David provides a framework for one of the most important conversations in a creative agency principal’s life.

Links

"When A Key Employee Wants Equity" by David C. Baker for punctuation.com

"Pros + Cons of Having a Partner" by David C. Baker for punctuation.com

Transcript

Blair Enns: David, the topic today that you have selected is when a key employee wants equity. I saw the title of this and I thought, "Oh, I've seen this so many times. I've had so many firm owners talk to me about this situation." It's not my wheelhouse. They're really just telling me what happened, not asking me for my advice. You've seen this a lot, obviously. You've really thought through this. I thought it was a pretty obvious topic that we would cover pretty quickly, but there's a lot of meat, I sound surprised, there's a lot of meat to this topic of yours.

David C. Baker: You're always surprised when there's a lot of meat.

Blair: We could shorten this. If you have an employee, not a key employee, who wants equity, well, the answer to that isn't easy. It's just no. This is a key employee who wants equity. Got you.

David: When you asked Colette to marry you, I can just see you tense up, even though I'm not watching you on video.

Blair: No, I'm totally chill.

David: How long before you got an answer from her?

Blair: I don't think I gave her an option.

David: Oh, that sounds just like you.

Blair: [laughs]

David: Win Without Pitching. I think of that example because when you ask somebody to marry you, everything is going to change because you're going to get a yes or a no. The same thing is true when you get a key employee who asks you to be an equity partner, you can't ignore that. [laughs] When somebody asks you to marry him, it's like, "Oh, I didn't hear that, sorry." No, you can't ignore it. You're going to say yes or no.

You probably have had no experience doing this. You're terrified of losing this person. They're obviously key to what you do, even though there may be some little issues that irritate you, and so you better handle it correctly. That's the scene setting here. It's like, "This doesn't happen often, but you've got to deal with it when it happens."

Blair: All very good points. I do want to back up, though. When you asked Julie to marry you, I assume it was you doing the asking.

David: That's not what happened. No. She told me, "I think we're going to get married." You know Julie, that is so not like Julie. It's like, "Whoa, well, there's no arguing that point." I was thrilled. I did ask her later. I had reservations at this great restaurant. We got there and it was closed, so we went next door to Pizza Hut.

[laughter]

David: The metaphor for our marriage.

Blair: Oh my God.

David: That's good.

Blair: Yes, that doesn't surprise me. I had told my sister I was going to marry Colette while I was dating somebody else.

David: Oh, whoa. That's interesting.

Blair: Yes. I had this moment, I realized, "I'm going to marry this woman, I should probably break up with my girlfriend."

David: Wow. Okay.

Blair: Yes.

David: Now, that sounds a lot more interesting than this topic. [laughs]

Blair: You remember that episode we recorded that we never aired about working with your spouse?

David: Yes.

Blair: We should go back and listen to that.

David: No, let's not. [laughs]

Blair: We're talking about when a key employee wants equity. The question comes up rarely. You want to be prepared for when the question does come up. If the answer is no, you're going to have to handle it delicately.

David: Underneath all of this is this notion that, well, there's several, one is that partnership issues. Man, if you make the wrong partnership decisions, your life can be hell.

To me, partnership is either the best or the worst moment in your life. There's very little in the middle. There are people who don't have partners who wish they had a partner. They just kill that instinct from time to time and scratch that itch in other ways. They're probably better off for it. Then I know that a lot of clients that have fantastic partnerships, married or not married. Then I've got a lot of clients who are in a partnership who wish they weren't. That's one thread through all of this.

The other thread is that you can't just do what's best for you. You are obligated, as a person, to do what's in the best interest of that person who's asking to. That's what we're trying to surface here is whether or not this is a good idea, not just from your perspective, but from their perspective, too.

Blair: You're responsible for A, the business, B, yourself, and C, the person who's doing the asking. Interesting way to think about it.

David: Yes. What's the path forward?

Blair: When this happens, it better never be a surprise. If it's a surprise, the answer is no.

David: Yes, exactly right. If it's a surprise, the answer is no, or if somebody asks you for equity during the interviewing process, the answer is always no. You should always work with somebody first. You may have worked with them somewhere else, so that would cover that base. It's never a surprise because this is a person that's already leading. I just have this really core belief that leaders who have the title are always leading before they actually have the title, so this is not a surprise.

Parts of you are relieved that this is happening because you've entertained thoughts of how your life would be quite different if this person left. This is a signal that they don't want to leave. Now, the problem is that if you don't handle this well, they probably will, because if they are dead set on partnership and you don't offer it, they're probably going to either leave and start their own firm or go somewhere else.

Blair: They might leave even if you do handle it well.

David: Yes, right. That's just a part of life, and it's fine. It's like, "What's your alternative? Ignore it? No, we can't ignore it, so we're going to have to deal with it." Let's deal with it well. I do this for a living. Jonathan does all our traditional M&A, I do the partnership stuff, sharing equity, internal succession, splitting partnerships up, all that, so I've dealt with this sort of thing.

One of the first things I noticed years ago when I started doing this is that many people want partnership, but they don't really understand the downsides of it. They understand the advantages of it without understanding the disadvantages. Your job is to be open to this possibility, but to make sure that the person who's asking for equity knows what that really means. When you go through all of the reasons why they maybe shouldn't be a partner, the downsides that they haven't thought of, then you should have an alternative to suggest to them so that it doesn't just die and they get discouraged.

If they back away from that suggestion after they hear all of the things that come with partnership, and then you step in with an alternative that doesn't carry those bad things with it, then it's a win-win for everybody, and it's far less complicated for you and for them. That's the theory here.

Blair: Do you want to walk us through the list of the downsides or the cons of ownership that this key employee might not be considering?

David: Yes. There's eight of them, and I can just go through them really quickly. They don't all always apply, but you should have them on a list. There's an article on the website, punctuation.com, if you want to go back if we're going through it too quickly. One is you may need to be signing a personal guarantee on a line of credit or a loan, or something, and you won't have any choice in that.

Above a certain percentage, the bank is going to require that, "Are you okay with that?" Of course, you don't say this next part, but what they're thinking is, "Oh, so my personal credit will be revealed." It's like, "I can't keep that to myself." That's the first one. Second, you'll have some fiduciary responsibility. Let's say there's a bookkeeper who's stealing from the firm and is pocketing maybe some deferrals that employees are making for their retirement planning or whatever it is, then the shareholders are actually responsible for that. They're not going to go to jail, but they're going to have to make it right.

Even if you don't know about something happening, you're still going to be responsible above a certain point. Third, you might need to lower your pay and a business slowdown. Fourth, you may actually be asked to make a proportional cash infusion. I