EP7 - Understanding Equity Beyond Money

In this episode, Jason and Makenzie dive into everyone’s favorite word — equity — and examine what it really means beyond payouts and financial rewards. They explore how equity extends far beyond cash, defining it instead through fairness, ownership value, and property such as home equity. They also explore the responsibilities, risks, and long-term mindset that come with equity ownership, highlighting how equity represents control, alignment, and time horizon. Whether you are a business owner or simply curious about how equity works, this episode delivers a thoughtful perspective on what it truly means to have a stake in something — and why that stake matters.

Chapters

• 0:00 Introduction
• 1:26 The Three Standard Definitions of Equity
• 3:07 The Thesis: Equity as More Than a Payout
• 4:06 Equity as Control
• 8:05 Governance and Influence
• 11:34 Equity as Risk Distribution
• 15:00 De-risking the Personal Balance Sheet
• 17:50 Equity as a Time Horizon
• 21:54 Equity as a Culture Signal
• 24:29 Equity as a Strategic Tool
• 26:34 Structural Manifestations
• 28:50 Closing Thoughts: Planning for Tomorrow

Transcript

[0:14] Welcome back everyone to the journey to an ESOP and Beyond podcasts where we seek to make all things related to Employee Stock ownership plans both accessible and understandable um your co-host Today Jason Miller, and I'm McKenzie worth. And today we're going to talk about everyone's favorite word I know it's not everyone's favorite word I just like to say things like that uh we're we're going to talk about equity. And how to think about Equity without thinking about moneyand that may be uh A New Concept or at least uh the ideas or concepts around Equity that aren't directly tied to money um aren't as uh highlighted in in a lot of our conversations uh so today we're going to break it out into 4 or 5 different pieces uh and talk about what Equity is uh in ways that aren't necessarily monetary what do you think McKenzie.

[1:17] I think that sounds good we have a lot touncover theirso the the definition of.

[1:26] Equity like if you just look in Google or dictionary.com or wherever you you happen to go on the Fly for for word definitions it'll come up with 3 that are relevant that we're we're all probably fairly aware of um interestingly enough the first 1 is the definition about uh things being fair and just and we've heard the term uh used in a very political fashion over the last number of years uh to to say e equity in relation to making things Equitable or solving inequalities, so that that's the first definition that shows up the second 1 behind that is what we tend to focus on as as ESOP advisors and you as as Founders and owners probably uh rely on which is the value of shares that are issued by a company, and then the third 1 the third definition that that comes up uh behind that is umwhat we're probably also familiar with or most most people are and we talk about property values uh and equity in a home and the lending world has done a great job about home equity loans and home equity lines of credit, so you can see where these 3 different uses of the word um or definitions of the word might might get a little confusing to folks uh at at times.

[2:51] Those are 1 non money and then 2 definitive money so how how do how else. Should we we think about this what what's kind of our core thesis for today's topic.

[3:07] Yeah I think it'sjust kind of expanding on the fact that Equity is not just a payout it's not just the monetary. Benefit or result ofhaving Equity there'sother factors there's other risks and, things to consider when you become an equity holder or have some sort of equity like whether that's synthetic Equity if it's not real Equity um. There's more to it than just money. And I think some of those pieces that will hit on today are Equity as controlum Equity is alignment. It's a Time Horizon and there's consequences.

[4:06] Probably develop a a journey to an ESOP and Beyond podcast drinking game where every time Jason says or starts a sentence with I think um I would quickly get out of control uh but me mentioning control um so Equity has control, let's look at that um. And this comes up as we talked to Founders about ESOP transactions a lot because it's inherently understood that if you are going to sell a majority of your Equity to another party, um that's typically like the first question umif not the first question it's the first that's the second question after what is this worth and again we're not focusing on the money aspect of of equity um but it's if I sell most of these shares part of what I am selling or transitioning with itis control.

[5:06] And so if let Let's uh unpack control as uh really what's being transitioned and how how would you um. How would you think to describe the elements of control that are being uh relinquished in a majority sale what are some questions that someone would ask themselves in that transition.

[5:32] I think primarily like when you're relinquishing majority control there's questions around, um you know who sits on the board who has voting rights who has a say in big decisionswho says yes or no, umwho's absorbing the risk. I would say those are the primarygut reactions. Who's going to decide for merightwho's going to tell me what to do.

[6:11] And are they going to treat things the same way that I would would treat them are they going to approach them the same way that I would approach them or that we would approach themum. What what what else goes along with with control uh and you know what what really does that does that mean and I I think um. We can, what what's take a moment to talk about the governance of specifically an ESOP transaction um and why this question comes up so often and why the answer isn't always as as bad as it seems.

[6:51] Right well in an ESOP transaction the the trustee you're hiring a trustee to represent, or manage the trust and represent the employees and protect the employees and oftentimes since the trustee is the buyer they think that. The trustee is then kind of Taking Over Control. And that's really not the case at all um trustees want they don't want to come in and disrupt the business um. They don't want to come in and start making their own decisions or tell you how to do thingsthey do have voting rights and they do. Um Elect the boardhowever as the selling shareholder you have a bit of a say in well 1 your hiring who the trustee is and then 2, the trustee typically if you already have a board set up or you have an executive leadership team that trustee is going to. First think of those people to be on the board or look to those people to be on the board. And the only requirement so to speak would be to have an independent if you don't already.

[8:05] Soour initial kind of gut reaction to control um, is all-inclusive of decision-making Authority risk mitigation um responsibility. Uh and. We I guess in in general as people we we use that word control in that sense we bundle it all together, but it does have a lot of nuance underneath of it and there's a distinct difference between um absolute control which would contain all of those things and then still retaining influence. And you can have very influential people within your organization that don't have, Equity ownership uh even though control and decision-making Authority and final says uh get wrapped up in a as a quality of of equity. And.

[9:07] The further you go down into what what really does control mean what does it do for me for for the organization it highlights things like uh okay well an aspect of control is decision Authority. And an aspect of control is how am I participating in the governance of of this operation um and then as. And influencer uh in the company I'm still going to set the tone for the culture that I want within the company that I built if I'm an owner that stays on the boarduh and I'm still going to supply that strategic Direction and we've mentioned that in in a number of our episodes before around the the role of of someone on the board. But each of those has a um a lifespan past a transaction from equity.

[10:11] Right and I would say each of those allow anyone with less than majority controlto still. You know like take on that that mindsetthat ownership mindset andas an equity holder. Equity in this sense determines who sits at the table right and. Not just the person who gets a check, from the monetary element of of equity so we're we're uh kind of divorcing those 2 Concepts from each other or unintelligible them I guess is the best way to to look at it in in that regard, so first Equity has control what's the the nextaspect that we're going to examine today. So we'll look at Equity as risk distribution. As an equity holder you're you're taking on risk of the es and flows of the company and the performance of the company and not only, what you can control internally but, external economic factors that impact your company you are taking on a lot of risk.

[11:34] In that definition of the the value of shares issued by a company I know I said I'm not going to do the money part and I'm not uh using this as a way to to reframe things within context and so it's a share of stock uh and when you go to the stock market, uh individually with your Investments or if you think about the stock market uh in in. Uh what's typically being purchased if you have a share of let's say McDonald'syou're you're buying 1 share of equity 1 share of value and you get to participate in in the upside of that you get a vote for your share alongside the other many billions of of shareholders and you get 1 vote per shareum. And with that. Uh you know what what's what's the what's your risk individually if you were to own a share of McDonald's McKenzie what's what's the limit of your risk.

[12:42] However much youbought in forthat's right, um so if you bought 1 share I don't even know what it's trading for today I don't I don't tend to follow things like that I don't know why I chose McDonald's um but I did uh so whatever the amount that I put in is what's at risk and so if I chose to buy a share of McDonald's for whatever dollars a share that's it if everything uh went went to heck in a hand basket tomorrow and McDonald's was bankrupt then I I would lose my $200 along with all these other things that we're talking about but it's only $200. And then if you have a sheriff McDonald's it's your 200 and all the way across all the ownership for McDonald's that that's what's at riskand that's common stock, uh and that's you get to share in the upside you get to share in all all the volatility of what happens in the in the market with with McDonald's there is a market, talk about that we we mentioned that in in numerous episodes toum but that that's what the extent of my my risk is. Um however. As an owner of your company uh McKenzie Inc um what what what would what did you put in for your company. Probably everything everything.

[14:09] And that's 1 of the major differences around, having multiple owners or considering employee ownership uh is, if McDonald's goes up by 2% and I it's worth hundred dollars a share then I I get an increase in value of 4 dollars. But it it's a a multi-billion dollar Corporation right so across all of McDonald's if I owned all of it and it went up by 2% and I don't know what the number is again I'm sorry for not being that prepared with my off-the-cuff let's choose McDonald's today, uh let's say it's a hundred billion dollar company well if it went up by 2%I'm not getting 4 dollars I would I would be entitled to 2 billion.

[15:00] Right. But I'm also not taking all all of the risks or I am taking all the risk in that scenario just like most of you that are listening did and that's this the space where you're sitting now. And what do I do with this value who who do I transition this to, and am I looking at this as we use the term D risk and we say de-risk your personal balance sheet when you sell a portion of your company or all of your company to someone else really what you're doing is, you are you're de-risking you're pushing the risk onto someone else of all the upside all the downside all the the volatility in exchange for Value today. You're taking different risks with thatand that changes the way that someone thinks.

[15:57] So McKenzie if you were to own a share of McDonald'show would you say that you work at McDonald'sno. But you could say whatit's my company or its my that's right.

[16:17] Yeah not just well I guess if I did work there it could just be my job but if I work there and. Owned stock then I guess it would be not just my job but also my companythat's right I'm I'm an owner, if I own McDonald a share of McDonald's I I own McDonald's I don't own all of McDonald's but I owe some of owns some of the McDonald's and, but that's different we don't think about that for our our personal assets we don't think oh um I work at Apple um I work at Tesla uh I work at these publicly traded companies or whatever is in in the the funds inside my my 401k or my investmentsum I say that those are my investments I treat them differently uh my everyone's risk profile is different and how they choose to invest. Did the same that that behavior of how to approach it from is this my job is this my company and you mentioned something really, really key is that you said if I worked at McDonald's and owned the company I would I would think differently and that combination of the 2 is what's powerful about employee ownership, so the next the next piece of.

[17:38] I guessfactor that we're going to go into regarding equityso we've talked about risk distribution we talked about Equity as control um.

[17:50] The other 1 would be Equity as a Time Horizonwhen you think aboutowners and Equity holders they. They're not just thinking about today they're not just thinking about tomorrow they're very forward-looking and big pictureum they're thinking about the next 3 to 5 years or 5 to 10 years.

[18:15] Whereas when you're just an employee you may just be thinking aboutyour next pay period um. Your next bonus cycle or performance review. So when you're an owner and when you're an employee owner um you still have that you have that sort of also behavioral shift or mental shift in not just thinking about the near future but. Longer term.

[18:45] This Gapis potentially huge on a number of different fronts.

[18:57] And. I I like the way that you position that and how owners thinkhow Founders thinkuh versus how employees think. And it manifests in so many different ways and from from an owner's perspective from a Founder's perspective it could be as, um as simple as uh I I don't know that they're ever going to get really what, what needs to happen in order for someone to step into my shoes um we've talked about that in a few recent episodes and that that transitioning being being a courageous leader and believing that people can to bridge that particular Gap and how do you speak into that um but meanwhile the employees, are are very today focused because they're very today compensated.

[19:54] And it's probably hard I mean you can't really I guess blame them for thatthey barely don't have any. Maybe motivation unless it's. Internal motivation but they're not given any motivation from the company to be thinking more long-term unless you have some sort of. Real Equity or synthetic equity. And the word um that you used earlier was alignment and I believe that this is the areauh these these differentials is is 1 of the ways that alignment. Solves or closes the gap, more than anything else with with the use of equity because it it creates that that mental change of oh um, it's not just that I'm going to be here in 5 years many of you have employees that have been with you since day 1 and you've you've had uh, a long career they may have survived Generations if you have a family business that's gone from 1 to the next uh there may be someone that's been there from for for 50 yearsuh.

[21:06] But how do they think did they think back then I'm going to be here in 50 years um and what what was it that kept them around for that long and a lot of you can uh State culture and family and the the qualitative we'll get into that in a moment I thinkum. But. And that's the extrinsic motivation right I'm going to be here for another year I get to hang on for another year I'm always going to have a job I do well um but the internal motivation is when oh I. I can I can start believing and thinking ahead because I have a stake in in an outcome that's well ahead of meright.

[21:54] I think that was a good segue into ourour next factor which was Equity as a culture signal which. To your point that that culture may already be there but providing. Either real Equity or Equity like synthetic Equity that communicates um. But that signalis what you feel about your employees and and your company um.

[22:22] Not only that they'velike you want them to benefit in the value of the company and they've helped maybe helped you build that um. And it's also communicatingkind of the points we've already made but. Now you can think bigger and far ahead umand like we believe you matter. More than just today more than just tomorrow on a long-term basis.

[22:57] I really love this word uh stewardship. It frames upthe idea of responsibility thatgenerates care. For a positive outcomeand. And in an ESOPwhat's been transitioned from an owner to the employees through the plan and through the trust is equityuhthat. Is not just worth money um but helps to again align these this idea of if I take care of this, uh then it it's not just going to be worth, dollars it it's going to be worth preserving and it's worth my time it's worth my effort it's worth my energy yes I get to participate monetarily financiallyum but now, everything that I dohas the potential or capacity to make this better. For more people than me and for more people then I'll ever imagine could be a part of this for decades in the future.

[24:19] What are some ways that you can Definethe role of of equity in in this context.

[24:29] I think that it's justin this context specifically with employee ownership it's a tool um and it's a tool for various, various things it's a it's a tool for culture preserve preservation it's a tool forum your employees Behavior. And mindset it's a tool for the retention of your employees um and then maybe the most obvious it's a tool for um succession or transitioning ownership. If money happened to be the answer to everyone's problems.

[25:13] Then. You could always get your intended result as an owner as a Founder as a leader just by paying people more. Mhmand I think. That many people would agree that that's the tool that they may have used at certain times but it doesn't always have the result because it doesn't create the alignment. Yeah100%.

[25:45] So we've covered 4 pretty pretty neat elements I think they're neat elements um the the audience you you guys can tell us if if we're off our rockers or not um, but e Equity has control Equity as risk distributionEquity as a Time Horizon. And Equity as a culture signal. And McKenzie said Equity is a tool and it is a tool in your toolbox uh for those of you that have known me for a long time you've heard me use that phrase before uh, and, where I want you thinking as you're listening to an ESOP podcast about potentially becoming an ESOP or you are an existing ESOP company uh is the structure.

[26:34] Is what's going to support the future of your companyand all of these these 4 elements. Manifest in the financial structureof the equity of the planwhat's.

[26:54] Yeah how how. Are we thinking about synthetic equity for SARS for key people how are we thinking about um, the the level of dilution that that may create for the entirety of the plan what's the the cost and benefit analysis there um what do I as a seller what am I entitled to that helps to again share the the risk distribute the risk um and the 1 way that I can think about that is through warrants um where you retain some risk because you are retaining the risk of the seller note um but you're you're giving the company a break on its obligations to make this transition easier.

[27:39] And all of these have the in the structure there's, that can be optimal and that's really what you're trying to solve for what's optimal for all the parties involved but that's how these manifest and I think if you pull out uh these 4 topics that we talked about today, and isolate them and say what are my concerns around control what kind of risks am I trying to uh distribute across more than 1 party how am I using Equity to send a culture signalum how am I aligning everything and that helps inform the structure of the transaction and how you're going to use synthetic Equity afterward.

[28:27] I think the overarching theme here is just thinking aboutequityor or teaching others. Especially as you're becoming if you're becoming an employee owned company being able to teach others about equityin aspects other than money. Rather than just money.

[28:50] I I liked this uh this phrase that that came up when we were we were building this episode it's if you only think about equity in terms of what it's worth today then you miss what it's designed to do tomorrow.

[29:06] And I believe that all of you listening listen because you are looking at, tomorrowand 1 of your unspoken concerns may be how do I get everyone elseto get my vision.

[29:30] And I would say that you're in the right place uh because an ESOP transaction an ESOP owned company uh inherently does a lot of the heavy lifting and the structuring for you in this regard. If it's the right thing for you. Uh thenreally dissect this episode in these 4 pieces um and I would encourage you to reach out to us if you have questions, um if you have some insights we would love to hear them if there's other content related to this that you would like us to dive deeper on any of these 4 Points uh you can interact with us at journey to an ESOP camand with that we thank you for listening share this episode with a friend that's concerned about losing control in a transition or in a transaction and we will see you next time on the journey to an ESOP and Beyond podcast.