When It Comes to Equity, 'Enough Is Better Than Too Much'
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In many indigenous cultures I have learned about, community members who want more resources than they can personally use are viewed as suffering from some kind of mental illness. Why would people want more stuff than they need or could use? Good question, especially in the richest country in the world, where "The Wall Street Journal" reported in 2011 that Americans spend $1.2 trillion annually on goods and services they don’t absolutely need.
It became a personal question at a crucial juncture in my life. During the last 20 years, my focus has been on building The VIA Agency, a marketing and advertising shop in Portland, Maine, dedicated to helping clients promote their businesses through creativity. Helping promote high-profile brands like Perdue, TD Bank, Samsung, Welch’s, Sam’s Club and Klondike led to an outside party making me a very attractive offer to sell the agency a couple of years ago. So I had to seriously consider my options.
Selling would have benefited me greatly, but everyone else connected to VIA would have lost a lot: Employees, clients and the communities where we live. While I was thinking about my eventual succession plan, the French proverb “Enough is better than too much” came to mind. And I remembered how greed was equated with mental illness in other cultures. So my wife, Linda, and I decided to model our actions on the wisdom of the French proverb and turn ownership of the agency over to the employees rather than sell it.
A traditional employee stock ownership program (ESOP) would have been the easiest and most obvious vehicle to use. However, it did not provide the flexibility and control I wanted, and because nothing in the DNA of VIA has ever said the easy road is the best road, I decided to rethink the problem and invent a new way to transfer ownership.
I was inspired by a friend who often talks about finding the “perfect deal,” one in which all parties’ motivations and rewards are aligned and maximized through the perfect balance of shared risk and return. Usually that requires the parties to think deeply about the collective outcome for everyone, not just themselves, and sometimes sacrifice part of their advantage to ensure that everyone gets the optimal upside in the deal. Rather than selling VIA or using an ESOP, I was hoping I could achieve better outcomes for all by creating a different kind of employee-ownership model -- the rare “perfect deal.”
Here’s how it works.
At the end of each of the next 10 fiscal years, if certain benchmarks are met by the agency (financial growth, profitability and overall company health), Linda and I will transfer up to 10 percent of our equity by granting stock options to all employees based on the same progressive formula we use to distribute employee cash bonuses. These target benchmarks will motivate employees to run the agency profitably, allowing distributions to be made to current shareholders (Linda and I). Once a certain threshold of distributions is reached, employees will be able to convert their options into shares and participate in future distributions.
Why it’s the “perfect deal.”
- Employee Owners -- For many agency members, the idea of starting a business is very alluring, but that can be extremely risky. Our model offers employees the opportunity to work for themselves without the risk, debt and very hard work that go into starting an agency while ensuring that they participate in the value they help build in the company. It also creates a competitive advantage in the marketplace that will help VIA attract top talent because new employees know they will be owners right from the start. And they will have the potential to influence the agency’s future through its management structure, which allows for all voices to be heard and leads to greater satisfaction for all.
- Clients -- Potential and existing clients consistently work with world-class talent that's highly motivated by having skin in the game. Plus, clients get peace-of-mind knowing that their teams will be more likely to stay in place because of a stronger commitment to VIA as owners rather than just employees.
- Current Shareholders -- In this case, Linda and I now have 100 people driving the business to make it theirs, which should provide us 10 years of potential distributions that could help us build a nest egg sufficient for our retirement. If all goes well, it could be even more lucrative then the buyout offer we received, though clearly not without risk. This deal also affords us more free time immediately (no earn-out periods) and gives us the satisfaction of knowing that we are helping our valued employees create wealth in a way they never thought possible.
- Community -- By turning the agency into an employee-owned company, we are setting it up for a much longer life in Maine, our native state we love so much. We’re investing in the employees who will in turn join the museums, nonprofit boards and charitable organizations in our communities, giving back in hundreds of small ways. This model is designed to have ripple effects that will give and give, hopefully for generations to come.
- Industry -- Other agencies will likely start following this model in their pursuit of a recruiting weapon to help them compete with technology industries in Silicon Valley and the like, powerful magnets for the best talent in the market. In the battle for outstanding strategic and creative minds, ownership offers an incredibly enticing recruitment tool with a built-in retention mechanism.
Using this model as a guideline, any company can transform itself into an employee-owned entity. It has the power to make a business stronger while sharing the wealth through the entire team’s efforts. If everyone contributes, everyone benefits fairly -- not equally, but fairly. By providing personal and collective motivation, this model will ensure the longevity and sustainability of the business for generations to come.