⚙️ Building a world-class equity management process

What’s Up Operators ⚙️

This week, we are changing it up (again!). I interviewed Nick Rasch over at Carry. Since there have been a lot of questions about equity management, I wanted to get an expert on the call. This is my first time experimenting with this format. If you want more interviews, reply to this email with “Just do it.” I’ll get the message.

Nick Rasch, the COO of Carry, helps business owners grow their wealth by saving money on taxes. The company has grown to 1,400+ users in 2 years and announced that it raised $10 million in its Series A this week. Before Carry, he was Head of People at Teachable, a platform where content creators offer online courses. With his help, Teachable was acquired by Hotmart for around $250 million in 2020.

Nick shared insights on the following topics:

• Equity compensation and how it differs from traditional compensation

• Setting up regulatory foundations and equity structures for startups

• Attracting top talent with equity compensation

• Helping stockholders and employees understand equity compensation

Where to find Nick:

• LinkedIn: https://www.linkedin.com/in/nickrasch/

• Instagram: https://www.instagram.com/nick.rasch/

• X: https://x.com/irraschional 

A few takeaways:

1. Startups are typically cash-poor but are equity-rich. This isn’t like the early 2020s when investors were ready to jump the gun on any good idea they saw. They’re a lot wiser today so initial funding is smaller.
   So, how do you attract top talent with limited cash? Equity mechanisms. With equity compensation, the founders’ and employees’ goals are now more aligned, and both are equally driven toward the success of the company.

2. RSAs or Restricted Shares are better when used during the early years of a business. In a structure like this, shares are given upfront but can’t be sold easily because of transfer restrictions and vesting. As your business grows older, it would be wiser to consider shifting to other structures like stock options for the company and the employees.

3. QSBS or Qualified Small Business Stock is a big plus for startups thanks to tax benefits. However, QSBS isn’t a one-size-fits-all program. Not all businesses can use it and without proper preparation, it’s hard to maximize the benefits you can get from it.

4. Equity compensation is more complicated than traditional compensation packages. You need to be a good communicator, so stakeholders and employees understand the equity structure well. If you want to keep employees hooked, it’s important to sweeten the deal with grants. A good strategy would be to add grants at the end of the vesting period. You’re making things easier for your employees by letting them know what their equity-based compensation is within one or two years. This also prevents the grants from stacking on top of one another, making their compensation inconsistent. One year, they’re making good money, the next they’re making less. No employee would want that.

5. Like traditional compensation frameworks, equity structures need to be legally sound from the get-go. We’re talking about proper documentation, compliance matters — the works. Since we aren’t in a perfect world, not every business owner knows their way around law and taxation. When things get too complicated, technical, and legal, it’s better to outsource instead. Using specialized platforms like Carta and AngelList will also make setting up an equity structure easier.

Topics covered in the podcast:

00:24 - Nick’s background

01:15 - Working with Teachable

01:56 - Founding Carry

03:52 - Equity compensation vs. traditional compensation

05:15 - Equity compensation for co-founders

07:00 - Setting up regulatory foundations

08:26 - Timeline for choosing equity structure

10:15 - Understanding QSBS (Qualified Small Business Stock)

12:19 - Strategies for attracting top talent with equity compensation

14:16 - What is 83(b) and what you can do with it

16:16 - How to pitch equity compensation to potential hires

17:47 - Setting up equity compensation for your team

20:14 - Common problems with equity compensation

Referenced:

• Teachable acquired by Hotmart: https://techcrunch.com/2020/03/16/edtech-notches-a-win-as-teachable-is-acquired-by-hotmart/

• Teachable: https://teachable.com/

• Carry: https://carry.com/

• What is equity compensation - https://www.investopedia.com/terms/e/equity-compensation.asp 

• What is QSBS - https://www.investopedia.com/terms/q/qsbs-qualified-small-business-stock.asp 

• What is RSA - https://www.fool.com/terms/r/restricted-stock-award

• 83(b) election as a tax strategy - https://www.investopedia.com/terms/1/83b-election.asp

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