On this episode, Rob talks through profit sharing, stock options, and equity and makes a comparison between these various approaches.
If you are thinking of ways to incentivize team members as a bootstrapper, this episode is for you.
The topics we cover
[07:52] Equity Grants
[11:47] Stock Options
[20:09] Profit Sharing
[26:09] Which is best for your SaaS?
Links from the show
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If you’re thinking about whether as a bootstrapped or mostly bootstrap startup founder, whether to set up a profit-sharing plan to offer stock options to do equity grants or to just pay bonuses or other ways to incentivize your team members, that’s what I’ll really be working through today.
First, I got a couple of the best podcast reviews I think we’ve ever had. The first one is from BrettxKelly via Apple Podcast, and he said, “Rob is the Chuck Norris of bootstrap founders. Thanks for all you do, Rob.” I really appreciate that, Bret. I appreciate the sentiment and the creativity of it.
The other one, the subject line is, “The podcast that changed my life. This podcast was instrumental in my journey from a blah day job to a successful tech founder. Rob and Mike for the first 450 episodes (or so) bring useful, actionable advice every week. I also really appreciate the honest delivery with none of the radio DJ sliminess that so many podcasts seem to embrace.”
Thank you so much for those reviews, and if you haven’t left us a five-star review in Apple podcast, Stitcher, Spotify, or wherever you partake of this show, I would really appreciate it because it definitely helps keep us motivated and it helps bring more listeners to the show.
Next, I wanted to mention hey.com. I’ve mentioned in the past that Basecamp is a headline partner with MicroConf and in partnership with MicroConf, I have had a few Basecamp ads on the show. We are switching those up, and are now for hey.com. If you’re listening to this podcast, you may have heard of it.
If you go to hey.com, you’ll essentially see that the folks at Basecamp have created an entirely new email service, and they say it’s “email’s new heyday. Email sucked for years. Not anymore — we fixed it. HEY’s fresh approach transforms email into something you want to use, not something you’re forced to deal with.”
Hey allows you to screen your emails like you screen calls. You can fix bad subject lines without busting threads, easily find your most important emails every time you log in. They have a built-in reply later workflow that was built from the ground up, and they block email tracking pixels among many, many other things.
I know many of you listeners are already using hey.com, but if you have not checked it out, head over to hey.com and you can try it free. Thanks to Basecamp and Hey for supporting independent startups, MicroConf, and Startups For The Rest of Us.
Let’s dive into our topic for today. As I said at the top of the show, I’m going to be talking through profit sharing, stock options, and equity. I touched on bonuses real quick just as a side note because it occurred to me as I was writing this outline that I should probably address that.
I had this conversation a bunch of times in the past three, four months, and have sent out a bunch of thoughts via email to folks. And I realized, if I just gathered those thoughts, put the bullets on paper, and talked it through that I can probably create, hopefully, an evergreen resource for folks who are thinking about motivating their team members.
I should be really clear that I’m not a lawyer, I’m not an accountant. Do not consider this legal tax advice or any kind of tax advice other than things I have learned from my own experience dealing with these types of incentive programs.
I’d also like to point out that I actually had a conversation with Dru from Trends.vc. If you haven’t checked out Trends.vc, Dru is putting out two reports a month on different trends he’s seeing in the startup space, the bootstrapping space, and he’s creating insightful reports and thoroughly thought out reports. I believe the reports are $20 each if you want to buy the paid version. Each one has a free version, or you can just subscribe for a nominal fee per year. I’m a premium subscriber.
He and I had a conversation a couple of weeks ago when he was preparing his report on profit sharing. If you haven’t checked that out, head to Trends.vc and you can pay a one-off $20 to read his report that’s focused on profit sharing. But today I’m going to be talking about profit sharing, stock options, equity, and touch a little bit on bonuses.
Let’s start with this first question of, I have one, five, ten team members. Why should I give them anything beyond just a salary or their hourly rate anyway? The idea is to align incentives. It’s to motivate people, not just by giving them amazing work to do every day, but to give them a financial incentive to really stick around.
Some people look at it as a retention incentive to not go elsewhere if they can do the same work and make more money. Others look at it as a way to make people just enjoy their jobs more or want to work a little harder and put in some extra hours because they feel like they can make a difference.
There’s a lot of different ways to do it, and of course, this is not a requirement. Giving bonuses or profit-sharing isn’t a requirement, but I personally feel like if your team is cohesive and is working hard to get the same end goal and you are creating profit, creating value, creating wealth. To me, it does feel right (in some way) to share that with your team members.
The first question of why not just give bonuses? Well, you can, and maybe in the early days, that’s something to think about. The big downside to that is oftentimes, bonus programs are pretty arbitrary. You’ve really just had to make a call and say you get a few thousand, here you get $5000, you get two weeks of pay at the end of the year or whatever.
It can feel a little squishy if you try to do this overtime for many years. People can feel like they get left out or they play favorites. Or if they talk among one another, they can feel like perhaps you’re giving more money to someone who doesn’t deserve it. You also don’t want to reinvent the wheel every year. You don’t want to have to reevaluate every year who gets how much bonus and why. As I said, it can feel or even be arbitrary.
In addition, there have been lawsuits from employees of companies where they’re given bonuses every year and they come to count on those bonuses as part of their income and the employees won. I believe this was in California many years ago, so even using the word bonus can be dangerous if you do it year in, year out.
If I were a brand new startup, I had one or two employees, and I wasn’t able to give a bonus one year or maybe two before I got something really structured in place, that’s probably okay. It’s a risk tolerance thing, but it can be dangerous long-term in terms of people to become reliant on it. And if there’s no formula (so to speak) of how to calculate that, which is what profit sharing and the others give you a formula or it’s a set thing that you don’t have to keep rethinking about and reinventing.
Lastly, bonuses are tough because incentives aren’t exactly aligned, are they? Something about profit sharing that’s nice is if the company doesn’t churn a profit that year, people don’t get the profit sharing. Whereas if a company doesn’t turn a profit and you don’t give bonuses, people can be really angry, and they can blame management or their owners. Or they can say it’s mismanagement, and you spent too much money on whatever thing that they don’t like. Therefore, we didn’t get bonuses because we didn’t get a profit.
Bonuses, I think, have a time and place. I think these days, profit sharing or stock options are actually probably better ways to go.
The second thing I want to touch on is equity, and I’m going through this almost in a reverse order of which I think you shouldn’t do. The reason equity is tough, meaning if you just give 1% of your company to the first employee or 3% to the CEO you bring in. Equity grants are not stock options. These are equity grants where you are literally giving a portion of the company. They are taxable on the current value of the company.
While that can be arbitrary, if you have a company—SaaS companies that are doing millions in revenue and you’re trying to give someone 1% of it, the IRS is not going to believe you when they file that the value of that 1% is $1000. You can have serious taxable events if you are given a substantial amount of equity or even an insubstantial amount (to be honest) if the company is large enough.
Now, I will say, if you run a services business, oftentimes—if you run an accounting firm or a legal firm—those can tend to have buy-ins, whereas you come up to become a partner, they value the business. They say, okay, you need to buy 5% or 10% of this business, and you have to buy-in that amount over the course of years. The partners are (in essence) taking that money out.
That’s not a taxable event for the person buying in, that’s different. It’s not an equity grant, that’s just buying into a business, and that is a model. Professional services usually use that model. I’m not talking about that, I’m talking about you’re running a SaaS company and you’re considering just granting equity to someone.
Aside from it being a taxable event based on the current value of the company. Assuming you are running a pass-through entity like an LLC in the United States, if you give someone equity, they now get a K-1 at the end of each year, which makes their taxes more complicated. And if they have never dealt with a K-1, they’re maybe going to want to hire an accountant to do it.
You can imagine this isn’t a big deal if it’s two founders of a company, but what if it’s 20 or 30 employees that you want to incentivize? You’ve suddenly complicated everyone’s taxes. That’s not an ideal outcome.
Another thing to think about is whether you are an LLC or a Corp, you need to have restricted units that vest over time. This would be, even with an equity grant, I wouldn’t tend to just give someone 1% or 3% right at the start. Typically, you have a four-year vesting period, and there’s an initial one-year cliff where they have to work for a year before they get any of the equity. And at that point, they get 25% and then vest it over the three years. That’s the most common approach. Obviously, talk to a lawyer to get specifics.
The interesting part about equity is it does make profit-sharing easy because if someone owns 5% equity and you take out a distribution, then they get 5% of that distribution. It’s simple. It’s tried and true. Equity has been around for hundreds and hundreds of years. It is simple in that respect, but honestly, there can be a danger too.
Let’s say you have an LLC. It makes $500,000 in profit that year, and you’ve given 1% equity to a key employee. Even if you haven’t’ pulled money out, it’s still in the LLC bank account. They get a K-1 for 1% of that $500,000, which will only be $500,000. But in essence, they would then have an income tax bill of $5,000 even though no money came out of it.
Equity makes things complicated. I’ll just put it that way. Know what you’re getting into. To me, equity is for founding employee type folks. If you have co-founders, you know what you are getting into. Straight equity with some vesting is something that a lot of us do. That’s how it’s normally done. But for employee incentives and aligning incentives, I don’t think personally it’s the best way to go.
One last note, if you hold equity for less than a year, it’s short term capital gains. And if you hold it longer for a year, then it’s long term capital gains. That’s one of the best parts of it is if you do have an exit, whether you sell your shares or whether the whole company gets acquired, you do get that nice capital gains treatment. Instead of essentially paying income tax levels on it, you pay 15% or 20%. There’s a much nicer basis there or there’s a much nicer tax outcome. Those are my thoughts on equity incentives.
Let’s move on to stock options, which are the standard Silicon Valley way to motivate folks above and beyond their salary. A stock option is just an option to purchase stock in the company. It’s a specific amount. You’ll say you have 10,000 options. It means you have an option to purchase 10,000 shares at a particular price called the strike price, and that’s set each year by a company’s filing with the IRS.
That strike price is usually quite a bit less than their last funding round. It doesn’t always wind up being that way, but what they say is, okay, you’re starting with us today. Here’s 10,000 options. You have to work for a year. […] Work a year, then you get $2500. And then each month after that, you get essentially 1/36 of the remaining amount up to four years. They typically give you another big chunk of options to keep you retained so you’re always working to just build that up.
A lot of folks don’t exercise their options. They just keep them around, and as long as you’re working at the company, you can just wait until there’s a liquidity event. Of course, the downside of that is paying short-term capital gains on it.
The good news about stock options is there are no capital gains to worry about. If you grant someone options, there’s no real value to them because essentially there’s an option to purchase at the price the company was worth when you’re given the option, so that’s not a taxable event. And they don’t receive a K-1 that complements their taxes, since they’re just an option to buy a share in the future.
It’s actually not owning equity, and there’s no profit sharing unless you would execute the option. They’re designed to payout if you have a liquidity event like going public or being acquired. I guess if you had options in an LLC, it wouldn’t be called stock because there’s no stock in an LLC but unit options, and then you exercise holding those. In theory, if the LLC took a dividend or distribution, you could get that. It’s a very uncommon scenario, and I don’t think people would typically go for that.
The other interesting thing about options is there’s usually this exercise window where if you leave the company and you haven’t exercised any of your options, you usually have about three months. And if you don’t buy the options, they just revert back to the company and you get nothing. I don’t really like that. I actually disagree with that. I don’t think it’s super ethical. I feel like that window should be much, much longer—one, two, three years—and there is a push for that to get longer because it kind of screws employees.
You think about an employee who comes in and they’re going to get 10,000 shares at a $2 strike price. That’s $20,000 worth of options. They work for the company for the full four years, and then they leave. They have this $20,000 that they could purchase. Maybe they don’t have that much in cash, or maybe it’s not a gamble that they can make at that time. But maybe the company sells or goes public a year or two later at $10 a share.
It’s a big gamble for some people to make, and I feel like having a longer time to evaluate that and a longer time to be able to purchase options feels to me like a better way to do it, a more fair way to do it.
The last thing before I tell you my own story about an experience with stock options is that if you exercise your options, you pay the money, then you own the stock in essence. Usually, it’s restricted stock, but it depends on if the company is private. It often has restrictions that you can’t sell it for a certain time.
But if the company is private, then you are typically just holding stock that you can’t sell. If they’re public, you can typically execute and then sell the same day or the same week. You then pay short-term capital gains on any gains that you get. You pay income tax. What I have heard about are folks who have enough money that they’ll exercise them. Hold them for a year, hope that the stock is still higher than when they exercise, and then you get long-term capital gains treatment on that.
My own story with stock options is back in probably about 15 years ago, I was a lead developer and a technical lead for an early prepaid credit card company in LA. We got options and I worked there—I got X thousand options granted, and I only stayed there for 2 years before I went out on my own.
I got half the options that were granted, and when I left, I had to make the decision within 60 or 90 days. Do I buy these? I did, I bought them all. I wound up spending under about $10,000, which is quite a bit of money for me at the time. I figured, hey, it’s a gamble. Maybe it’ll turn out.
Within a year or two of leaving, they raised another round of funding. They didn’t go public, but they allowed people who owned stock to sell a certain percentage of it. I don’t believe I sold any in that offering, but I did sell a little later for about half of it for 10X gain, and then another half for between 10X and 20X gain. It was several hundred thousand dollars, which was obviously really nice at that point in my life. We used a big chunk of it as a down payment on a house, then a chunk of it to fix the roof on the said house, and fix a bunch of other stuff that was broken. Don’t get me started on homeownership. But all in all, it was a good outcome.
If I had stuck around another 2 years I could have made double the money. But I’ve always thought, those were the years that I really cranked up on entrepreneurship. I started writing my book. I built the Micropreneur Academy. It was some early-day stuff. There were a lot of opportunity costs that probably wouldn’t have been worth it.
But my experience with stock options is that one experience. They did later go public, and I actually sold the last of my shares after they went public. My experience, of course, was positive. The reality is in almost all cases, there is no liquidity […]. Most startups fail. Most venture-funded startups fail, and so most venture-funded stock options really aren’t worth it. They just aren’t worth the money, aren’t worth the paper they’re printed on (so to speak).
That’s the reality of gambling on startups. We know that as founders. That it’s dangerous and that it comes with risk. I think it’s harder as an employee when you have so much less control over the company and over the success of it. But these are your choices that you have to make as an employee.
Now, as a founder, as a CEO, if you’re going the Silicon Valley route, you’re raising a big round of venture funding, and you’re doing the Delaware C-corp, stock options are the standard way. If you did anything else, people would look at you funny. I think with bootstrap startups, you can do this.
I think a big question is stock options typically aren’t worth much unless you plan to have a liquidity event, and that doesn’t mean sell or go public necessarily. You can sell shares on a secondary market. Future employees can buy them back. Founders can buy them. There can be some type of liquidity events that can happen. You could take just a minority investment even at some point if you wanted to provide liquidity for employees with a stock option pool.
The bottom line is most startups and most SaaS apps do sell at some point. The vast majority, they do sell within whatever timeframe we could define, 7-10 years. There are very few bootstrappers who are still running the same SaaS product that they were running 10 years ago. That is a reality to think about is there may likely be a liquidity event even if you don’t particularly plan on it today.
I think stock options are a reasonable choice. I hate to even make a recommendation for or against. I think they’re a longer-term play for sure because they do require that liquidity to be worth anything versus profit-sharing, which is more short-term cash out of the business type approach.
But frankly, if you’re not going to pull cash out of the business, if you’re in a high growth market—I think about when we were growing Drip—we weren’t pulling cash out of the business. If we had implemented profit sharing, people would have wanted us to become profitable. The goal at that point was not to be profitable yet, it was to keep growing. In that sense, I think a better motivating or incentive alignment would have been through the use of stock options, even though that can feel weird.
I think about an LLC having stock options, and it’s totally possible to set up a structure like that, but it can feel a little different than the typical C-corp setup. Again, I want to reiterate that not only am I not a lawyer or an accountant, but there are just a lot of pros and cons to these things. If there were one right answer, then everyone would choose to do that. It just depends on the situation and the specifics of the type of company you’re trying to build and how you’re building it. If it’s going to be profitable in the short-term versus long-term, and how you want to structure things for yourself.
Lastly, let’s talk about profit sharing. What’s nice about profit sharing is if you don’t ever plan on selling or having liquidity events, then money and profit distribution make sense. It’s what real businesses are built on. Real businesses sell real products to real customers. To me, again, it makes sense to share those in some form or fashion that the employees and the team members who are building that company with you get to share in some form or fashion.
One drawback to profit-sharing that you don’t see with the other approaches is that if an employee leaves, they don’t take the profit-sharing with them. It ends when their tenure with your company ends. It’s not like having equity or stock options where you can hold onto these things for a future gain. I left that credit card company two, three years before it went public. But I had that lasting piece of equity that I had exercised. It’s maybe not as ideal for employees who want to leave, which works as an incentive to keep them there but can also be a bummer for folks when they leave.
One thing I would think about if I were structuring profit sharing is to make it a pool, not a committed percentage to an individual. That’s a mistake you can make with an early employee is to say, oh, you get 1%, 2%, or 3% of profits. I would think more about, hey, let’s have a 10% profit sharing pool, and all key employees share in that, or all employees share in that.
Such that as you add more people, obviously, that first employee’s percentage of the whole chunk will go down. But ideally, the company should be growing, and these individuals should be contributing to that. If you’re going to do profit sharing, you probably want to stay away from being a C-corp because that’s going to give you double taxation, so you’re going to want to be in a pass-through entity.
Again, I mentioned Trends.vc at the top of the show, but there’s a really good report that Dru put together over there talking about the ins and outs of profit sharing. The best article I’ve ever seen written on profit sharing is from Peldi Guilizzoni. He wrote about the profit-sharing that he designed for Balsamiq. We’ll link that up in the show notes. But he basically said, they started off with a 10% pool—10% of the profits. I believe each quarter was distributed, and then he moved that to 15% at a certain point, years into the company. Now he’s up to 20%. I love that range right there. That feels really solid to me. To be honest, that 10%-15% stock option pool is also the standard size that a Silicon Valley startup would have.
That number does ring in that zone that I feel personally comfortable with. From Peldi’s article, one thing he talks about is they do quarterly distributions, which is probably what I would do if I was going to do it because if you do monthly, it’s too often. It’s just too much paperwork. If you do yearly, then people wait around and it’s bonus season. People will stay past that mark.
If they’re unhappy, they collect the profit sharing for the year, and then they take off. I don’t like that gap. It should be 3 or 6 months tops. But Peldi says, “Our quarterly bonus program allocates 20% of profits to full-time employees: 25% is split equally and 75% is split based on seniority, then it’s all weighed by the cost of living in each location.”
That’s how he structures it, and I do like that there’s a part split equally. There’s a part split by seniority. I have also heard of folks doing it based on the amount of salary people make, and then not having that cost of living of your location factor in because that’s already factored in.
One thing I would stay away from personally is using performance evaluations as some type of thing that affects profit sharing. That can be dangerous as different managers across a company might rate people differently. Basically, you should have A-players on your team, and if not, then they need to be let go in essence. If someone is performing at a subpar rate, then you need to be addressing that rather than essentially docking a bonus because there’s a lot of ways that this can backfire. Personally, I would not be including employee performance as a part of the criteria.
One drawback of profit sharing is that it’s really always taxed as income. It’s a big hit. If you’re talking about, you’re in the 33%, 35%, or 40% tax bracket, and you get a chunk every 3 months in essence, that’s a big difference versus if you were drawing out dividends. I guess through a C-corp, you’d pay double tax on it anyway. Or if you had a stock that you were able to sell, that long-term cap gains is a really big difference, and it can make a really big difference in the tax bill. But that is what it is.
Profit-sharing is cash. It’s a short-term motivator. I shouldn’t say short-term because it can motivate people over the long-term, but it really does allow employees to focus on not only growing the top line but potentially looking at reducing expenses, which the profit is obviously the revenue minus expenses.
I do think that a lot of folks in your company can impact the net profit that it has. If they’re thinking about their share of that, it does a pretty good job of aligning those incentives in a way that perhaps stock options are pretty nebulous.
Why is the stock worth more? Well, it’s typically worth more when someone buys the company or when you raise that next funding round. Is me saving $2000 a month on our AWS bill going to really impact the value of my stock options? It’s very unlikely versus profit sharing. You can see the money hit the Excel spreadsheet, the Google Doc, and you could see how it could literally trickle down to not only the company’s bottom line, but then to your own.
Some companies have folks vest into profit sharing or not be eligible for the first 6 or 12 months. I don’t think that’s unreasonable much in the same way that many companies have a waiting period to get on health insurance or to start a 401(k). This is another perk that makes sure the person’s a fit for the team, that the team is a fit for the person, and then evaluate getting them set up with all of the benefits.
These days, if I was going to evaluate these approaches for my own SaaS startup, I would think about whether I was going to be able to run it profitably. Obviously, profit sharing might be the choice then. Think about whether I was going to grow this and sell it, or have a liquidity event at some point. Then obviously, stock options might be a better opportunity.
Again, I think bonuses can be useful in the early days, but personally, they’re a little too arbitrary and can create a little bit too much chaos or just reinventing the wheel syndrome every year to personally be my favorite for having to run it long-term. And then equity, obviously, I mentioned, if it’s founder-level folks, then you can talk about that. But there are a lot of complexities there—taxable events, K-1s, and all that—that I don’t think scales to a full workforce.
Thanks again for joining me this week as I talked through different ways to incentivize your team members. If you have thoughts or comments on this episode, please give me a shout out on Twitter, @robwalling and @startupspod. I will talk to you again in your earbuds next Tuesday morning.
In this episode of Startups For The Rest Of Us, Rob and Mike talk about switching from enterprise to the SMB market, staying small indefinitely, dealing with raises, and take more listener questions.
Items mentioned in this episode:
Rob [00:00]: In this episode of ‘Startups for The Rest of Us,’ Mike and I discussed switching from enterprise to the SMB market, staying small, and definitely dealing with employee raises and more listener questions. This is Startups for The Rest of Us episode 330.
Rob [00:23]: Welcome to ‘Startups for The Rest of Us,’ the podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products, whether you built your first product or you’re just thinking about it.
Mike [00:33]: And I’m Mike.
Rob [00:33]: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s the word this week, sir?
Mike [00:37]: Well, I don’t feel like I’ve made a ton of progress this past week basically because I’ve been dealing with taxes, but I did manage to convert a couple of more of my preorders in the paid subscriptions and added another customer on top of that to Blueticks. So, things are progressing I think like any other product launch ever. Like, they’re never quite as fast as you’d like but they are moving forward. So, it’s good to see.
Rob [00:58]: Yeah. Well, I mean, it’s not really a product launch, right? It’s just more of a product – it’s a customer development in the early. I’d say it’s like a prelaunch, right, early access maybe.
Mike [01:07]: Yeah. Yeah, that’s probably a more accurate description because I haven’t really gone through like a major – like a launch to a list or anything like that. I’m still kind of working through issues as I onboard people and trying to iron out the rough edges and stuff because there are certainly some of those that I’m trying to make sure that people aren’t running into or when they do that it’s lessened to some degree either through KB articles or through onboarding emails and stuff like that.
Rob [01:31]: Yeah, nice to develop that stuff at this point. So, if we bring the ‘Startups for The Rest of Us’ drinking game back, remember a couple of years ago? Should we do that every time you say that you added two more customers?
Mike [01:43]: I don’t know, it depends on what the rules are I guess.
Rob [01:46]: Right, right. [?] on my end also got my taxes out, so I am notorious for filing, what is it, extensions and wind up getting everything into my accountant in like late April or may and then he gets it out in June or July and it’s become a pain in the butt. So this year, I got everything done super early and I’m hoping to have everything filed on time. But I’m curious, you mentioned you didn’t get a ton of progress this week because of taxes. My taxes since everything is in zero and we share a bookkeeper actually, right.
I have two business plus you’re my shared business with MicroConf, but since tax is zero and the bookkeeper had done. I mean, my Drip and [Newmor?] group taxes literally took me less than 30 minutes a piece because I basically give my – my accountant already has access to it and I just kind of give him some heads up about different things. And then my personal stuff took a little more because it’s all piece of paper all over the place and you get all these W2s, but it probably took me less than two hours. So literally, maybe three hours to get everything done. Did it take you more than that and why?
Mike [02:45]: So on the academy stuff, there was some things that were classified wrong because of the – basically because of PayPal and selling things in Europe. So whenever something goes through our accounting software, it ends up creating three or four different transactions for the same ones because it does transferred from Euros to US Dollars and then back and forth. And then there’s an additional charge and if those aren’t classified correctly and mashed up correctly, then there are certain numbers that are off. And there were numbers that were off and I had to go through and find them, so.
Rob [03:19]: Boo, that’s no good.
Mike [03:20]: Yeah. I kind of got a system at this point for figuring it out but then on my own business taxes, there are some things that were misclassified the previous year because we were going to try in different revenue and we couldn’t do that because of when we sold tickets to MicroConf because we did it in the previous years. And then years passed, we didn’t do that in, I think, 2015. My accounting software is in zero as well, and there’s things in there that were not fixed the previous year. So like the numbers were way off and I honestly still don’t know how to fix them. I sent it over to my CPA eventually and just said, “Look, this is what these are. I know why it’s that way and I just don’t know how to fix it.”
Rob [03:59]: Got it. But how much did all that take you? Was it like a day?
Mike [03:59]: It was probably two, something like that.
Rob [04:05]: Really? That’s insane.
Mike [04:06]: Well, it’s just like finding the transactions that are wrong. And it’s like sometimes are not as easy to find as they should be. I honestly wasted too much time on certain piece. I mean, it’s not like it was two full days but it was like kind of hanging over me for that two days or so.
Rob [04:23]: That’s the thing I found, man, is as much as I’ve been able to hire people to help out with stuff like this, because I have a CPA and I have legal counsel and I have a bookkeeper and yet taxes still take several hours to get done. And when Drip was still independent, I had like a remote executive assistant/ops person. She was doing a bunch of ops work but I still found that there was hours a week that I was sitting there and not marketing, not looking at features or working with customers, but I was just doing stuff HR payroll, even though again, I had an ops person who was doing that, I was still involved in it. And that’s – I don’t know, man.
I think it’s a hard thing I found getting passed no matter how much I hire, no matter how much I find good people to do the things. The stuff slips through and you wind up doing stuff that isn’t necessarily fun. And that’s, I mean to be honest, post acquisition, I really enjoyed – I don’t have to do any HR now, and I don’t have to do – the only reason I’m doing taxes for Drip is because it existed last year until July, right? So we had to file for that but I’m actually kind of looking forward to things simplifying because the overhead me admin work around running a business is just, I don’t know, man, it’s probably my least favorite part of the whole deal.
Mike [05:34]: Yeah. I mean, the other thing that has kind of factored into it which isn’t directly related to it is that like my wife is looking to potentially acquire a fitness studio that is in our town. And so I’ve had to do like got through a lot of paperwork and tax things and stuff to look at, is it a good deal, is it something that she wants to go through with, is there actually a business there. So that kind of factor some of that time in there, which I don’t know how much time that actually was because it wasn’t like I was tracking the time. But I kind of lump it into that process.
Rob [06:04]: Very good. Anything else going on with you?
Mike [06:06]: No, not really. I mean I’ve got a few more demo schedule and going to be going through those over the next week or so but I’m starting to shift my focus over to like really detailing what my customer acquisition funnel looks like and why or not some of the automation behind it. So, taking somebody from, “Hey, they’re on my email list,” and then moving them over into like a survey and then getting the answers from that and then kind of picking and choosing who I’m onboarding and in what order. And then kind of wiring everything up to help automate that process a little bit.
Rob [06:33]: Nice. It’s good to start thinking of that stuff at this point. All right. So we have a lot of listener questions today, some really good ones. And then we’re getting a little bit behind. Some of these are from, well, this one’s from October of last year. So good old four-five months ago, and there may even be some that are older than this. So, apologies on that but I wanted to work through some of them so people aren’t waiting so long.
This one is from Daniel Cao and he says, “I’m an avid listener. Thanks for being so generous with your knowledge. We have an enterprise level SaaS product that we successful sell for $5,000 a month. However, each sale takes six to nine months and it’s a slow process. We can adapt the product to be suitable for SMB sized business, so that’s small to medium businesses, but they seem to only be able to bear $200 to $300 per month as a price point. We really want to pursue the SMB market but we see it’s 20 times as much work for the same end result financially. Are we insane? Should we just take the enterprise? Or is there something magical that happens when you go for the higher volume of small value customers. Many things.”
Mike [07:36]: I think the question whether you go in that, the direction of the SMB market and try to position your product there really depends a lot on what your longer term goals are for the business and whether that’s – a market that’s even really viable. I mean, if it’s taking you 20 times as much work for the exact same revenue, that alone should say no don’t do it. And I don’t know if there’s any way to kind of slice that or position it in a way that it doesn’t make it like that. I mean, you can always – like over time, you can generally drive the cost of a business down. And it sounds to me like this is one of those situations where the upfront cost of making it or fitting the products into the SMB market is going to be quite substantial.
But if you’re making $5,000 a month from each customer that you bring on, then yeah, it sounds like that’s a reasonably good way to position it and you could potentially like support yourselves while you transition the products. Is it worth doing that? I don’t know. I mean, I would take a look at that and say, “Well, how much lower can you really drive the prices? Are you going to be able to maintain the same level of support with those SMB customers? And dependent on the complexity of the product, you may or may not be able to. It sounds to me like my inclination just kind of a glance based on the 20x number. Is it you probably don’t want to go in that direction just because I think it will be very difficult to drop the acquisition cost by that much to support the work level that it takes to get those customers onboard.
There’s also the fact that some types of products just they seem like they would be a good fit for the SMB market but they just aren’t. Those customers as you said, they don’t want to pay as much as an enterprise customer. And the reality is that they don’t really need it that much. They may think that they do or they want to be in a position where, “Hey, we’re sort of a big company,” and they feel like they’re important but the reality is that, they’re not in the same situation as those enterprise customers and they just will not buy it or not buy it at the levels that you want them to. And at that point, it becomes a losing proposition.
Rob [09:30]: Yeah. In almost all cases, you want to get your prices up higher even if the sales process takes a long time. And the answer to the six to nine-month sales cycle is to just have more and more of those enterprises in the pipeline so that you’re constantly closing them, right. So if you only have five in your pipeline and you all started them today, then yeah, it’s going to be six to nine months until you close those five. But if you five that come in your pipeline today and five tomorrow and five the next day and five, then starting six to nine months from now, you’re just going to be closing a few them basically every day or every week or whatever.
And that’s where you want to get. Based on the information you’ve said, I don’t think there’s any way I would try to do a lower price offering at this point. The only reason I would consider doing lower price is if you’re in innovator’s dilemma situation where someone else is building a simpler, lower-cost version and they’re taking your customers from you. And someday you may have to do that if you become a big cumbersome entity like the Marketos and the HubSpots. Not that I’m such that cumbersome but Infusionsoft, Eloqua. I mean, basically, we’ve innovated Drip innovator dilemma them from underneath, simpler, lower cost, easier to use. But you’re not saying that here. You’re saying, “Should you go there so that you cut down on these lead times?”
I’ve never heard of an approach where you try to go cheap and go for volume because trying to get that volume is it’s a pain. It’s so much work. It’s harder to support. You’re going to need a lot more features because you’re going to have this broader swath of people having 10,000 customers versus having 500 or 200 customers. It’s the whole different ball game. So, if you look at how Jason Lim can talk and he’s kind of B2B SaaS, one of the experts in the world, his whole thing is start cheap or start as expensive as you can but you’re not a brand name so you got to start cheap and then work your way up. And you’re talking about going the opposite direction.
And I would almost not even consider this out of hand. Obviously, you never want to say never and there are exceptions to this. But I would guess it’s probably 1 in 500 businesses that should actually do what you’re suggesting. And so I’d say odds are pretty heavily against trying to go for SMBs. I think the last part of your question was, is there something magical that happens when you go after this market and the answer is not. It’s still a ton of work and it’s just a lot more customers to try to sell and support. So thanks for your question, Daniel, hope that helps.
Next question is from Rob at onlinetravelmap.com. And he says, “Hi, Rob and Mike. Thanks for making such a great resource. I’m working my way through the Blank and Dorf book, ‘The Startup Owner’s Manual.’ And I’m on the customer discovery part of customer development. They say to create three things that I’m having a hard time seeing other entrepreneurs create. First is an influence map, second is a customer archetype, and the third is a day in the life of. Did you create these for your businesses? And if so, how? I ask because it seems like more info than people would want to contribute.”
So for those who haven’t read ‘The Startup Owner’s Manual,’ Steve Blank is a guy who come up with the concept of customer development and later a student of his era agrees borrowed customer development as well as some of his other concepts and developed the Lean Startup. So Steve Blank has founded and/or been a venture capitalist. He’s founded a number of companies. He took several of them public. He had a bunch of axis. I mean, this guy knows what he’s doing. He’s been an entrepreneur in the trenches.
So in this book, ‘The Startup Owner’s Manual,’ they talked about different things. It’s like don’t create a business plan but create these influence map and the customer archetype and a day in the life and that kind of stuff. So, I guess and now that we know what that is, did you create these for your businesses and if so, how? You want to kick this off, Mike?
Mike [12:59]: Sure. I probably didn’t sit down and go through like those specific concepts like the way that he would’ve recommended and say, if he’s got templates and stuff like that, I’d certainly didn’t use them. I mean, I did write down people who I thought would be good influences or people that I could leverage to get to more customers. And I also wrote down some conceptual stuff about like who is the type of person who would use this, are they paying for it, or are they just using it and their boss is paying for it and stuff like that. I did not really go through a day in a life of but I thought about how the product itself would be use.
So, I did to some extent I would say did do these things but I probably didn’t document it to the nines when I was going through and writing it all out. The other thing is I didn’t plan these things in advance because – or at least not so far in advance that it turned out to be useless because it would’ve been based on pure assumptions. So, essentially what I did was before I really started to go down the path of building it, I thought about who it was that could help me and wrote down a list of names. And then I also thought about the people that I was having conversations with when I was going through validations and saying, “Okay. Is it possible or is it going to be difficult for me to get in front of more of those types of people?” So I used that to kind of identify what marketing channels to use.
But again, like of the life of, I didn’t really think too much about that just because I was focused more on how is somebody going to use this as opposed to if it’s consultant use or a freelancer, what does their day look like? I know that they get pulled in all sort of different directions and quite frankly, the best position for them to be in is to not really be in my product that’s doing other things. It’s supposed to work in the background for them.
Rob [14:37]: Yeah, and for me, no I’ve absolutely never created these things but I create my own versions of them. I just think what is the value proposition, what is it going to take to get this many people to the site, this many people to the funnel to grow this fast, what are the possible channels for that. I didn’t draw an influence map but I definitely had a list of folks who I thought could be – could help me out in some way, affiliates, that kind of stuff. But I mean, this is a bulleted list and a Google Doc, right. I just told that I had the HitTail marketing game plan and then I had the Drip one. It was all the marketing ideas that came up as I went through it.
Customer archetypes, you know, again, I didn’t do ‘The Startup Owner’s Manual’ but I wrote out, who do I think like the top three possible customers for these apps are, where are they, and you just kind of build this out, just research it and then forgot how you can advertise on those place. Or is it more organic, are they going to Quora? Then maybe I should answer questions on Quora, that kind of stuff. A day in a life, never done it. I know a little bit about it. I don’t know how that would be helpful for me. But the thing is, the problem is I do think the stuff is helpful for beginners but it’s like it just gets too deep.
You get this 600-page book like the ‘The Startup Owner’s Manual’ and they have this whole section on TAM and SAM, right, it’s like total addressable market and served the addressable market and target marketing, blah, blah, blah. And it’s like you have to go to think about those things but I think people just spend way too much time looking at this stuff. I mean, especially if you’re bootstrapping, the TAM doesn’t matter. The total addressable market does not matter for trying to build a $10,000 a month business.
It matters if you’re trying to raise funding because they need to know it’s a $100 million marketing and you need to prove that. So, so much of this is not relevant towards bootstrappers. I mean, you can grow a seven-figure business and never want to do any of these things. But with that said, I think the issue is that they have you thinking through based on all of these key resource hypothesis and the customer relationships hypothesis. I think thinking through them once is probably good but when you think about bootstrapping a business, it’s like, am I building something people want? How do I get there quickly and then how do I let people know about it?
Those are the three questions I ask and that’s what – the day we launched Drip, I had a 12-page Google Doc which is a bunch of bullets and notes and thoughts and just every podcast that I heard that gave me ideas that I thought could work I put on there. And by the end, I have this big list of tactics that I was then able to develop into a strategy and to leverage that and figure out what works and what doesn’t. And then from there you go to a spreadsheet. There’s a whole other system down there but these are theoretical and they’re business model planning. And Steve Blank is an academic. He did launch several startups but he’s a professor now.
And so he thinks in terms of these broad frameworks and often these broad frameworks are pretty high level and are pretty MBA type stuff. And in my experience, MBA type stuff does not tend to help you when you’re actually having wherever meet the road. It tends to help you really well if you’re raising funding, if you want to do a pitch, if you want to talk about, but nuts and bolts of actually getting customers is just a whole different story. I’d be really careful with spending a ton of time on these things you’re talking about, but I do think it’s helpful to do these extremely thin and quick versions of each of them and try to think through what are the questions that they’re trying to have me think through because I do think there’s benefit there.
Mike [17:36]: I think the important thing to bring up here at this point is that the reason why it’s helpful when you’re looking at going out for funding is that it forces you to think about things that you probably haven’t put a whole lot of time and effort into or that consideration, so that if you get into a situation where VC or an angel investor ask you a detailed question about something like this, then you’ll have an answer off the top of your head because you have looked at that specific question before and you won’t have to um and uh over it and come up with something on the spot. You’ve already thought about it in advance. That’s where it’s helpful.
It’s not helpful in terms of implementing your business and actually doing anything, because I think that what you’ll find is that, you can put together this plan and do all this stuff in advance, but things are going to change as soon as you start talking to customers and that’s really where – that’s where all the other things that Rob just talked about and moving quickly and having those lose spreadsheets and Google Docs that you work from, that’s the most important at that point. When you’re talking to VCs, they just want you to know that you have done your homework and really thought in depth about these things. And if you can answer some obscure question, then they’re more likely to fund you because of that because you can answer that obscure question.
Rob [18:46]: Right, and I mean, it comes back this quote that I say a lot which is about how I prefer to build businesses instead of slide decks, right, and this comes back to all the stuff we’ll probably look really good in the slide deck when you’re raising funding but it just doesn’t question how much. It’s really worth in the long term in terms of actually when we’re meeting the road. So I hope that helps, Rob.
For our next question, it comes from Liam Elliott and he says, “Hey, guys. First of all, I love this show. I want to pick a startup to run with but I’ll be in university for at least two and a half years starting in September. Is it possible for me to plan for growth as a one-man show? I want to avoid having to make the difficult decision of business or school somewhere down the road. Do you have any advice or war stories about the consequences of resisting natural growth in order to maintain availability for another area of life such as work or school during a predetermined period?”
Mike [19:38]: I feel like there’s a kind of a false assumption here that everything is going to be successful, and that growth is going to become very quickly and very easily and you’re going to have to make a decision down the road of, “Oh, do I stay in school or do I go with this business and do that instead?” I think if you look at widely publicized examples of people doing exactly that, you end up looking at people like Bill Gates or Steve Jobs. And those come to mind when you look at that stuff, but I don’t think that there’s too many other examples that do.
So, it kind of skews your view of what really happens when you’re trying to build something. I think that if you’re going to a university and you’ve still got two and half years ahead of you, then I would use that time to essentially build a business and practice with a lot of things where there’s marketing or a product development or doing anything related to customer development in order to put yourself in a position where when you get out into the real world and you have to actually start paying bills as opposed to taking classes all the time and not having to worry about that stuff. Then you’re in a better position to be able to grow the business.
From my own personal experience, I only know of one person who was going to college and ended up building a successful business while he was in college, and the end result of it was that he was one class short of getting his degree in photography and decided [?] I don’t care because he realized that his business was making more than enough money that he didn’t have to worry about it. But he had also started this business back in high school and he’d been running it since he was, I think, 17 or 18. And by the time he was 21-22, I mean, the business was making close to 7 figures and this was back in the shareware days and there was not a ton of competition. So ti was a very different environment at that point. And he still runs the business today but he also runs a couple of others as well.
So I can’t think of too many examples that really fit that mold of where somebody’s going to college and they build a very successful business and then they have to choose, do I want to grow this thing even more at the expense of quitting school.
Rob [21:34]: Yeah. I think that’s a good point. I think the odds of it happening are pretty slim. I think I’d be less worried about it growing and having you to decide and more worried about it just being a time suck, right, because even if it’s not growing, it can still be a huge time suck that you’re investing a bunch of time in. I think one thing to think about is like this is perfect for kind of the start small stay small approach which is the book I wrote in six-seven years ago. And it’s where you look for really small niches, right. You look for have [?] website just hold a few thousand a month. I had an in-voice that sold several thousand a month but very small, very self-contained markets, almost no competition. I had a few others ahead.
There were some e-books in different markets and they were just so small. I mean, they were literally between 500 and 5,00 a month each. And there was very little work to be done on a month-to-month basis and they were never going to grow to be $10,000, $20,000, $30,000-businesses. But that’s the like the perfect, I can imagine a better business to have while I’m going to school. Not much work, no danger of growing, not a competition so I don’t really have to fight it off. So that’s probably where I would think of going down more of this micro approaches like having whatever your talent is. I don’t know if it’s WordPress, plug-ins, or Photoshop add-ons or a Shopify app.
I mean, there’s these little tiny markets you can get into where it isn’t a ton of work and it generates a bit of money but you’re not endanger of this thing growing even if it grows to as big as it can be. It’s still only a few grand a month. So it’s an interesting thought experiment and I appreciate the question, Liam. I hope that’s helpful.
The next question is from a guy Louis and he says, “Hey, guys. You’ve responded to a number of my questions in the past and I appreciate that. I have another one. How do each of you approach scaling support? I heard Jordan [Gaul?] mentioned a StatusPage.io runs 10,000 customers, 1,600 of which are paid. They bring in 2.4 million AOR yet they only have one full-time equivalent support role. My business is growing via channel partners who while currently taking up a lot of my time, are helping me streamline support so I’m ready in the future to take on more. Currently, I use videos, flowcharts, and manuals, plus an online ticketing system, but I wanted to know what else I could consider to help reduce common questions and problems. What are your thoughts?”
So one clarification here is the StatusPage.io thing with 10,000 customers and one support person is a little bit of a – I don’t know. Maybe –
Mike [23:51]: Edge case.
Rob [23:52]: It’s an edge case, that’s a good way to put it. Because think about how simple – I mean I used – we used to have StatusPage.io replaced for it. It’s a simple app. There’s not much fare, so there’s not much to support. An app I own years ago was HitTail. It was a simple app. We had one part-time support person even though we had – I’m trying to think of how many thousands of customers we had. It’s just there wasn’t that much to do when you just get set up and then things run on autopilot. It’s very different. It depends on what your app is but you look at an app like Drip or an app like direction Bluetick has headed, Bidsketch, these are much more complicated apps, a lot of moving parts, a lot of things to get configured, a lot of things to think about, dozens, 50, 100 different screens of background process. I mean, there’s just a ton of things to know.
It’s just apples to oranges, right. There’s a reason that in StatusPages that one reasons can support 1,600 paid whereas in an app like Drip, maybe that’s five people that need to do the same thing. So, that’s not your question, I realize, but I wouldn’t try to think that every app can have that ratio. But back to your actual question of he says he uses videos, flowcharts, and manuals, plus online ticketing system. I’m assuming that a Help Scout or Zendesk, he’s wondering what else he can do to reduce common questions and problems. Go.
Mike [25:00]: Yeah. There’s only so much that you can do and I think that there was an attendee talk last year by a Ben Orenstein who talked about how he tried all these different things and he was watching from people’s shoulders as they were going through his app and he’s like, “Oh, they didn’t realize that they needed to do this. So let me put some text around that.” And he went to the next person and watched them and they didn’t see the text. He’s like, “Oh, well, maybe I need to make the button bigger.”
And he made it bigger and it still didn’t matter. And he tried all these different things and the reality is that there’s so much variation between customers that it’s very difficult to do one thing or even sometimes a combination of things inside of your app that will completely eliminate all support questions or problems that come up with that one particular feature. And if you would extrapolate that across the entire app, there’s no way to eliminate them all especially in any sort of application that has a level of complexity to it, above like a static HTML web page. And even that, you’re probably going to get questions about.
So there’s a lot of things that you can do. It sounds to me like you’re doing a lot of the things that I would probably tend towards. I would take a look at your support tickets and see if you can classify them or categorize them in such a way that you were able to identify the places where you are getting a lot of questions about and see if there’s ways to either put some wizards in or streamline the user experience so that maybe it’s a multistep process or something along those lines.
I’ve also seen apps that are out there that you can kind of integrate into your application that allow you to have a help page on the specific page of your application that points you directly to the KB articles that are relevant directly to that one page. But even with that, you still have to educate people that that’s where they can go for help on that particular page. So, there’s always going to be places where people overlook stuff and there’s literally nothing you can do to stop that.
Rob [26:49]: Yup. I mean, it’s blocking and tackling, I think, right? I think you get something. You’re going to have something, some in-app help, having a chat widget can be nice although you’re going to need more people if you offer that kind of real-time support. And certainly videos, flowcharts, and by manuals, I’m assuming you mean online knowledge base not a big 300-pound paper thing that you ship to someone like in the old days. I mean, our KB has been super, super helpful and people search that all the time. They want to find the answer right away. They typically want. It depends on your audience but they typically want to find an answer without emailing support because they know it’s going to take a while to get a response. So the more you can build that out, the better you are. So I don’t know if any magics over bullets here. I just think the more info you can get out there in a searchable fashion, the better off you’re going to be.
One hack that we do use, maybe this is something that I can throw out, is I went in. RKB runs on WordPress, and I hacked it since I still know a little bit of PHP. And I wired it up so that any time a question or anything’s typed into the box and we don’t have a result for it, we pop it into, in essence we send an email into an inbox. And then we have someone go through those once a week. And there’s a bunch of junk and there’s a bunch of stuff that we’re never going to do if we found people phrasing things differently, obvious repeated searches that we should build. So we wind up building KB articles based on basically people not finding information and we found that over time that the amount of searches that aren’t being found are the ratios reduced. So, that’s one clever hack but that’s not individually going to scale your support up, but everything – it sounds like you’re on the right track at this point.
And I think for our last question of the day, we’re going to take it from Dave. And he’s asking about raises and when to give raises and how do deal with them. He says, “We have 12 employees and every 6 months we evaluate them, have one-on-one meetings and give them raises. My employees are great and I don’t have any qualms in that area. We’ve been lucky enough that our employees like us and stick with us but this creates a small problem which is that after an employee has been with us for one and a half to two years, they’ve received several considerable raises. For example, my lead developer who started with us less than two years ago with 18 bucks an hour is now up to $31 an hour. That’s the biggest jump. But there are others who are heading in that direction. For that amount, I could almost squeeze in another developer which we badly need.
Now the company has grown and the employees are now more experienced and more valuable, but still it feels difficult to just by paying the same guy that used to pay 18 bucks an hour, $31 an hour. It isn’t a large a company and it’s not the type of place where people jump to upper levels of management and start adding values in ways they weren’t before. Actually, most people are doing what they did two years ago, fix bugs, add features, etc. At the same time, now that we’ve set this pace of raises, I wonder what the expectations are and what would be the reaction if I all of a sudden we said, ‘Sorry but you’ve reached your limit.’ In short, how do you deal with raises? How is it tied into the growth of the company? What do you think is fair”
Mike [29:36]: So I’ve never been in a position where I effectively doubled somebody’s salary over the course of a year and a half or two years. I think that that is asking for trouble in many ways, but it’s also hard to go back and change things if you feel like you’ve made a mistake in that particular situation. I think when you get to a certain point, you also have to probably let people know where the business is at and what your priorities are moving forward. And to kind of that point what I would say is go take a look – we’ll post this in the show notes but I would go take a look at [?] profit-sharing program that they put together. And it sounds to me like that might be an appropriate way to go where you’re not necessarily guarantying somebody that they’re going to get a particular raise, but at the same time, you’re encouraging them to work smarter and do things that are going to increase the profitability of the company without directly giving them money regardless of whether the business does well or not.
So, as the business owner, and this is an odd thing about entrepreneurship is that as a the business owner, you are the person who’s undertaking the vast majority of the risk. And if you can do a profit-sharing of some kind where you essentially shift some of that risk back to the employees to some extent, I mean, obviously, it’s like you want to pay them a fair salary but instead of giving them exponential raises every year which you can instead do is say, “Okay. We’ll give you a small raise and we’re going to implement this profit-sharing that allows people to get a much larger upside than they would otherwise in a way that is not guaranteed.” So I think that that’s probably the direction that I would go with something like this.
Rob [31:08]: Yeah, that was going to be my first suggestion is to not make it raises but to make it somehow based on profit in essence. You can’t base it on revenue either, right, because if you guys are growing then there’s not going to be a ton of profit, but if you can share in that then everybody shares in the upside. The other thing – I mean, I think this should be a cautionary tale for people listening. Obviously, I think giving someone a raise in two years from 18 to 31 is, unless they were drastically into market is just way too fast the pace and you have set an expectation now with these folks. So I think the answer, if you haven’t done that, it’s like don’t do that. You can give a raise every year, it’s typical. People tend to I think expect that. And I think that’s a good thing and if they’re solid that that’s fair. But going above and beyond has repercussions. There’s a reason that people don’t often give hefty raises every six months.
The other thing I would think about is what is market rate in essence, like where this person lives based on where their location is. What is market rate for what they’re doing? And if they’re over-market substantially, say, Marcus, 25, and they’re at 31 then have a conversation with them and let them know like, “Look, I know that market rate, you’re over-market rate, we really value but we just can’t continue to bump you up at this pace if it’s only one person who’s way over-market. And there are salary surveys and such. If people are still under-market, then perhaps you can just slow down the pace and just say, “Hey guys, we’ve grown to the point now where we need to do. We’re not going to raise every six months or we’re not even going to evaluate you every six months. We’re going to do it every year instead and you can slow the pace down there.”
I mean, there are options here and none of them are super easy because of the expectation that you’ve set, but I think that you’re asking the right question and definitely thinking about it well because then I think if you were to be flippant and just suddenly change policy, I do think that you’re going to need to have some conversations for sure. And I like what Mike said. I think I like the profit sharing idea just because it then becomes relative to the company’s success.
Mike [32:55]: I think the most important part of all that moving forward though is being a little bit more transparent about not just the company’s finances. And you obviously don’t have to share absolutely everything but let people know, “Hey, this is where the business is. This is the goals that we’re trying to achieve and the reason we don’t want to give you a massive raise moving forward or this year is because we need to grow the business. We need to hire support people. We need to do all these things. So we need to allocate the business resources which in this case is money.”
And then you can introduce the profit sharing, but it starts with those conversations. If you don’t have those conversations, you just drop it on people, then I think you’re probably going to start introducing more problems than anything else. I mean, you have to have those preliminary discussions first and set expectations around what the schedule going forward for raises is and have some preliminary discussions just to kind of float the idea.
I learned a long time ago that I took some leadership classes back in college and one of the things that they recommended was that, if you’re going to a group of people and you want to get their support on something, never walk in the door and just drop the idea on the group because what will happen is the people will shoot it down and there’s always a couple of people who are going to shoot it down because they’re not going to be happy with it. And everyone else doesn’t know which side to go on because they haven’t really heard about it before, so they don’t have all the facts.
And if you do that in this case like this, you’re going to just run into problems. So, float the idea to people. Talk to them a little bit about it beforehand. Get their input and you can actually – if it’s a small enough group with only 12 people, you could probably do that with every single person and just say, “Hey, let’s just keep this between us because I want to float the idea behind. What do you think?” And then everybody feels like they at least got some sort of a say in it or communicated with you about it.
Rob [34:34]: Good. Really good strategy there. So that’s actually how I approach the Drip acquisition with our employees. I went to everybody one by one. It was very time-consuming to have it, because I pretty much cover 30 to 60 minutes per team member. And there were some that were in person, some remote. Some of the conversations were different than others. And it was time-consuming but in retrospect, it was exactly the right way to do it because if I got everybody together, people don’t want to speak up. They don’t want to ask questions. But when you’re doing it one on one, that’s just so much easier. And again, it’s way more time-consuming but there are certain issues that I think warrant that in talking about an acquisition or employee pay, I think are probably two issues that do warrant it.
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