Giving Shares of Your Company – DSP 337

A lot of small businesses have a romanticized idea of what “shares” in a business actually mean. Float On did, once upon a time. What does it mean to give shares of your company to someone? Is it a good way to reward a valuable and dedicated employee? Are there other, more appropriate rewards that you can offer instead?

Graham and Ashkahn review this question in detail, sharing many questions that any float center owner should consider before offering an employee ownership of your company.

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Transcription of this episode… (in case you prefer reading)

Ashkahn: Hey

Graham: Hi.

Ashkahn: Hey everybody. This is Ashkahn.

Graham: I am Graham Patrick Talley.

Ashkahn: This next question has just come straight out of the oven, can you smell it?

Graham: I have it right here, I have it right here somewhere. I set it on the counter. Take it out of the window here.

Ashkahn: It’s just gotta cool.

Graham: “My employee is asking for a raise. They absolutely deserve it, but I can’t afford it.” Classic. “I was thinking of offering them shares in my company. They’re a great employee and are basically family and I don’t want to lose them. Any advice you can give me?”

Ashkahn: Yeah, I mean it’s tough.

Graham: It’s tough being a float center owner, you know?

Ashkahn: It’s a predicament I feel like everybody is in, right? People who work in float centers, if they’re good employees tend to be really passionate. They’re with you, they’re awesome, they’re reliable, we have really good employees.

Graham: And a basically thankless job for a giant jerk, us, the owners.

Ashkahn: And oftentimes we get people working for us who are probably qualified to a higher level than most other retail jobs. They could be making more money elsewhere.

Graham: They could be us in a different world.

Ashkahn: The reason we’re getting such talented people is because they think it’s cool to work at a float center and float centers are cool, and it’s a nice job to have. It puts a lot of people in this position where like, hey we have these great people on staff. They really should be paid more than this, but the income coming into our float center is what it is.

Graham: And I like the thought behind the question, which is that going immediately to well, I might not have the cash-flow to support a higher income but maybe there are other things that I can provide to this employee that will make them more likely to stay on board and make this a job that they can handle.

Ashkahn: Before we jump into that stuff, there are other operational practices that I think can help in these situations, and one is just open finances. It’s not like the owner of a float center is out there taking his private jet around and all the employees are being paid garbage. That’s just not this huge crazy CEO salary that someone’s making and this disparity is a really real thing that can be felt.

I think a lot of people working in float centers would be surprised to see the income that the center owner is making or how much is actually left in profits at the end of the day once the expenses for covering payroll and everything else that goes into a float center actually comes out.

Graham: Yeah, I mean, certainly if the issue there is that they want a raise because they feel like you’re raking in all this money and they’re just getting the short end of the stick working crazy hours for you, then yeah, being up front and honest is a great way to allay that concern.

Ashkahn: So shares, giving shares.

Graham: Yeah, and I guess … and we’ll delve into that and maybe we can talk about some other things that you can do too. Incentivize employees or just give them non-monetary rewards as well. Cause shares are an interesting one. I feel like this idea of being an owner in a business and having shares in a company almost sounds more romantic than what it is for the level that you’re probably at right now.

Ashkahn: It’s sounds really businessy. Like yeah, that’s a businessy kind of move.

Graham: Yeah, when big CEOs of big, big companies get rewarded you’ll hear about them getting extra shares in the company, or…

Ashkahn: And tech companies. You hear so many tech startups where the packages of bringing talent on is this much money and this many shares, right?

Graham: They’re getting less than they deserve, and then they’re getting stocks and this tech startup.

And lots of times that’s startups that are either things like publicly traded already so they’re getting stock as opposed to shares, or they’re things that have a direct plan of funding. Like they’ve already achieved some kind of seed-funding, they know when they’re going to be going for their round A, their round B, their round C. They’re trying to be scaling up in terms of operations each given point. And every time that you have this influx of money coming in from financiers and hopefully for a product that in your mind has the potential to grow exponentially and make investors really excited.

All of those money influxes do a lot to make those shares worth something. And if someone’s willing to come in and invest more money, it gives anyone who owns those shares a chance to also potentially get out and divest themselves of their shares in exchange for an actual payout day.

And a lot of float centers aren’t on that track. Most float centers aren’t aiming to be a national franchise in which case you’re going to be raising all these different rounds of funding and expanding out, and that’s really I think where ownership starts to make sense is where you have this potentially really big upside down the road.

Ashkahn: I mean, basically money is money and has that kind of inherent value built into it. And shares are one step removed from that. The crux of this is how do shares become money is the question you need to answer for what the value of shares are. If you run a company and you’re giving shares out and you have no plans of giving out dividends which is where you take a portion of income or profits and distribute that to people based on how many shares they own. Or a marketplace for people to sell those shares, like being on the public market or some sort of investor who’s going to come in and be buying those shares in the future. If you don’t have those clear paths towards shares turning into money somehow, what you may be offering people could be relatively valueless.

Graham: Potentially even detrimental too. I remember the first time that I heard this idea was a business interview with a guy who said that he has to set aside a certain amount of his in- … he’s a tech consultant. And he sets aside a certain amount of his income every year just to pay taxes on the different startups that have made him a partial owner. Because if you happen to be passed through taxation and taxed in certain ways, then an ownership can actually be a monetary liability if you haven’t set up the proper ways to handle that, so.

Ashkahn: And the legal complexity.

Graham: Yes, and that’s gonna cost a decent amount of money too. If you’re not planning on doing this with future employees and if this is just a one-off thing, you also have to consider the cost in legal fees and CPA fees just to make sure that you’re bringing someone on in a responsible way and not shooting yourself in the foot down the road. And that’s yeah, no small feat either. Just make sure you understand what you’re getting into both in terms of the initial cost for the legal and financial side of it, and ongoing implications. Again, are you actually costing your employee more money during tax time than you’re giving them by shares in the company and that’s actually a complete possibility.

Ashkahn: And maybe leading back into what you were saying before, the other part of shares if we’re not thinking about shares in terms of how do they convert into fungible money. The other benefit of having shares is having some sort of sense of ownership and the feeling that comes with it and how invested you feel, or engaged you feel in being a part of the organization you work for.

Again, if you don’t have answers to those questions of are there gonna be dividends? Who can they sell these shares to? How do these shares turn into money? You might be better off going down a different path towards giving people a sense of ownership than giving them shares in your business.

Graham: Even something like phantom stock which you can look into, or just profit sharing in a simpler sense. Making them feel tied into the performance of the business rather than being legally tied in to the actual structure might be, at least on a small scale more of what makes sense for you.

Ashkahn: Or just the culture of your place-

Graham: The ping pong tables, and the float rooms, you know. The vending machines for free.

Ashkahn: No, what I mean, like creating a culture of ownership where people feel autonomous and have a level of responsibility that’s gratifying for them and feel like they’re kind of engaged in the business. While that doesn’t turn into direct monetary reward for people, you’re creating a work environment that’s breeding … or bringing more … breeding. That gets into some weird stuff.

But bringing more satisfactions to peoples’ work lives. And I think there are people out there that would rather work for a place and make a little bit less money but have a much happier work experience than the other way around.

Graham: And have say in it, and not feel micromanaged. This is a lot of stuff where if you’ve been listening to Ashkahn and I’s talks and podcasts for a while, it’s no surprise. We’re very into this idea of employee ownership and empowerment and sometimes that comes along with not actually being legal owner of the business in a certain sense.

Again, this isn’t to deter people from taking that step of giving your employees ownership. In a very real way, that’s how for instance Jake Marty came onboard with us. We as Float On have a history of sharing ownership and giving out ownership as people have gotten more involved, especially during our early stages. And so we know first-hand what kind of complexities these can lead to and at the time it sounded really romantic and exciting to us and I’m really glad that we went that route, but it was way crazier than I thought it was going to be from the legal and financial aspects.

We just didn’t know ’cause we have this romanticized sense of what being a business owner and sharing your business with other people mean. I guess just reconsider the fairytale side of things and do make sure that you have good, solid, grounded sense of what this will look like in reality.

Ashkahn: And the complexity can ramp up. There’s just something to be said about the fact that a lot of float centers are small businesses. Cause we even got as far as looking into like … there’s things like ESOPs, employee stock ownership programs that are more formalized structures for sharing ownership with your entire employee base or even eventually getting your entire company to be employee owned. But those are complicated. They take a lot of funds, they do require basically a certain sized company to even be able to handle the infrastructure of running something like that.

Graham: Yeah, like at minimum around like 5 million dollars in revenue kind of company.

Ashkahn: So there’s something about the fact that some of our options are a little unrealistic for us in terms of the scale of our businesses.

Graham: So again, I really like the place where your mind is going and maybe it’s even a great option for you depending on the specifics of the case with your specific center and employee. Some other things too that I think are worth considering. Just really good fringe benefits. Free floats any time is something that we offer our staff and we just say “Don’t take advantage of it.”, and it works out really well.

Similarly, free floats for friends and family. Again, we’re like “Hey, don’t take advantage of this, but if we have a light day and you want to get a couple of your friends in for a free float, for sure. Feel free to give those out.”, and that’s a really cool … in our case our full price floats are $77, so we just gave people to give $150 of a present away to a couple of friends which is no small thing in the scheme of things, you know?

Ashkahn: Yeah. And just in general, honesty, transparency, or one thing we’ve done is we’ve created ways for people to raise the amount of money they’re making based off of other things like, take on some more responsibilities. Run our payroll, run our shift schedule, do things like that and that’s taking some work off of other people and it helps justify spending a little bit more money to maybe take work off your plate personally.

Graham: We also do a lot of barter and a lot of the things we get for those barters go back into a general pool for employees to be able to take advantage of. So if we do a trade for a brewery, then we sort of just split up whatever beers we’re getting with the staff in brewery tours and stuff like that. If we do a trade with a wellness center for a certain number of hours in a hot tub, and massages. They’ll go out to some members, and they’ll go out to whichever ones of our staff feel like they need a massage that week.

So you kind of end up with, although we don’t provide healthcare anymore like we once used to. We do provide this amazing array of things that people can select. Again, just little fringe benefits that they get to go out to concerts for free. They get to go get free body work, they get to get a loaf of bread that’s delivered once a month to the shop. Things like that are actually kind of neat in addition to an already cool job.

Ashkahn: Once a year we let people come onto our private jet for one ride. That’s another perk.

Graham: Yeah, we usually just take the six blocks down from our house to Float On in the morning when we’re going to work. But I think one day a year, maybe every two years.

Totally distracted me with the jet thing. There was something else that was very totally critical and important that I was going to say.

Ashkahn: I don’t know what we were talking about either, so don’t worry about it. WE’ll get to it later. If you guys-

Graham: I remembered what it was, I remembered what it was.

Although its hard, also consider it might actually just be right for this person to leave your company. It might be that working for a small business, even if they are an owner isn’t going to give them enough money to do whatever they want in life or raise a family or something. A lot of times when people say that they need more money, it’s because they actually need more money. And sometimes that’s building a family, sometimes its pursuing your dreams. Sometimes both of those are the same thing, I wouldn’t know.

Ashkahn: That is a really good one. I’m glad I didn’t end the podcast episode before you said that, ’cause that is true. If people are in a position where what their financial needs are just really not on the same page as what your financial possibilities are, it really does cause a lot of stress. It puts a lot of friction on the system and they’re very likely looking for more than just their rates being bumped up a dollar.

It’s just one of those things that constantly gets brought up and is on their mind. It really adds a lot of tension that I’ve noticed in the couple of times that’s been a situation that we’ve had to deal with.

Graham: Yeah, sometimes its just better to recognize that although it sucks and it’s always hard, especially if this is your first employee and the main staff member that you’ve had for years and they do feel like part of the family. It might just be in their best interests as well to find something that can pay them better.

Ashkahn: And to be honest instead of just being like, incrementally going up and them hoping, “Okay, maybe in another 6 months I can get it up a dollar further or something like that.”

When we started, my hope was to pay all of our shop staff like 60-70 thousand dollar salaries a year.

Graham: Yeah, me too.

Ashkahn: As soon as we make a bunch of money doing this we’ll get everyone these amazing cush salaries.

Graham: I wish I made that much money.

Ashkahn: So yeah, there’s definitely a reality here that has to come into play with this stuff.

Graham: Alright. Anything else about handing out shares of a company.

Again, it can totally I know that in a lot of ways we tried to encourage you to think a little more heavily about this and maybe even a little discouraging, I think it’s really cool. I do think sharing ownership is cool, but it is way more of a can of worms than you might think that you’re opening initially. Just be sure that you go into it-

Ashkahn: It’s a noble pursuit, absolutely. I don’t think it should be considered a bad idea.

Graham: What we’re saying isn’t meant to discourage you. It’s to encourage you to go do research which can then maybe discourage you, so. If you have questions of your own-

Ashkahn: You can go over to floattanksolutions.com/podcast.

Graham: Alright, talk to you all tomorrow.

Ashkahn: Bye.

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