Episode 145 –How Life Gets in the Way of Scaling a Professional Service Firm and What to Do About It – Member Case by Matt Jenkins and Nick Moretta

The personal lives of the Founders evolve as a firm advances. And the professional lives of the Founders morph as a firm matures. How can partners stay in harmony with themselves, and with each other, along the entrepreneurial journey? This session shares how partners work well together and use a tool called The Commitment Letter.


Greg Alexander [00:00:10] Hi, everyone. This is Greg Alexander, the host of the Pro Serv Podcast, brought to you by Collective 54, the first community dedicated to the boutique professional services industry. And on today’s episode, we’re going to talk about how one’s personal life and professional life change as a firm goes through its natural evolution and how critical it is for partners co-founders to. Change with the times, so to speak, and how to keep those things in harmony. And if they’re not in harmony. Bad things can happen. And if they are in harmony, wonderful things can happen. And we have a couple of collective 54 members with us today, Matt Jenkins and Nick Marella, and they are someone who’s taught me quite a bit about this subject and I thought it was worth them sharing what they’ve shared with me, with all of you. So with that, guys, it’s good to see you. Welcome to the show. Why don’t I let you introduce yourselves and maybe, Nick, I’ll start with you and then Matt, we can hear from you. 

Nick Moretta [00:01:22] Hi, I’m Nick Moretta. I’m a founding partner here at Other and I oversee a couple divisions of the business and they’re my very proud  Collective 54 member and father of two. Yeah. 

Greg Alexander [00:01:33] Thanks. 

Matt Jenkins [00:01:35] And my name is Matt Jenkins, one of the other founding partners here at Other. I oversee sort of the operations, service delivery and the business oversee a little bit of client services as well. And I am a father of one right now. We’ve got three partners in the business, so two of the three of us are here today. 

Greg Alexander [00:01:53] Okay, very good. And for the benefit of the audience, tell me what other is. 

Nick Moretta [00:02:00] Yeah, sure. I’ll take that one. So we’re a 40 person performance marketing firm. We have clients in Canada and the US, and really what we do is we help our clients derive the most value from their paid media investments using our proprietary methodology and channels like paid search and paid social. That’s really what we do as an organization. 

Greg Alexander [00:02:16] Okay, very good. Perfect. All right. So let me start with the first question, which is how have your personal lives changed, you know, since the founding of the firm until now? And, you know, maybe I’ll air traffic control this. Nic, why don’t we start with you? Because you just told me. Just add your second kids. So lots of change in your life right now. So this is a timely question. 

Nick Moretta [00:02:39] Yeah, definitely. Definitely. Yeah, I think I think so. Like, you know, when we started the business, we were super young, right? We were, I think around 25 years old. And, you know, life has changed a lot. When we started the business, there were super long hours, you know, we were coming home at 11 p.m. or midnight. We were starting at 8 a.m. in the morning. You know, very exciting time in the business to sort of build and get off the ground. But we didn’t have a lot of commitments. We didn’t have mortgages at the time. We didn’t have children. And I think over the past few years we’ve really seen that shift a little bit. You know, all three of the partners at our firm have young kids. I have two kids. Matt has one, Catherine has one. So we’re just getting used to that change and making sure that we stay disciplined with creating or integrating both our personal lives that are in our professional lives. 

Greg Alexander [00:03:28] So, Matt, in terms of the professional life, we just heard from Nick how the personal life had changed over time from, you know, being young and full of energy and being willing to burn the midnight oil to a time of adulthood and having obligations which we all eventually mature to. How has the the professional life, Matt, changed since the founding of the firm? 

Matt Jenkins [00:03:53] It’s not dissimilar to the personal side. If you think about your team in the context of being like your business family. And we don’t necessarily refer to our our team as a family, there’s a very different dynamic that happens with your your team than with your family at home. But know, in the beginning I think we spent a lot of time, Kat and myself, doing the work we spent. We would go on, we would we would find a client and we would bring them on board and come on board. We were the same people sitting there that needed to do the work and actually service what what we’d sold in. And so we spent a significant amount of time doing that. In the early days, and then he sort of move on and realize the need to bring on your first team member and and bring them all in and you can offload some some work, but then you need to mentor them and you need to take care of them, need to look after them, to train them and to create exposure and upward mobility for them. And then he starts to extrapolate that among the larger group of people, and that becomes you get some time back because you’re not doing the work yourself so much anymore, but you’re managing and mentoring these people and there’s time associated with that. But it frees up some time to be able to grow the business as well and for myself to start to build some business infrastructure. And so today we’re about 40 people and we’re across two offices. We have one in downtown Toronto, we have another one in Ottawa. We work on a principally hybrid model and we have a couple of different layers of management. And so things change remarkably. We’re not really the ones doing too much of the the actual client work anymore, really spending the majority of our time growing the business, continuing to augment the the operating infrastructure and processes and spending a lot of time mentoring and helping our people to grow. So it’s a very different vibe today than it was it sort of responsibility today than it was then. Yeah. 

Greg Alexander [00:05:52] That’s a great illustrative example for sure. And sometimes people struggle when that happens because they actually enjoy doing the work. And then, you know, I once learned in my life, you know, you go into business for yourself and you think you’re working for yourself, but one day you wake up and you realize you’re not. You’re working for your clients. Then one day you wake up and you’re not just working for your clients, you’re working for your employees for the reasons that you all just mentioned. And then eventually you wake up one day after you exit and you realize you’re not working for your clients, your employees, you’re working for your investors. So it changes kind of as you go through time. But, you know, you have to go through it to learn it. There were a few things that that you all shared with me that I wanted to pick on as examples, because I think our members would be particularly interested in this. So you went from a period of time where you were focused on salaries to now where you’re focused on distributions, and that is a big mental model shift. So tell us a little bit about that. When did that happen and kind of what caused that and how are you dealing with it? 

Matt Jenkins [00:06:56] Sure. I think there’s also an important stage actually prior to that, which is the pre salary stage, which is at the early days where we didn’t make any money. So it took some time. It took some time. At the beginning we only had $150 each into this business at the beginning, which was not enough for any sort of payment. And we took some risk and we started to build it organically. And at the beginning, yes, it’s it’s salary from a taxation perspective, It’s salary, but it’s it’s significantly based on what we are bringing in on the top line and what we’re able to take home and obviously a function of our cost base. And so in some respects it’s in some respects it’s performance based. And then as we’ve grown over time, we have to keep our salary structure commensurate with the work that we might be paying somebody else to do a similar job inside of the organization. So if I’m acting as a lead of operations, how much would a lead of operations cost in the marketplace and structure the compensation around something similar? But at the same time, we’re still owning the company and our responsibility is to the overall financial performance of the company. And so there starts to become an element that is outside of that, that’s performance based distribution. And so that’s the sort of middle stage is that when there’s a balance of those two things. And now as we think more about ourselves as the founders of the organization and the owners and are less in the work, it’s it’s becoming more on the performance compensation side and less of the day to day compensation of somebody who might be, you know, might be available in the market to occupy that same kind of role. So from sort of nothing to the small salaries and the salaries and distributions. And then we’re sort of off in the future looking at probably a larger portion of distributions and less salary. There’s also the elements of taxation that’s important along the way, which is having a good partner to help you navigate that and making sure that you’re you’re earning efficiently is also really important. 

Greg Alexander [00:09:12] You know, And someday if you do exit your firm, it’s going to make it a lot easier for somebody to buy your firm because they’re going to understand what the true cost of operating the businesses, which is your salary, reflective of what the going rate would be for somebody to perform that job. And then they can separate that from the distributions of the excess profits that you’re distributing to yourself right now, which is how an owner would get paid. So you’re balancing the two hats of owner operator extremely well. So that’s a lesson for all of our members is that, you know, those those things are separate. You know how you’re compensated as an operator, what should be market based and how you compensated as an owner? What should be distribution based, based on excess profit? Okay. Let me go to the next one, which was the shift from focusing on utilization, you know, as a measurement of yourselves to focusing on profits, you know, as a measurement for yourself. It’s kind of related to what we just talked about. But the way you run your firm and like the KPIs you look at, Accenture might be slightly different. So maybe I’ll direct this one to you, but how did that evolve inside of your firm? 

Nick Moretta [00:10:23] You know what, Greg? I think actually Matt could provide a probably better, more concise answer for this one. 

Matt Jenkins [00:10:29] Sure. Yeah. To be completely transparent in looking at utilization in the organization is not something that we’ve always done. It’s not something we were taught to do in previous lives. We haven’t run professional services business before and so we were coming into this and we were really focusing our our time and effort in the earlier stages of the business around some of our traditional business metrics. What does top line look like? What is profitability look like, and are those things growing? And we didn’t look a whole lot at the science behind what makes the inside of the engine actually work. And in the last several years, we’ve spent a lot more time on that. I think there’s also a lot more time on that, and we’ve re-engineered the organizational KPIs around that. They’re certainly still top line and profitability at a board level. But when we look inside and think about how to manage resources, it’s much more focused on target billable gaps and utilization rate and and things like that. But I think there’s also a mental shift, which is at the beginning, kind of like Nick was saying, we’re spending until midnight. We’re not going and tracking that time and time tracking system and making sure that the profitability get there. It’s a it’s a do whatever you need to do, whatever cost to make this client happy so that you can continue to build and grow that relationship. And that worked really well for us in the beginning. It’s obviously not sustainable strategy over a long period of time. But I just want to speak to there’s there’s kind of the size part of it, but then there’s also the mental shift that we’ve had to go through to say, okay, how can you manage this really effectively? And I think one of the things that we actually look at that’s a big topic in our category is that traditionally in advertising and marketing agencies, the notion is that people are overworked, that they come in very early and they stay until very late and they work too much. And I look at that as if there’s something broken in your business model, if people are doing that. And so if we see somebody in the office at 630, 7:00, I look at that as actually poor management and not somebody who is going above and beyond because our economic model should work and our operating model should work such that people can be in the office for the hours that we’ve allotted to that. So, yes, it’s shifted in a couple of different places. That’s a. 

Greg Alexander [00:12:51] Great synopsis. All right. So we’ve talked a lot about how the business has changed and the professional lives have changed. Let’s come back to the personal for a moment. You all have this wonderful tool that you called the commitment letter. And I thought it was it literally blew me away. I’ve never seen anything like it before. I love the symbolism of it, the wet signature. And it’s so relevant to our community because like you, that’s there’s three partners. Most processor firms are partnerships. Partnerships need to work. They’re kind of like marriages. There’s got to be compromises. People need to understand where everyone’s coming from. So why don’t you tell me about the commitment letter, how it originated, how you’re using it today, and maybe at the end of that explanation, give some advice to our listeners as to how they might copycat you on this. 

Nick Moretta [00:13:43] Sure. Yeah, I can definitely elaborate on that. So, you know, earlier I would say earlier this year, late last year, you know, we were approaching, I guess, you know, we’re approaching nine years now. We’re at eight and a half years old, our firm. And, you know, we’re feeling tired. You know, we had all young kids. We’re feeling a little bit beat up. And we know that in order to preserve your, we have to stay resilient. And part of the idea behind it was how can we have a commitment letter where we make commitments to each other? Because I think a lot of us and a lot of the members here, maybe they make commitments to themselves, maybe they’re around physical health or mental health, and maybe they’re commitments around business or family. And sometimes it’s difficult to live up to the commitments that you make to yourself. But when you make a commitment to your business partner, you make a commitment to a family member. I always find that, you know, brings a little bit more skin in the game and you want to make sure you live up to your commitments. So the idea was, we’re in a sit down. We’re going to make, you know, a series of commitments around different areas of life. So how do we we want to commit to becoming better executives? Part of that was actually setting up for collective 54 so that we could learn we can educate ourselves on how to become executives. We want to be more accountable to each other. We want to make sure we show up prepared to meetings. We want to make sure we, you know, allude a certain preparation to the rest of the organization. Personal and mental health, you know, physical health and mental health. These are important things. Commitments to exercise, commitments to seeing coaches. So we wanted to make sure that we just had a shared set of principles and commitments that we put down on paper. And then symbolic, like you mentioned, you know, how can we sign this document off? It’s not like a legally binding document. You have your shareholder’s agreement, but it’s more around saying this. And we sat down and we committed to these things. So we’re going to make sure we remain a. And, you know, if I needed to to give any advice on how someone could get started, you know, perhaps we could share the template with you, Greg, and you could put it into the portal. But I really think you have to sit down with your business partners and find out what are the things that are, you know, you’re struggling with both personally and professionally and how can you how can you commit to resolving some of those things? So are we operating at peak performance as a partnership group? If we’re not. Why not? Is a personal is a professional. List those things down and then put those series of commitments together and just put a signature against it and say, we’re going to commit to this for a year, which is what we did. 

Greg Alexander [00:16:12] It’s a fantastic story. I’m so glad that you guys have brought this to us. I would very much appreciate the template, if you wouldn’t mind. Couple of quick follow up questions on it. Are the three founders all approximately at the same stage in life in terms of age and things like that? 

Nick Moretta [00:16:30] Yes. Yes. We’re all three of us are at very similar stages. 

Greg Alexander [00:16:33] You know, that’s often overlooked. But it’s it’s mission critical because imagine a commitment letter, you know, if you have one partner in their sixties, one in their forties and one in their twenties, I mean, you just you just life is different. So it’s hard to make, you know, mutually reinforced commitments to each other. So something to think about there for the members. As you were going through the commitment letter, was there a negotiation? You know, were you horse trading in any way or was it not Was that not the spirit of the document? 

Nick Moretta [00:17:03] I think, you know, negotiation is more of a hostile word, right? I think it was more around making sure that they were realistic commitments for everybody. So, hey, listen, we’re going to commit to these things if we do. You realistically think you’re going to be able to live up to this commitment. So one of them is we need to exercise at a minimum 1 to 2 times per week. Do we think that this is realistic? You know, yes, this is realistic. If we came over at four or five times per week, maybe not. So it was really around are these realistic commitments that we can make to each other less around negotiating over the specific thing? 

Matt Jenkins [00:17:40] And I will add there that one thing that did have some meaningful discussion around it was actually making it time bound because when we originally put it together, it was put together with no end date on it. It was just, here’s the commitment from now until forever. And I think in some ways that when we were trying, it took time. It seemed a little bit daunting. It’s like we’re going to commit to this now and then. And then what? And so what we decided we were going to do is we’re going to put a time frame of a year on it. And it also helped us to narrow in and say, okay, what is truly important if we want to get where we want to be in one year, what is truly important between the three of us and let’s narrow in some of the language around that. And then we signed it off for one year. And so when we get back to the end of this year, we’ll revisit it and say, you know what was helpful? What wasn’t helpful? What do we think is a priority for next year? And we’ll we’ll do a fresh one or well, at least do a version of this year in a modified way. So the time bound piece I think has been helpful for us, and that was probably the thing that we discussed the most throughout the process. Yeah. 

Greg Alexander [00:18:46] The thing that I love about it the most is that to Nick’s earlier comment, you know, I mean, I am a habitual offender of commitments to myself. I oftentimes blow them off and because, you know, I’m not letting anybody else down other than myself. So therefore I tolerate it when I make commitments to my team. I mean, I have a tremendous sense of obligation and I don’t want to be that guy, you know, that guy that let down everybody else. There’s just something about our human psychology that that that’s part of who we are. And if you’re structured in a partnership and you really have partners, then it’s intensified because, I mean, the last thing you want to do is let your partners down. So I think it’s such an effective tool. Well, listen, we’re at our time window here. We try to keep the podcast short. We’re going to go into this much greater depth when we have our private member Q&A session with you all. But on behalf of the membership, it’s just wonderful having you guys in the community. This contribution to the body of knowledge is particularly fantastic amongst many others that you’ve made over time. So thank you for being here. 

Nick Moretta [00:19:47] Thank you. Thank you very much. Appreciate you having us on. 

Greg Alexander [00:19:50] All right. I’m going to give the audience just three quick calls to action. So members look for the invitation to attend the Q&A session with Matt and Nick. If you’re not a member, you want to become one. Go to Collective 54 dot com and fill out an application. We’ll get in contact with you. And if you’re someone who just wants to learn a little bit more directly to our book, you can find it on Amazon. It’s called The Boutique How to Start Scale and sell your professional services firm. Okay, guys, we’ll talk to you soon. Take care.

Choosing the Right Business Entity for Your Boutique Professional Service Firm

Choosing the Right Business Entity for Your Boutique Professional Service Firm

Choosing the Right Business Entity for Your Boutique Professional Service Firm

Starting a boutique professional service firm comes with the excitement of delivering exceptional value to clients. However, one critical step founders must navigate is determining the best business entity for their venture. This choice affects aspects ranging from liability to taxes. Here’s an overview of the different types of business entities and their pros and cons.

    1. Sole Proprietorship


      • Simplicity: No need for formal registration, reducing paperwork.

      • Direct Control: Sole owners make all the decisions without outside interference.

      • Pass-through Taxation: Income and expenses are reported on the owner’s personal tax return.


      • Unlimited Liability: Personal assets can be at risk if the business incurs debt or faces legal issues.

      • Difficulty in Raising Capital: It might be challenging to attract investors.

      • Limited Growth Potential: Can be restricted by the capacity of the sole owner.

For members of Collective 54, a sole proprietorship is not recommended. This business entity is better suited for single shingle freelancers not concerned with building a firm.

    1. Corporation (S Corporation or C Corporation)


      • Limited Liability: Shareholders are typically not personally liable for business debts.

      • Growth Potential: Ability to issue stock can attract investors.

      • Perpetual Existence: Corporations can continue beyond the life of its founders.


      • Complex Formation: Requires more paperwork and expenses.

      • Double Taxation (C Corp): Profits can be taxed at both the corporate and individual level.

      • Ownership Restrictions (S Corp): Limit on number of shareholders and they must be U.S. citizens or residents.

This type of business entity is not recommended for Collective 54 members. The reason this is discouraged is founders of boutique professional service firms do not need to raise capital. Professional service firms are capital lite businesses and are most often bootstrapped. Given the primary benefit of a corporation is that it allows for capital raising, which is not needed in pro serv, this choice should be avoided. Unfortunately, this business entity is often mistakenly chosen by first time founders of professional service firms. This mistake is made because many boutique pro serv founders come from product companies and this entity type is used often in that situation.

    1. Partnership (General Partnership, Limited Partnership, Limited Liability Partnership)


      • Multiple Owners: Enables pooling of resources and expertise.

      • Pass-through Taxation: Profits and losses pass directly to the partners’ individual tax returns.

      • Flexibility: Fewer regulations compared to corporations.


      • Unlimited Liability (General Partnership): Each partner can be personally liable for the firm’s obligations.

      • Limited Liability with Compromises: In limited partnerships, limited partners have limited liability but can’t engage in management decisions.

      • Potential for Conflict: Multiple partners can lead to disagreements.

This structure works well for some Collective 54 members. It is best suited for firms started by co-founders/partners. The reason this works well for some is because partnerships are funded by the partners. A word of caution: firms structured as partnerships need well written partnership agreements.

    1. Limited Liability Company (LLC)


      • Limited Liability: Members aren’t typically personally liable for the company’s debts.

      • Tax Flexibility: Can choose to be taxed as a sole proprietor, partnership, S Corp, or C Corp.

      • Operational Flexibility: Fewer restrictions on management structure.


      • Complex Formation: More paperwork than a sole proprietorship.

      • State Variances: LLC regulations can differ from state to state.

      • Limited Life: Some states dictate that an LLC must specify a dissolution date.

This is the most used business entity within the Collective 54 membership, and the broader professional services industry. The pros are well suited for founders of small service firms and the cons are minor. A word of caution: firms structured as LLC would be wise to have well written operating agreements (similar to partnership agreements), and will need to file articles of formation.  

Decision-Making Tool

Here’s a simplified decision-making tool to help:

1. How many founders or partners will the firm have?

    • One: Consider Sole Proprietorship or LLC.

    • Multiple: Look into Partnerships, Corporations, or LLCs.

2. Is limiting personal liability a top priority?

    • Yes: Focus on Corporations or LLCs.

    • No: Consider General Partnerships or Sole Proprietorship.

3. What’s your preference concerning taxation?

    • Avoid double taxation: S Corp, Partnerships, or LLC.

    • Okay with potential double taxation for other benefits: C Corp.

4. Do you intend to raise significant capital in the future?

    • Yes: Consider C Corporation.

    • No: Any entity might suffice depending on other priorities.

5. How much flexibility do you desire in management and operations?

    • High Flexibility: LLC or Partnership.

    • Structured Governance: Corporation.

After considering the above, it’s advisable to consult with a business attorney and an accountant to discuss specifics. They can provide insights tailored to your firm’s unique circumstances, ensuring you make the most informed choice. Here are a few Collective 54 members who can help you with this:

In conclusion, choosing a business entity is foundational to your firm’s future. While all entities offer distinct advantages, understanding the needs and long-term goals of your firm will guide your decision-making. With the right choice, you can create a solid foundation for your boutique professional service firm’s success.

Evaluating Partnership Potential: A Comprehensive Checklist for Professional Service Firms

Evaluating Partnership Potential: A Comprehensive Checklist for Professional Service Firms

In professional service firms, the difference between partners and employees is often illustrated in their degree of “Skin in the Game,” as coined by Nassim Nicholas Taleb. Partners bear both the upside and downside of their decisions, while employees typically enjoy a compensation program, shielded from the firm’s potential losses.

Not everyone should, or indeed can, ascend to the partnership. Employees often harbor the hubris that they are entitled to partnership status. However, once they understand that becoming a partner means sharing in the downside, the luster of partnership often dulls. A partner’s decision to invest in a risky venture, for instance, could lead to significant profits (first-order consequence). But if the investment fails, the firm could suffer substantial financial loss (second-order consequence), and in the worst-case scenario, the firm could face bankruptcy (third-order consequence).

The analogy of a dog versus a wolf is insightful in this context. An employee, like a domesticated dog, feels safe and comfortable, with a stable supply of resources. But without its owner, a dog may struggle to survive. In contrast, a wolf, akin to a partner, is trained to survive in the wild, adapting to changing circumstances, weathering hardships, and hunting for its sustenance.

Another example of the contrast between partners and employees in a professional service firm is the “tragedy of the commons”. This refers to the exploitation of shared resources due to individual self-interest. In a professional service firm, this could manifest when employees overly focus on their individual success, neglecting the firm’s long-term strategic interests.

Partners and employees differ because of skin in the game. However, partners also differ from Founders.

Founders of boutique professional service firms are like artists as they have soul in the game, not just skin. They create for the love of creation, putting their reputation on the line with each piece. In contrast, partners take calculated risks. Founders often make better risk-takers because they are driven by passion, not just profit.

A concept to keep in mind when contrasting partners and employees is the agency problem. This arises when the decision-maker doesn’t bear the consequences of their decisions. For instance, a manager with no skin in the game might decide to cut costs by reducing staff, boosting short-term profits and their bonus. However, this decision could lead to lower service quality, damaging the firm’s reputation in the long run.

No amount of compensation can alleviate the feeling of shame when one’s decisions lead to negative outcomes. This is particularly pertinent in professional service firms, where the firm’s reputation is often closely tied to the individual’s reputation.

Long-term employees can become akin to housebroken dogs. They might be loyal, dependable, but often lack the hunger and drive needed in a partner. This is an issue in today’s market, where employees are loyal not to a company, but to their employability. They are often more concerned about maintaining a pristine reputation to keep their options open with potential employers.

Finally, it’s important to note that partners can inadvertently create a form of ‘slavery’ by overpaying employees. High salaries can make employees feel trapped, unable to leave due to the golden handcuffs. This aspect is often communicated to employees to ensure they understand the trade-off. It’s a stark reminder that a dog may feel safe with its owner, but without the owner, it may struggle to survive, while a wolf, like a partner, is always prepared to fend for itself.

If you are considering an employee for partnership, be careful.

Here is a tool to help when facing this decision. It can be used as a self-assessment by the employee or as a guide for performance reviews by the Founder. It’s not a definitive measure of an employee’s potential for partnership, but it provides a comprehensive view of the qualities and skills required.

1. Financial Acumen:

    • Understands and analyzes the financial reports – Yes/No
    • Identifies key financial indicators impacting the firm – Yes/No
    • Makes effective budgeting decisions and manages resources – Yes/No

2. Strategic Thinking

    • Understands and contributes to the firm’s strategic goals – Yes/No
    • Identifies potential opportunities and threats in the market – Yes/No
    • Makes decisions considering first, second, and third-order consequences – Yes/No

3. Risk Management

    • Identifies, assesses, and manages risks – Yes/No
    • Takes calculated risks, considering the firm’s long-term stability – Yes/No
    • Understands ‘skin in the game’ concept and is willing to share in the downside – Yes/No

4. Leadership and Management Skills:

    • Effectively leads and manages a team – Yes/No
    • Inspires trust, respect, and loyalty in subordinates and peers – Yes/No
    • Handles conflicts and difficult conversations effectively – Yes/No

5. Client Relations:

    • Builds and maintains strong relationships with clients – Yes/No
    • Can bring in new business and contribute to the firm’s growth – Yes/No
    • Manages client expectations and ensures high levels of client satisfaction – Yes/No

6. Ethical and Moral Standards:

    • Upholds high ethical and moral standards – Yes/No
    • Makes decisions keeping in mind ethical obligations – Yes/No
    • Handles the feeling of shame and admits mistakes when things go wrong – Yes/No

7. Adaptability and Resilience:

    • Adapts to changing circumstances and environments – Yes/No
    • Handles pressure and setbacks, demonstrating resilience – Yes/No
    • Is prepared to transition from the ‘dog’ mentality to the ‘wolf’ mentality – Yes/No

8. Commitment to the Firm:

    • Is committed to the firm’s success – Yes/No
    • Puts the firm’s interest ahead of personal interests – Yes/No
    • Is ready to tie professional and financial success to the firm’s success – Yes/No

9. Innovation and Creativity:

    • Demonstrates innovative thinking and creativity in problem-solving – Yes/No
    • Seeks to improve existing processes and services for better efficiency and effectiveness – Yes/No
    • Embraces and encourages new ideas and approaches – Yes/No

10. Communication Skills:

    • Effectively communicates ideas and information – Yes/No
    • Listens and responds effectively to feedback – Yes/No
    • Has strong negotiation skills and can persuade others effectively – Yes/No

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.