Breaking Up With William: A Misunderstanding of the Very Important Matter of Economic Fairness

I knew that William was a potential superstar the moment we started talking. He was smart and funny and confident – real confidence, not bluster.

He wasted no time establishing himself as a valuable employee. He then worked in overdrive till he was put in charge of his own product line. He hired and trained a crew that grew that product line into one that was contributing nicely to the company’s overall profits.

As CEO of his division, William made a six-figure salary plus a bonus of 10% of the profits. As his business grew, the bonus was increased to 20%. And as part of his contract when he made CEO, he was also promised 20% of the purchase price if his division were ever sold.

Some years later, the division stopped growing. And because I had an interest in the business, I was called in by my partners to speak to William about it. He was gracious and appreciative of my concerns, but he ignored my suggestions. He was comfortable with the division running at that level of profitability.

I’m not comfortable with an idling business. Unless you are seeking to grow profits, entropy takes over and sales gradually recede (along with everything else). But when William’s sales began to recede, he didn’t seem bothered.

I was bothered. And my partners were bothered. So when an offer was made to buy William’s division, they thought: good timing. To be fair to William, I recommended that we allow him to have a voice in the negotiating process. That proved to be problematic, as he had an unrealistically high idea of what the division was worth.

Eventually, it was sold at the right price. And William received, as promised in his contract, 20% of the purchase price.

Instead of feeling good about it, he shocked us by asking for 40%. His rationale was that he deserved an additional 20% of the profits because, in his role as CEO, he had somehow “earned” an extra 20% in “sweat equity.”

“Sweat equity” is a term that is sometimes used with start-up companies. To persuade a CEO (or other key executive) to work for a salary much below market rates, they are offered the chance to receive equity as a trade-off. For example, instead of paying Sally the $150,000 she would normally make, she is paid $50,000 and receives (after the year ends) $100,000 worth of equity.

That is how sweat equity works. It is a deal the two parties make beforehand. And it is not merited simply because someone works hard or successfully. It is essentially bought with the compensation that the executive willingly gives up.

When both parties agree to it, it’s fair. What William was asking for was, in our view, completely unfair.

I’ve always said that what is fair in a business relationship is relative. It’s relative to the people involved and to the situation, which is always changing.

If, as things change, your view of fair is in a range that doesn’t overlap with mine, we have a problem. Sooner or later (in William’s case, later), we will be at odds. And because our views of fairness are so different, there is a good chance the relationship will be ruined.

If you are entering into a long-term business relationship – whether it be a partnership, a joint venture agreement, or an employment contract – it’s not enough to agree on terms and to put those terms on paper. You have to spend some time talking about how the terms might change in the future.

My partners and I never did this with William. We just assumed, since he shared our views on so many other things, that he shared our sense of what fairness would look like as his role in the business became more important.

Had we done so, we might have realized that, for one thing, he had a very peculiar idea about meriting sweat equity based on his own assessment of his work.  READ MORE

Continue Reading

Horse Ears

“Do you know how horses communicate?” Beverly asked at the beginning of our riding lesson.

My mind trotted back (it cannot race anymore) to the last time I heard Beverly ask this question. I was sitting on this same bench in the Rancho Santana stables a year ago. Or was it two years?

Trot. Trot. Trot. Just as I was pulling open memory’s file, she answered her own question: “With their ears.”

“When your horse is feeling comfortable and happy, his ears are upright,” she explained, using her cupped hands to demonstrate. “And when they are not happy, what do you suppose they do?”

“They are pulled back!” I nearly shouted, responding like the eager school child her style of pedagogy implied.

“And when their ears point forward?” Andy asked.

“Good question!” she said. “When their ears are pointing forward it means that they are no longer paying attention to you. Their ears are pointing towards what they are interested in or what they’re about to do.”

Rancho Santana, as the name suggests, has always been a ranch. Long before we bought the property 20+ years ago, horses were stabled here, along with cattle and occasionally goats.

The stable we were in is the third one in my time. The first was essentially a covered corral near the beach. The second we built a year or so after we bought the land. It housed six horses and was replaced by the current one, which is about three times larger and way nicer.

Today, the stable and surrounding paddocks are home to 15 or 20 horses. And the ranch itself frequently hosts a dozen more that somehow get onto the property and graze on its fields – free food, basically – then make their way back to their owners’ casitas at night.

I’ve never been a much of a caballero. I like the idea of riding a horse and the way a body looks sitting upright in the saddle. But I’ve never enjoyed the riding itself. When the horse is walking, it feels clunky and slow. When the horse is trotting, it’s uncomfortable. (Horse people say otherwise. I don’t believe them.) And when the horse is galloping, it’s frightening. And dangerous!

Still, I feel some sort of obligation to “use” the stables when I’m at the ranch. So I usually book one ride per stay.

Cecily, Andy, and I arrived at the stables at four in the afternoon. We figured that would give us 90 minutes of daylight in the cooler part of the afternoon. And after Beverly’s lesson (which we did enjoy), we saddled up and she tested us on the basics: going forward, backing up, and turning.

Since these horses are accustomed to amateur riders, they are very responsive. We all passed muster, so Beverly turned us over to Lorenzo, chief horse master or whatever, and his two sons. (Apparently, she felt we each needed a handler.)

Lorenzo asked me which of the half-dozen routes I wanted to take. I told him I had another idea. He looked concerned. I said I wanted to ride all the way to Los Perros, at the southern end of the ranch.

“But that will take more than an hour,” he said. “It’s not good for you to be riding back in the dark.”

I told him that my plan was to get there just before sunset and enjoy cocktails as the sun dropped behind the horizon. “You and your boys can take our horses back.”

He seemed okay with the plan, so that’s what we did.

Lorenzo was at the lead, followed by Cecily and Andy, followed by Giovanni, Lorenzo’s youngest son, followed by me, and with Lorenzo Junior at the tail.

The trip took just about an hour. It was mostly walking, with the occasional 50-yard trot. But there were steep ups and downs that tested our leg muscles. Along the way, I paid close attention to my steed’s ears – which were, I am proud to report, generally in the upright position. She labored well, up and down those hills, carrying me, at 210 pounds, on her back. By the time we arrived at Los Perros, I’d had my fill of riding for the day, and I believe my horse was happy to have me dismount. Walking stiffly to the beachside cantina, Cecily, Andy, and I agreed that it had been a good idea to make the ride one-way.

As a courtesy, I invited Lorenzo and the boys to have drinks and snacks with us. He surprised me by agreeing. We sat at a table overlooking Playa Iguana. The waves were gentle. The sky was turning orange. My Margarita was salty, not sweet, which is the only way to drink it. I asked Lorenzo if he minded taking the horses back in the dark.


Continue Reading