22 Feb 2022
The below article is a transcript from Christian Beck’s guest presentation at the recent Smartequity launch event in Sydney. Christian Beck is an entrepreneur and the Founder of LEAP Legal Software and Infotrack.
I started LEAP legal Software a long time ago and my father was quite influential as I wrote a program for his practice originally.
He employed a lot of people himself and he had a theory with people - two important things:
My father talked about how important it was to recruit the right people, but no matter how hard he tried, he could never get to the point that more than about a third of the people were really ‘good’.
I believe that myself. You can work on picking the right people, but in my experience, it is hard to get all good people. The only way to get all good people is to make sure the good people stay, and move the ones that don’t work out for you.
What employee shares are about is retaining the really good people. Over time, that has become increasingly important.
Steve Jobs once said that good programmers are about 30 times as good as the average programmer. 30 years ago, the good workers might be 30% better than the average – good programmers are about 3000% better. That is because you can’t really supervise what programmers are doing, they are fairly autonomous, and the good ones are extremely important to your business.
I believe that is somewhat true in programmers, and especially true in management. I’m not as extreme as Steve Jobs, but I feel with good programmers or managers they are at least three times as good as average. So I’m willing to pay them, through shares and equity, twice as much as the normal market rate for them would be. That is one of the ways we’ve retained staff over a long time – we pay well through shares and cash.
I recently saw an interview with the NetFlix founder. He had quite a number of economic problems around the year 2000. He had about 120 staff and had to make about 40 redundant. And ultimately what he found was the company operated just as well after those redundancies, as it did prior to them. What it came down to was talent density and keeping several really good people in the company.
We (at LEAP Legal Software) focus on that as well. In all the companies we are involved in, we try to make sure there is a very high proportion of really good people.
I find employee shares work exceptionally well if the shares employees own in your company represent their biggest asset. The absolute number or value of the shares is less important than the proportion those shares are contributing to the employees own personal wealth.
If your employee’s biggest asset is shares in your company, they will treat the business like it is their own business, and have a mind-set closer to you as an owner.
What I generally try to do is set up a situation where the really good people can earn a lot. They can take a proportion of their earnings as shares. They can get a large shareholding that’s probably bigger than any other asset they have. Once that experience is engrained, you have teams of people who are very invested into the company. If you have the CEO and the rest of the executive team in that situation, the company seems to run really well.
It sounds like a lot, but it is not really. For most young people, for example, if they have $30K or $50K invested in your company - that is probably their biggest asset. Comparing the cost of losing good people and replacing them with the value of those shares – this approach ends up being really good value in my experience. Obviously with the more senior people it requires more money, but then the returns are better again.
Also, we have always tried to ensure the valuation of the company is going up. If the valuation is increasing it all works beautifully. If the value goes down, the outcomes of this approach can also be negative. The main way we have done that is to focus on the valuation and make sure it is realistic.
It was fairly hard to raise money for tech companies about 15 years ago in Australia. The valuations we could get were not very good. We had staff who could see that in the long-term the company was going to work and they really wanted to have shares. So when we got the external valuation and offered it to staff members, who it looked attractive to, and they took shares. And then as a consequence it reduced our staff costing, increased retention and over time that went really well.
It was a beautiful thing for the company, but also for the staff as many of them are millionaires out of shares these days.
If you are a smaller company, or a distressed company, you do have a lot more potential to grow the value of shares than a big company, because the ability of a big, successful company to double or triple the value of their shares is next to zero. And the ability of someone to come in, take shares, make a difference and create wealth through shares is very difficult. Whereas in a small company, it is quite common for a small company to double, triple or even quadruple share value over a number of years. And if employees can get in there and experience that impact - starting off with $30K in shares and see it triple in value - that is a really positive experience for them, and also obviously for the shareholders.
The other thing to mention about shares is the impact on lifestyle. I have a few businesses now and I don’t actually work in any of them. I’m a director in some and a chairman for others but I don’t have a full-time role in any of them. I feel really comfortable doing that, mostly because for the CEO in all of them definitely have their biggest asset as shares in the company, and most of the executives are the same, so they tend to treat the company like their own. That gives me a lot of lifestyle choices. I can be out of those companies and not worry about it too much. I think that is a really good thing about shares.
Our view is: the best investor you can have is your own employees - employees first, customer second. Also friends and families of the employees can be great investors. If family take shares, they tend to encourage their loved ones to stay with the business, and be successful in the business to help it succeed. We have a lot of parents of employees who have been really good shareholders for us for a long time.
One final thing to mention is to consider providing annual liquidity. Every year our employee share plan needs to buy some shares in order to offer them to staff. When that happens we work out the valuation and give all the shareholders the opportunity to sell at that valuation. We give a preference to employee shareholders over the larger equity shareholders. So at least once a year there is a liquidity option for all staff members.
At that point when outside investors come in, we also offer all shareholders the ability to sell (before we bring more money into the company).
Those sort of liquidity options have worked well for us as a private company.