized to stay and contribute to the firm’s growth.

    1. What happens when a co-founder is forced to leave?

Answer: This is a tough but necessary discussion. Establish a framework detailing specific scenarios where a founder could be asked to leave (e.g., misconduct, not meeting agreed-upon commitments). In such cases, a buyback clause at a predetermined valuation would be triggered.

    1. How is a “forgotten founder” handled?

Answer: “Forgotten founders” are individuals who may have contributed in the early stages but weren’t formalized as part of the founding team. Addressing this proactively, Agree to acknowledge any early contributors either with a smaller equity stake or a one-time compensation, ensuring they’re recognized but without long-term firm obligations.

In conclusion, structuring ownership isn’t just about equity distribution. It’s about crafting a relationship framework that will endure challenges and maximize collaboration. By confronting these questions head-on and forging transparent, fair agreements, will lay a strong foundation for your collective future.

If you find this article helpful, come join us at Collective 54. Apply here.

Dead Equity on Your Cap Table Means You are Dead

Dead Equity on Your Cap Table Means You are Dead

Boutique service firms that have dead equity on their cap tables are dead.

What is dead equity? Dead equity is equity held by people who no longer work for the firm.

Why is it a problem?

Acquirers do not want their growth equity to be used to buy out people who are no longer contributing to the growth of the firm.

The presence of dead equity prevents many founders of boutique professional service firms from exiting.


Don’t give equity to people who are not helping you grow the firm.

And if you already have, buy it back before you try to sell your firm.

Episode  125 – How a Founder of a Consulting Firm Added Equity Partners to Scale Beyond a Lifestyle Firm – Member Case by Mike Braun

Mike Braun started Pivotal Advisors with his brother to get off an airplane and make a living with less stress. One day he realized he wanted more than a lifestyle business. This required the recruitment of the next generation of leaders who wanted a piece of the pie. Mike masterfully created a plan to allow for equity to be shared with the new team. And in the process, he built a legacy, a firm that would last long after he and his brother were gone.


Greg Alexander [00:00:10] Welcome to the Pro Serv podcast, a podcast where leaders of thriving boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community focused entirely in exclusively on the very unique needs of the boutique professional services sector. My name is Greg Alexander. I’m the founder and I’m going to be your host today. And on this episode we’re going to talk about how ownership structures in boutiques change over time. For example, sometimes we start our firms and we own all of it, or maybe we start it with another partner. And then over time, you know, key employees start to contribute. The firm gets bigger and you need to maybe include others in the ownership structure, and doing that correctly can be tricky. So we’re going to talk about that today and hopefully you can learn something. We have a great role model with us today. His name is Mike Braun. And Mike’s been through this and he’s going to share a little bit with us how he has been able to make this happen. So, Mike, it’s good to see you. Thanks for being here. Please introduce yourself and tell us a little bit about your firm. 

Michael Braun [00:01:29] Thanks very much for that. Glad to be here. So our firm is a sales effectiveness firm, which you may be familiar with. And although a little smaller markets were probably down market from when you played before, and we think of it as working with the small to midsize market for people that have an underdeveloped sales team and they’re trying to get more out of it, which is we find to be a large majority of CEOs are trying to get more out of their sales teams. 

Greg Alexander [00:02:00] Yeah, very good. Okay. And as I understand it, you started the firm and it was an equal partnership between yourself and another person. And then over time, it became four owners. Is that correct? 

Michael Braun [00:02:15] That is correct. And the the first 5050 not only was another person, the other person was my brother. 

Greg Alexander [00:02:20] Oh. 

Michael Braun [00:02:21] So so we have the family component here as well. So we we we ran around in other businesses and both grew up through the sales side, learned a lot and decided that we were going to share all of our knowledge and start a business that we knew something about. And our goal and this is a funny part, our goal was. We’re not going to get on airplanes because we were both road warriors. And we’re going to make a living and we’re never going to have partners. 

Greg Alexander [00:02:52] Okay. 

Michael Braun [00:02:53] So that was the original movie, right? 

Greg Alexander [00:02:57] COVID certainly helped with the airplane thing, but it went from two partners to four partners. So what happened? 

Michael Braun [00:03:06] Well, as we went on and you know, we started this back in 2008 and the other, you know, bad part of life and recession was hitting. So we’ve been through a couple of them now. As time went on, I think we we decided probably very late in the game for me, but we decided it was a great lifestyle business for us and a few other people. But now we wanted more and to get more we needed to move on and we actually needed to make it a business. We could scale and grow. And to do that, we needed to bring in some other highly talented people. And we brought those people in. We needed a way to retain them. And then, of course, these smart young people started asking questions like, Well, if we grow this thing and knock it out of the park, what’s in it for me? 

Greg Alexander [00:03:50] Those damn smart people.

Michael Braun [00:03:52] And I think what happened is we said we’re not going to get to where we want to fast by ourselves. 

Greg Alexander [00:04:02] Okay. So let me ask some tactical questions. So that’s good context for us. So, you know, the first thing you got to get right when you’re cutting new partners into the partnership is the valuation. So how did you get everybody to agree on what the firm was worth? 

Michael Braun [00:04:18] Great question. And I did I didn’t take your advice for the chapter as I hadn’t read it yet. You know, go go get a good investment banker and no, go get really smart people to help you. So I did some work, created a valuation formula, took it up cheap to some accounting friends of mine. Not that they’re cheap. They’re professional accounting valuation people, but I got them to do it sort of on the gratis take a peek kind of thing. We came up with a financial formula that said, you know, I think cleanly said, here’s how much we’re earning here and here’s what our cash flow is and that kind of stuff. Then you have to pick your multiple, right? And it’s it’s how do you pick a multiple when you’re when you don’t you’re not really selling, you’re not really in the market. You don’t have good comparables. So we just went and found a study that said, here’s what the average management consulting comparable is. And I think it was 2012. And we all said, is that a good benchmark for us internally to put a number on it and through some discussion on the matter? Everybody said, yeah, as an internal number, it’s probably not the maximum we would get if we sold the business. But for us, that says a metric that we can use. 

Greg Alexander [00:05:37] Yeah, perfect. I mean, the most important thing is to get agreement from all the parties, which is sound like you were able to do is, which is great. Which takes me to my next question because it’s one thing to say this is how we’re going to value the firm. And then there’s another thing to say, you know, here’s who, here’s who has the rights to do X, Y, and Z. Because once once people become partners, they have rights. So how did you handle governance? 

Michael Braun [00:05:59] Great question. And it took a pretty big evolution in our myself because I had one between my brother and I, which was relatively easy to put together. But now you start to bring in other people in and you’ve got the whole control issue. So so the way we did it is we said we still have to make sure that we keep controlling interest. So that kind of divided very quickly how many shares were available. And then we even set it up so that there’s. Sort of different levels of membership, if you will. So he and I still have what I would call company control. And there are really minority partners that share in the income. Producing distributions as well as if we ever did sell the company, they would obviously get their share of that, but they had less. If we disagreed, they would have less say and. What we’re going to do or what process moving forward. And that took some work because, you know, being a minority shareholder, everybody wants equity. So they realize what being a minority shareholder is really about. 

Greg Alexander [00:07:08] Right. You know, everybody wants equity until they have to pay for it. So did you guys grant the equity or did you sell it? 

Michael Braun [00:07:15] Great question. I am one of those people that never bring up equity. I don’t I don’t believe in that. Right. It’s like I worked for this. I’m not going to give it to you because you work hard. So they paid in in in each of them did differently. One, save money for a period of time, although we did it kind of like a stock option locked in a price. Instead, you can buy in at this price. And then, you know, it took a couple of years to save that money and, you know, physically wrote a check. The other person said. I want to get in faster. And so we basically did a seller financed who said, okay, you’re bought in today, but we’ll do an installment purchase over a period of time and you can buy it. But either way, they are buying shares to become owners of the company. 

Greg Alexander [00:08:04] And are they still doing that? And how long does it take to buy the shares? Is there a schedule? 

Michael Braun [00:08:10] There’s a schedule, but one is, you know, wrote the check upfront. So they saved for about two years and bought in. The second one will have bought in after about two and a half years. 

Greg Alexander [00:08:22] Okay. Very good. You know, I’m glad to hear you say this because you and I are similar in the sense I don’t believe in giving equity away. I think you got to earn it and it should be paid for, otherwise it’s really not worth anything. So but, you know, sometimes people struggle with that, but you learn real quick who really wants to be a partner. I mean, if they’re willing to save up for two years and buy the stock, then they’re all in. You know, if they’re not, then maybe they’re not. So the advice to the listeners would be is to is to follow that. It’s a good screening tool. Tell me a little bit about how you and your brother, over time as you decided you wanted more than a lifestyle business and you’re going to grow it? You know, it’s one thing for the equity to change in the minority rights to come into play, but what about the day to day job and responsibilities? How did that change over time? 

Michael Braun [00:09:09] Yeah, it was it was really interesting because one of the things we said is, you know, we have to. We’re going to have to migrate. And then, of course, if you do that, if you do, I’ll give you a general idea. So. I’m in my early sixties. My brother’s four years younger than I am. His other two partners are 15 years younger than we are. So now you got four partners with completely different time horizons that have completely different ideas of the time frame to grow this business or move to the next step. Right. Yep. So we started putting things in place pretty quickly Where? I started giving away. Responsibilities on finance and product development and giving away responsibilities on managing the delivery team, if you will. And my brother ran the BD in the marketing side of things largely, so I was building myself out of it and continue to do that, which is a weird spot to be. That’s probably another podcast. And but we. We really started getting clear about who’s doing what and who owns what. In that process, with a much more focused goal on how do we how do we drive enterprise value, not just not just matches EBITA, but enterprise value, and how are we going to grow this thing? And in course, some of the group just call us the younger part of the group was let’s take every dollar reinvested in the business and grow this thing over the next 15 years. And as the eldest partner and the we don’t want to, we would keep some of them on the right. So we were in that mode and continue to be. But I think the happy medium, you know, if I think about when, when one of the other members talking about the rule of 40 when it comes to sort of profit and valuation that was super helpful around let’s be in 2020, let’s have real cash flow, let’s have real money, let’s have a real firm in in let’s grow at 20%. And some years we were pretty close. So many years were just off that. But, but that’s the model where we’re chasing after, you know. 

Greg Alexander [00:11:28] And Mike, after having a successful family lifestyle business, life’s pretty good. Everybody’s making money, you’re not on an airplane, etc., etc.. I mean, what caused you to wake up one day and say, you know, I want to do something more than a lifestyle business? 

Michael Braun [00:11:45] You know, really, we always said we wanted a company, not just our own little practices, because we could have done that. We did build the company and we brought other people in right away. But I think it really changed. And this is probably something for everybody to think about. When we said we want this thing to live beyond us, there’s going to be a day where we and I and that wasn’t even really that close when we started having these conversations. We are still probably half a decade. And yet if it’s going to live on, it’s got to live beyond us. And how do we make something that continues to provide value to our clients, continues to provide, solve the problems for them, and gives people great careers? You know, when I’m off doing something else, yeah, I’m never going to get there. Otherwise, you know, this is going to look like I’m going to work till I’m done working. And then this thing goes, Yeah, which was going to be a problem for my brother, who had four years left. Right. Like. Like, Sorry, dude, I’m out. And that just wasn’t feasible. And then we said, maybe. Maybe we have to build a real growing company here. And to do that, we need some other people. 

Greg Alexander [00:12:56] Now, sometimes founders. Aren’t as idealistic as that. Maybe there are two. Capitalistic, meaning they sell their firm, they get a bunch of cash they don’t really want. They don’t care what happens to the firm after that. They’ve been validated, so to speak, and they look at their bank balance and it puts a smile on their face and they ride off into the sunset. Others say, You know, I really care about my clients and want them to be treated well afterwards. I really care about my employees. I want them to have good-paying jobs and career opportunities afterwards. You know, there’s people that fall, you know, in the middle between those two things. So obviously, you know, you made substantial changes because you care what happens to your firm after you leave. Was there a particular influence that made you think that way? 

Michael Braun [00:13:47] Oh, my. That’s a that’s a really good question. And I will also say it’s as much as it sounds like I did that perfectly. There are days where you think about the bank account. 

Greg Alexander [00:13:56] Yeah, sure. Always. Right. 

Michael Braun [00:13:57] Right. And so if I’m honest about it, there are days where it was like, well, how do we maximize this? And then there are other days where it’s no, we got to do the right thing by the employees. And then there are other days where it’s like, Hey, these clients deserve the best. And so you do run around that triangle a little bit. But but from an influence perspective. This is going to sound really, really weird, but I’m going to go back to my mother with tell us, as kids, you know, if you do the right thing by people and hold your head high, you don’t have to be the richest person in the room. Yeah, maybe without even thinking about that. That was buried in there at age six, right? Yeah. 

Greg Alexander [00:14:42] Yeah. Great advice. You know, I think we all need role models. Parents obviously can play that role. You know, for me, you know, I studied entrepreneurship. That’s what I’m passionate about. And the most successful entrepreneurs that there’s always somebody who has more money than you. 

Michael Braun [00:14:59] Oh. 

Greg Alexander [00:15:00] Oh, I mean, I don’t care who you are. It could be Elon Musk. And now he’s no longer the richest person in the world. But the really successful entrepreneurs measure their life’s work around impact. And that’s not to say that you shouldn’t make a profit. You should. However, impact is greater than that. And I think what you’re doing is fantastic. And it sounds like you guys have given a lot of thought to this. And as a result of that, you’ve built a great company and you’re in your early sixties and you know the next chapter, your life might start here relatively soon. And it sounds like the firm’s in good hands afterwards. So I really appreciate you coming on the on the podcast. I’m really excited for the private member Q&A that we’ll have with you where members can ask you questions directly, but on behalf of the membership, appreciate you making a contribution today. 

Michael Braun [00:15:48] Thanks for the time today and again, thanks for your input into it. You were part of all that thinking. Great. 

Greg Alexander [00:15:52] I’m glad to hear that. Okay, so a few takeaways for the listeners. So if you are a member, look for the invite to Mike’s Q&A and be sure to attend that so you can ask your questions to him directly. If you’re not a member, I encourage you to think about joining. You can go to Collective 54 dot com and fill out a contact us form and we’ll get in contact with you if you want to consume some more content. A couple of ideas for you. One is subscribe to our newsletter collected 54 insights that comes out every week. You get a blog on Monday, a video on Wednesday and a chart on Friday, a little bit more digestible. And then we’ve got a couple of great books. We have the boutique How to Start Scale and Sell a professional services firm. You can find that on Amazon. And then we have a member-only book available to members only, I should say, called The Founder Bottleneck How to Scale Yourself. And it talks about some of the things we discussed today, which is legacy succession, etc. So I’d point you in those directions, but thanks for listening. And until next time, I wish you all the best of luck as you try to grow a scale and sell your firm someday. Take care. 

Should You Give Employees Equity?

Should You Give Employees Equity?

Play Video

Equity splits are the number one cause of business divorces and can cost you millions. So how do you ensure you not only get it right the first time but keep it right as your business evolves?

This week’s video lays the groundwork for it all. Join us to hear about the reasons you should care about equity in the first place, mistakes to avoid, criteria for signing equity, and when to make adjustments.

In this video, we also cover:

    • Six criteria for signing on equity
    • Dynamic equity splits vs static equity splits
    • What dead equity is and how to get rid of it
    • Why 50/50 splits almost never work
    • When to divide up equity

Episode 84 – A Marketing Agency’s Approach to Sharing Equity with Key Employees – Member Case with Kelsey Raymond

There are many ways to split up a partnership. And the equity split needs to evolve over time. On this episode, Kelsey Raymond, Co-Founder & Chief Executive Officer at Influence & Co., shares how she successfully replicated herself by developing a key employee into her COO, so she can run the business on her own terms.


Greg Alexander [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. For those that aren’t familiar with us, Collective 54 is the first mastermind community to help you grow, scale and exit your firm bigger and faster. My name is Greg Alexander and I’m the founder and I’ll be your host today. And on this episode, we’re going to talk about ownership, structure, the right one, how to split up equity and all of the associated challenges with that. And the reason why members should care about this topic is because converting income into wealth is how boutique founders realize their dreams. Generating a high W2 or K-1 is easy. Most of our founders are exceptional people, and generating high incomes has not been a challenge for them. However, building a large balance sheet is hard. Net worth Trump’s net income and net worth is generated from ownership. We want to make sure that our scaling activities are producing lots of personal, net worth and wealth for our founders. And sometimes that requires sharing equity with others that can help grow the pie, so to speak. So therefore, the right ownership structure is so important. So we have a role model today, Kelsey Raymond. And Kelsey is an expert on this. And she’s someone who has created wealth for herself and converted income into wealth. It’s built an amazing business. And she’s going to tell us a little bit about her journey and how she pulled this off because so many of us are trying to do it. So. Kelsey, welcome to the show and please introduce yourself. 

Kelsey Raymond [00:01:58] Thank you. Thank you for having me here. As you said, my name is Kelsey Raymond. I’m the CEO and founder of Influence and CO, which is a content marketing agency. And yeah, I have been doing it for about ten years and have learned a lot and made a lot of mistakes along the way. So hopefully others can learn from some of those. 

Various Speakers [00:02:21] Okay, great. And I wanted to talk a little bit about equity and equity splits. And as I understand it, but I’m sure there’s more to the story that you have a CEO, I believe her name is Alyssa, and she’s been pretty important to you. And and you have shared some wealth with her. As I understand it, she’s an equity owner in your firm. Tell us a little bit about how that evolved over time and and why you decided to go that route. 

Kelsey Raymond [00:02:53] Absolutely. So the first iteration of this, from the beginning of the company, since we started turning a profit, my former co-founder and I decided that it was important to align incentives with the whole team. So we from the day that we started turning a profit, we allocated 10% of the company’s profit for a profit sharing pool to pay back to the rest of the team. This was always, you know, communicated as this is at our discretion. If we have a really bad quarter, it’s not going to happen. You know, don’t count on it. Don’t go plan to, you know, put a pool in the ground or anything like that. But but so from there, that was a way that, you know, even as a small team of 12 people, we had this profit sharing pool and everyone got different amounts determined by their role, their seniority, their performance. And it was paid out on a quarterly basis. Mm hmm. Alyssa was our first ever full time employee. So she’s been here since day one. I very much consider her, you know, an unofficial co-founder from the beginning. So as that her profit sharing amount was always the highest or on the higher end of everyone else on the team. And over time, we saw that one way to really show her how much we valued her was to give her a guaranteed amount for that. So it changed from, hey, you’re going to get some percentage to, you know, we’re allocating 10% for the whole team. 2% is just for you. So, you know, every quarter you’re going to be getting 2% of the profits. But at that time, it wasn’t equity. It was really I think most people would call it phantom stock. So if she chose to leave the company, that was going to go away. So I share this is kind of a an evolution over time of both Alice’s role changing in the organization and really, you know, her stepping up more and more. I wanted to tie her in more and more as her role changed. So once she became the CEO, I really, you know, and my co-founder left. So that’s a whole other story there. But I really, really saw that it would make sense for her to have some true equity. And one of the reasons for that is that we were having conversations that we were open to the idea of selling the business at some point. And based on her, the profit sharing structure that she had, she wouldn’t have been included in any exit, any sale. And so went to her and said, you know, I really would like for you to come in as an equity partner. You know, up until this point, we’ve just we’ve given you this 2%. If you want to buy in at, you know, up to 5%. I’d like to welcome you to do that. And the way that we structured it is that we only asked her to pay 20% of that purchase price for the equity that she was buying upfront. And then the rest was paid out of the proceeds of her distributions. So that really allowed for. Her to have true equity in the company without having to come up with a bunch of money upfront, but still having some skin in the game since, you know, I had brought a lot to the table when we had got the loan and everything like that. So that’s kind of the evolution over time. And then we actually did end up selling February 4th. Melissa and I are still running the company, so it’s an interesting structure. But with that, you know, her her return on what she invested to become a true equity partner, she said, is, you know, the best investment she’s ever made. Times 1000. So it all it’s all worked out really well. And it made me really happy that, you know, that opportunity that made me more wealth worth selling that business, that she was really included in that because she’s been so key and so integral to the organization. Yeah. 

Greg Alexander [00:07:04] Well, so first off, congratulations on your sale. We’re very proud of you. And I hope it was everything you dreamed it to be. But I will say I’m glad you’re still running the shop. And and it sounds like you’re going to go on a journey. Did you sell to a private equity firm? 

Kelsey Raymond [00:07:18] We did. We did. It’s an interesting, interesting structure, which I think is probably pretty standard. But, you know, part of the value was in cash up front, but then part of it’s in over an hour now and part of it is enrolled equity. And so that’s where, you know, Alicia is still included in that as well. So that’s, you know, rolling that into hopefully something a bigger pie in the future. 

Greg Alexander [00:07:39] Yeah. So your incentives remain to be aligned and hopefully the second bite of the apple is even bigger than the first bite of the apple, as they like to say. Okay, so I loved the story on how it evolved over time and the vision that you had from the get go of aligning incentives and setting aside this profit sharing pool. And then when you decided that this one individual was worth buying in and having real equity coming up with a creative, creative financial structure to make that happen, because sometimes when when members try to do that, they go to people and they make the offer, but the people don’t have the money. And it. Exactly. It’s prohibitive. Right. So and I did that with my firm and it worked out really well. There are some challenges with that. I’m sure you uncovered, for example, you probably had to have a partnership agreement at that point that that, you know, governed what you can and cannot do because you now have a fiduciary responsibility to it, to another party. So you had to weigh all the headache of doing this with the benefit. So what was kind of your pros and cons analysis there? 

Kelsey Raymond [00:08:43] Yeah, that’s a great question. I think the the biggest pros and cons analysis was. Replacing a. Like. I know. I think that she is absolutely capable to go out and start something of her own. Not even if it would just be a competitor. She could start any company. Yeah, she’s incredible. And so knowing that she’s going, she. She knows her value enough that even if she loves working with me and we love, you know, everything that we’re doing together, she knows that she could do something on her own. And so that was, you know, the biggest thing in the pro column is what can I do to make sure that she knows she’s valued and that, you know, she’s going to stick around for the long term. So that was the biggest thing I will share, that I had an instance with an employee that was leaving who also had a guaranteed portion of profit. This was our former CMO and she had asked when she was leaving, Hey, can I can I buy that portion like I’m leaving? And I know that that goes away, but I think the company is going to continue to do really well. So can I buy in and get that percentage? And the answer to that was no, because there wasn’t value there to me, because she wasn’t remaining on. Right. And so with Alissa, I really was looking at is this going to keep this person motivated and incentivized to stay with the company? And looking at, you know, if I knew that if we were going to sell someday, I needed her in my court on that. I needed it to be something that she was excited about as well. And so having those incentives aligned for her on a potential sale was really, really important to that as well. Yeah. 

Greg Alexander [00:10:29] What’s so great about the story is that her investment and the equity she got as a result of that materialized. Exactly. Yeah. Sometimes I hear, unfortunately with other members when investments made and you’re making an investment in illiquid private company. So everything has to go right in order for that to get liquidated and in it turn into real money, which it did in this case, which is such a great example of that. Sometimes when private equity makes an investment in a firm like yours, they want meaning the new investors want a broader set of owners. They sometimes they set aside, for example, I don’t know, maybe 10 to 20% of the equity in stock options. And they want to spread ownership across instead of just you and Alissa, maybe you, Alissa, and three or four others that that happened in this case. 

Kelsey Raymond [00:11:21] It didn’t. The conversation that we did have is that they are creating a liquidity pool, liquidity bonus pool for when the that second bite of the apple when it the entity as a whole because we’re rolled up with a few other agencies now sells again they’ve asked me to identify a few other people in the organization that I think are other other people that we really want to make sure are incentivized to stay, that they see that same vision and that they would be included in that liquidity bonus pool. That, though, is different than equity because they would have to be remaining at the organization during that time frame for that to materialize for them. 

Greg Alexander [00:12:07] Okay, I see. So they are aligning incentives and doing it with a liquidity bonus pool as opposed to the stock option, which sometimes happens. But I’m glad to hear that they did that. You know, you mentioned something about your CMO and her wanting to buy her phantom stock, but then leave and you had the wisdom not to do that. When I see people doing that, they create this thing called debt equity. And debt equity is when somebody owns a piece of your firm, but they don’t work there. So they’re really not creating an equity. And when you go to sell the firm down the road, it becomes a real problem because somebody says, okay, I’m paying this amount of money for this piece of equity, but there’s not there’s no one behind it. Yep. Did you get lucky there? Did somebody give you that advice? Have you you know, how did you know enough not to do that? 

Kelsey Raymond [00:12:55] Yeah. I’m trying to think. I think the biggest thing for me because this I respect the heck out of this for this woman that asked. The biggest thing for me, though, was also kind of creating a precedent for if I said yes to that, we had other people that were involved in profit sharing that may also want to buy in. I’d have to have a really good reason to tell them no if they were still with the company. And I let someone buy in who’s not with the company. So I think that was a big case of it is thinking through, you know, doing this for one person on our leadership team, anything that has anything to do around compensation, equity ownership, I assume that everyone else knows everyone else’s business. Yeah, because I think that’s the only way you can make smart decisions is if I assume that if I tell her yes, she’s going. You go tell every single other person on the team, which she wouldn’t have. But if I make that assumption, then I can make the decision through that framework of what I be willing to do this for every person that asks. And if the answer is no, then I need to be really careful about setting that precedent. Where was Alyssa? She was the first employee on the team. I think many people probably assumed she was an owner even when she wasn’t. And so telling the team the why behind Alyssa is the only one that was given that opportunity was a very easy explanation and something that I knew I could stand behind. 

Greg Alexander [00:14:22] Yeah. And they were probably happy for. 

Kelsey Raymond [00:14:25] Absolutely. They were excited because I think, you know, they also saw that as great a loss is not going anywhere. We don’t want her to. 

Greg Alexander [00:14:31] Yeah, exactly. When you weren’t selling the equity to Alyssa, how did you put a price on it? 

Kelsey Raymond [00:14:38] Yeah. So this is going to be I’m going to try to sell the short version, but interest. What made this even more interesting is that I started the company with two founders back in 2011. Two other co-founders. One of the co-founders owned a. Basically what turned into a private equity firm. It wasn’t a private equity firm at the time. It was kind of like an incubator. It was very unique model. And so he brought all of the money to the table. And myself and the other cofounder were the ones executing. That was in 2011. I had a very, very small percentage of the company over time, seeing that this other co-founder brought the money to the table, wasn’t involved in operations at all. My other co-founder wanted to do something different. It seemed like the timing was right for me to buy both of them out. So I bought both of them out in 2018. Alissa bought in in 2020. So what we were able to do is I said, you know, I would feel comfortable giving you the same deal that I got. So let’s look at the multiple that I bought it on of EBITA and apply that to our last trailing 12 months EBITA and use that same multiple. So we both agreed that was a fair way to do it because it was basically the same that I bought in at as far as the multiple. And she thought it was a really fair deal as well. 

Greg Alexander [00:16:02] Yeah, very good. So you had the good fortune there of having precedent, you know, and you were generous enough to give her the deal that you got instead of trying to mark up her deal. Yeah. Which is fantastic. And the proper way to handle that. So. Well, listen, I could talk to you about this forever, but we’re. We’re at our time limit here. I do look forward to the member Q&A, which we’ll do here in a few weeks. But, you know, the way that these collectives work is people like you deposit knowledge into the collective body of wisdom, and we all benefit from that. And every time a smart person does that, the whole membership benefits. So. So Kelsey, I literally on behalf of the membership, your story is fantastic. It’s inspirational, it’s educational. And I just wanted to thank you for contributing today. 

Kelsey Raymond [00:16:44] Absolutely. It’s fun to get to talk about these things. And like I said, I’ve learned a lot. So anytime other people can learn from the things I’ve learned along the way, I appreciate it. 

Greg Alexander [00:16:52] Okay. Fair. Fantastic. Okay. And for those that are listening, if you want to know more about this subject and others like it, pick up a copy of the book, The Boutique How to Start Scale and Sell a Pro Serv Firm. And if you’re not a member and you’re listening to this and you want to meet brilliant people like Kelsey and hear these types of stories, consider joining our mastermind community as you can find out, collective54.com. Thanks again. Have a good rest of your day.