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.
TRANSCRIPT
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.