S: It’s hard enough to build a business out of nothing when you don’t have funding and you don’t have training in entrepreneurship. Imagine what it would take if you are actually homeless and you’re starting from scratch. Now, imagine building up a successful business from those beginnings, to walk away from it, and follow your true passion, your true dream, which is to create your own non-profit. That’s exactly what you’re going to hear about in today’s episode number 153. Our guest is Jabez LeBret. He’s been homeless, he’s been a highschool dropout, he was on a path to nowhere. After getting his GED, Jabez studied finance and marketing at Gonzaga University. He went on to become a financial analyst at Nordstrom, an international public speaker, author, and Forbes contributor. He recently sold his award-winning marketing agency to free up time to pursue his passion in education as co-founder of Sisu Academy—a new education model. Jabez is a coffee lover and gin enthusiast. Jabez, it’s great to have you on the show.
J: Thank you for having me.
S: Let’s talk about first of all, what it’s like to sell your business, you had an agency and you decided to make a pretty significant shift in and your career direction, your life direction, and so you sold your agency. I’d love to learn a bit more about what that process was like, and what your decision was based on all that sort of stuff.
J: Jumping into the heard of things. I like this.
J: I think any time that you spend all of your blood, sweat, tears, and energy, and money building something that the decision to walk away from that whether that is a decision that is forced upon your, or in my case the decision I got to make, I had the opportunity to make, I think it’s tough. A piece of you is alive in that thing, whatever business that you’ve built. We had employees and I had a business partner who we are 50/50, we had basically gone through war together, been through the battles, the ups and downs, and you grow very close to each other, and learn to depend on each other, and a decision to go a different direction is not a decision made lightly. Fortunately for me in my situation, my business partner and I parted amicably, and we’re able to really come to good terms and understand where each person was heading in life and kind of why there needed to be a divergence. We were about seven years old, almost eight years old, we were starting to move into a really good and steady growth phase. An odd timing to leave an agency that you built but, my business partner was supportive and understanding, sometimes life takes you in different directions.
S: Did you both come to the conclusion that you would sell the business together, or did you sell to him, and maybe to his employees, who is the eventual acquirer?
J: In this case, I sold to my business partner. I sold my shares. In fact, in our working operating agreement which I highly recommend people take a look after going into a partnership. We had some pretty good language around what sales should look like, and how if somebody needed to sell for whatever reason, what would be the process and procedures, him and I were both able to I think kind of come to a good agreement without having to get the dogs in the fight, which was great. It was interesting. We’re not a service business, we’re a marketing agency, and so we provided digital marketing, and online marketing advertising, social media marketing for law firms. When that’s what your whole business is built on, it doesn’t matter how many millions a year you’re making, the real value is in the time that’s being put in. So those are hours for dollars. Selling that sort of thing, I hate to admit it to folks out there, but there’s not a ton of value in something where literally you’ve got a couple handful of 70/80 annual contracts. That’s really all you can lean on, there’s no widget or proprietary information. I think on one end, that makes the sale value a lot smaller which can make it more digestible for the buying party but more challenging for the person leaving. There’s an opportunity cost lost there for walking away too soon. My business partner realized my heart wasn’t in it anymore. It wasn’t that I didn’t love him, and love the business, but I found myself really being torn in my soul, and that’s disruptive to any sort of relationship in a business partnership, that’s why I think we both realized, we have to do something about this.
S: Was it that you were going to burnouts, was it that you felt a calling to some higher purpose, you wanted to go a different direction, or a combination of things, what was that?
J: No, we burned out years ago. If you’ve built a business, you’ll understand what that means, you go through burnouts all the time. Those parts where you’re just getting off the ground, and you’re hope you’re going to make payroll. In me, it wasn’t burnout. About four years ago, my wife and I were on vacation and I looked around––I’ve always been passionate about education, I have never been an educator. I was a financial analyst at Nordstrom from a long time, I’ve owned a couple of companies that helped build this agency, and I just said, I think that there’s a problem in education that we can solve, I don’t know what that means yet, but there’s this group of students who are falling through the cracks, kind of an underserved disengaged population that is going unnoticed. They’re slipping through the cracks, they’re not getting the opportunity that they need and I said, “I think, we should open a high school someday.” She kind of looked at me like I was crazy, and she’s like, “Okay, that sounds great.” Just another one of my ideas because I’m not an idea generator, and she just kind of set it aside, and then about six months later I came back and said, “I’m dead serious, I actually think that we can build a high school here that’s going to help students who desperately need help.” Fast forward three years later, we had a really incredibly solid working plan and model for what a new kind of high school would look like in a really innovative approach. Once, I think we turned that corner of, kind of our litmus test, where we ran it by educators, and we ran it by donors, and we ran it by parents, and we ran it by business people, and they all said, “That’s actually a really interesting approach.” I suddenly got sucked in. It’s almost like a black hole, and then I realized, I have to go do this thing nowm, just because once I had the knowledge, I couldn’t unknow it.
S: Did you form of 501(c)(3) nonprofit and start to build this high school, or what would happened next?
J: We did, that was one of the hardest decisions to make early on, was what we’re going to structure this thing as. For those that don’t know and have never started at a 501(c)(3) which I had not up until this point, no one owns a 501(c)(3), or I guess the public owns it. It’s for a social good enterprise that is, and not only as a tax exempt, which everybody knows, we’re all familiar with 501(c)(3) is a nonprofit, you can donate to their charity if you will. What we often don’t know is that there’s no equity in that. For a business owner, they will understand the big vulnerability, and I think the leap to decide to build something with no equity where you don’t own it, and you literally are just someone who is there to service this institution, or do you build something as a for-profit engine knowing that that way, you can maintain control, set up as an LLC, or incorporation, in that way you can maintain control and drive. For us we really stepped back and said, what are we in this for? Are we in this for our own personal gain? Or are we in this to actually go make the massive impact we want to have. If we’re in this for the massive impact, let’s set up a 501(c)(3) to show to the world that we’re not in this for us, this is genuinely a project for the kids. We established the 501(c)(3) for the school project. We set up an educational research 501(c)(3), and then eventually went and set up our school 501(c)(3) as well, just so that we can kind of really keep ourselves properly separated from the business endeavors from the institution and our own personal interests.
S: Okay, and then you have presumably like a board of directors, or board of trustees, board of advisers or something like that besides you and your wife that are steering the direction of both of those charities, is that right?
J: Yeah, first, hat’s off to my wife. She’s the smart one in the room. She’s got two masters, her MBA, and her masters in human resources, and she was working in healthcare technology in San Francisco as a former consultant, and she’d left her career to jump into this project. That is huge. I don’t know that we could build what we’re doing without the two of us doing it together. Then I obviously sold my agency to go do this, and we had to go find a board. That’s what a nonprofit does, that’s how they’re effectively managed in a sense, or will run if you will, the board is like the CEO. We went out and found a board, and we are so fortunate to have gotten the board that that we have pulled together. There’s two kinds of boards in the world, there’s the pay to play boards, the ones who people came in and write you a check for $20,000, $30,000, $40,000, $100,000 and said, “We want to be on your board.” That’s great, fine and dandy. Then there’s the board where we’re all incredibly sophisticated, and really in tune with what’s going on in the direction of what we do in our life. We have an executive, a former executive from Sony and IBM. We have the dean of the director school of management from Claremont is on our board. We have an attorney which you should always have an attorney on your board, but she also works at the Salesforce, which is an innovative company. We’ve been able to pull together this board of just rockstar individuals, and has really helped in the formation of the organizational structure and where this project’s going. Then we have advisers, and educators, and all sorts of other people have been involved in the project. I think it takes a whole army of folks to build a school. Those are not built easily, and they shouldn’t be. There should be a lot of thought that goes into building a school.
S: Building a school is hard enough, but building a charity that’s a 501(c)(3), that’s a whole other matter, that’s double the difficulty level there, my hat’s off to you for accomplishing that, that’s pretty amazing. I do know there is a different hybrid option that I don’t know a lot about, but instead of just going down the 501(c)(3) route which has a lot of legal headaches, a lot of compliance headaches, and so forth with it, or the other route of just creating your own corporation, or your own LLC, her partnership. There’s actually a middle of the road hybrid option called the B Corp or B Corporation where there’s a for good kind of element to it, and you can also own that company unlike a 501(c)(3) and you can make a profit, and that’s something I don’t really quite understand the details around, but did you look into that as a possibility? The B Corporation?
J: We did actually. B Corporations are great. I’m a big advocate of B Corporation. I think that more organizations should be socially conscious, that’s kind of the way that I’ve always leaned. Jokingly, eventually after several years, after high school, I went back and went to college, maybe we’ll jump into that story later, but I went to Gonzaga University which is a Jesuit school, and I always joke around that they ruined me. I came in with this dog eat dog business mentality and came out with a social conscience, which is wha t the Jesuits kind of instill in you, it’s go be good to the world. A B Corporation is exactly that. Be a corporation, you can still make money but be good to the world. Our particular project involves building a high school that is a tuition free boarding high school for underserved and disengaged youth, and the way that we maintain long term financial stability is that we’re running an accelerator on campus. We’re going to actually build our own companies, we’re going to retain or sell the companies that come out of our school. The students aren’t employees, they’re not the ones building the companies, but the students will be involved in some of the ideation process, and we’ll have a team of professionals that are going to build these organizations for us when we step back and we said, “Okay. We have this B Corporation option which is a great option, but we also have 14, 15, 16, 17, 18 year-olds under our responsibility at an educational institution.” Our goal is to make money to cover our entire operating cost. If that’s our goal, and we want to be able to go out there and say, “Yeah, we’re building these awesome companies out of this school.” For us we said, we can’t have any doubt in anybody’s mind that this isn’t 100% about the school. A B Corporation would have allowed us to essentially keep the retained earnings. A nonprofit, we can’t. That’s really one of the biggest differences, a nonprofit they can go make money, nonprofits they should, in fact I think more nonprofits should be more business oriented in the sense that a nonprofit should have a mechanism that helps them go make money so that they don’t have to continue to only rely on donors to be able to keep them going. But you can’t take the money home, and so all the money stays in the system. For us, that give us an extra level of integrity that we really needed for projects when working with minors just to be able to prove to the world that this isn’t about us, this is about truly innovating in the education space, and maybe someday we’ll build another organization that does something else, and B Corporations are certainly a fantastic route to go.
S: Yeah, certainly I would think easier to get donors behind a 501(c)(3) than a B Corporation. It makes sense.
J: It is, but it’s hard right, because now you’re relying on donors. That’s a total whole different world, it’s just now you need people to literally cut you a paycheck because they believe that you’re doing a good thing. A little different than raising money when there’s a return of cash, just a different animal, it’s not bad, it’s new for me.
S: Yeah, so you didn’t start out by joining any boards that are nonprofit boards or anything like that? For example, I’m on impact networks board, they build schools and operate them in Zambia, rural Zambia and serve underserved children in these rural villages which is amazing and they even have an elearning curriculum, and they’ll build the schools with solar power because a lot of times, there’s no power out there, and so that can run the projectors and recharge the tablets and all that, really cool stuff.
J: That’s amazing. Over the years, I’ve been on nonprofit boards in various capacities. I have been involved in that side of the world I think from a running a nonprofit side of the world, it’s very different than running a for-profit engine. That part was just like completely eye opening to me on how that world––how this philanthropic world functions. It’s a whole different circle, it’s a different group of people that run around in the donor world. The business world, we have venture capitalists, we have angel investors, we have bootstrap businesses, those are kind of your categories of individuals who are out there building and running companies. In the nonprofit world you have, donor managed funds, individual donors, foundations, and those are your sources of income. Certainly, you can bootstrap your nonprofit, too. which I think most kind of start out that way. It’s just getting to know the nuances of the other side of the world, and how those relationships, and communication, and how do you close the deal. You still got to close the deal, how do you close the deal to a foundation versus how do you close the deal to a VC, those are different conversations.
S: Yeah, did you sell fund at the beginning? You took what you had gotten from the sale of the agency to fund this?
J: I wish the sale of the agency was enough to fund that, I wish it was that good, that would have been awesome. We did self fund, I think it’s easier at the beginning if you have enough bandwidth that A, you cannot pay yourself, so that’s a huge benefit, I think that gets overlooked a lot. My wife and I, she hasn’t worked for 18 months, I haven’t worked about a year and, you need a runway for that to be able to survive, and so that’s huge. On the other side of the fence, you have to travel, you have to go to conferences, you have to go meet people, you have to go to the meetings in person, you’re going to have a chance to meet with a $1.6 billion foundation, you go sit down at the table with them. If it’s in Massachusetts, you fly to Massachusetts, and if they say no, not today but maybe later, that’s still a productive use of your time, but man that was still $1,400 out the window that somebody has to pay for. I think that once you can establish some runway, then it’s easier to go to somebody and say, “Okay, now I need some cash to help me with this look.” I’ve already done something, I’ve already put into this. An angel funder here in San Diego where I live, I was at a conference and he said, “You know, I don’t invest in part time entrepreneurs.” And I just thought that was such a poignant way to put it. Nobody wants to invest in a part time entrepreneur, nobody wants to invest a part time charity, and so you’ve got to go all in and that’s kind of where we’re at today, and it’s worked. It’s been paying off.
S: Some donors don’t even want to invest in the operating expenses of the nonprofit. They only wanted to go directly to the kids, and say who’s going to pay for the flights, and for the executive assistant who’s managing all your travel, and all your email, and answering the phone and all that, somebody’s got to pay for that, and if the donors aren’t willing to, then again, you’re using up what you’ve gotten from the sale of your business which really sucks.
J: Yeah. I mean operations is not sexy. Operations is not the picture that you get to carry around with you and say, “Look at the impact that I had.” Even though it really is, and that’s something I’ve been really working on messaging wise. I noticed the same thing when I jumped in this world, nobody wants to fund operations, there’s an interesting nonprofit at a New York culture charity water, that is a really great organization, they provide water for individuals in third world countries you don’t have access to clean water which is a huge problem, you’ve been to Africa I’m assuming, have you ever been with a nonprofit? Yeah, and so you’ve seen firsthand. I’ve been to Kenya and I’ve observed firsthand the challenges of just getting access to water. On my flight back from Kenya, I had a whole day in Milan which was amazing, and so fortunate that to go from one experience to the next, and I remember when I landed, I hopped on a train and went to Milan’s little city center, and I had to use the restroom, and I peed in a toilet filled with clean drinking water. That’s how opulent it is, our position in this world. We fill our toilets with clean water, that sort of a stark contrast for me, it’s what really begun to drive this thing of like, look, this organization like charity water, they separate out their administrative costs and have donors that fund only administrative costs, and the donors that want to fund the water, 100% of that goes towards the water. I’ve been supporting charity water in a modest way for a long time, and have been a silent, or I guess kind of a quiet fan of theirs. I’m not really that big of a presence with that organization, but I believe in what they’re doing, and partly because of my experience in having traveled to a country with not enough water. When I stepped back to start our own nonprofit, and I looked at that as an option, I said, “What if we just bifurcate this out?” If we have one organization that runs the administrative cost, and another one that runs the direct impact portion. I said, but that’s ridiculous, the administrative assistant is as much impacting the student as the teacher. Without all of the pieces of the puzzle together, there is no operation. You are not effectively doing the best you possibly can, and so, are we going to be an organization that’s a nonprofit that couples buy and cut every corner that we can possibly cut for the drive to keep the administration cost down as much as possible because, oh my gosh, we don’t want anybody to see that we have an administration cost, heck no, are you kidding me? we’re going to run an organization where we buy the right tools, we invest in the right technology which cost money and that is a straight up administrative cost, we’re going to hire the right individuals in the right positions at the right pay amount that they deserve so that we can do the best that we can do, not so that we can barely serve the community we can, and scrape by year by year, but so that we can knock it out of the park, and genuinely have a massive impact. I hope more organizations start to develop that kind of methodology, and it’s changed the way that we’ve approached foundations, and donors, and how we’d language what we talk about and what are you donating to. We barely entertain the idea of a donor only ever donating every single dime to the end user because without the machine, it doesn’t matter how good that thing is that you want to hand over to that person in need, it never gets to them. They never receive the benefits, or at least not the full benefit because we’re starving on the backside. In order to keep it going, we get really passionate about, it’s a team effort. We’re a team, it takes all of us, and that’s maybe coming from a business background, I don’t know what has really driven me on that side of the fence.
S: Yeah, but from a pragmatic standpoint, I imagine you wouldn’t turn down an offer from somebody who says, “I’ll donate $1 million, but it has to go straight to the kids.
J: Nope, I would not turn that down, my email address is email@example.com if you’re listening and you’ve got that $1 million check, we will absolutely take it. The point is, we want to have a smart conversation with our donors to say, “Hey, can we portion off a small percentage of that to help with some of these other needs, to assist with that part of the project.”
S: Yeah, makes sense. All right, so let’s jump back to this concept of, you sold your business and you didn’t get super flushed with cash from that transaction, so you weren’t able to fully fund your nonprofit with it, and all that sort of stuff. I’m curious about kind of how this all unfolded, if you could give us a little more detail around that, did you try to set up something in the company that would be more than just a trading hours for dollars sort of consulting/agency type of situation, like some sort of software as a service for example, or did you just really enjoy serving the clients and not really think that some sort of scalable technology that would allow you to sell for more multiples than an agency. I’m just curious what your thought process was throughout the growth of that business.
J: So with GNGF, Get noticed, Get Found which was the marketing agency, from day one, we had our eyeball on, is there a software for service, or some sort of widget product that we should be creating. We took a couple of stabs at a couple of different possibilities of options for that, and would have continued, and I believe that Mark Homer, my awesome former business partner is still going to continue to pursue options for that because that’s smart, that’s good business. I think if you’re setting up a service company, don’t forget that you should build something that’s got more punch to it if you ever need to sell more multiples. Now with that said, the problem in my personal situation is that I didn’t anticipate leaving. If I had known in year three that in year seven, I would be exiting the company, I probably would have spent a lot more time in year three focusing on how do we get a thing that’s going to have a bigger multiple than we did, but man we were growing so fast, we were growing at about 90% year over year every year, and to keep up with a growth pace like that, it’s exhausting. There was either energy on focusing on growth or energy that you can focus on development of new products and ideas. We really can’t do it all, and we are focused on growth, we really doubled down on just building the agency up to size so that we could be a lot more stable. There’s some hurdles you’ve got to get over, some sizeable hurdles you’ve got to get over. Unfortunately when I left, we just hadn’t gotten to that point yet, and I hope that they do. Like anything else, this is a structured buyout over time, I think that’s a pretty common way that businesses are sold. I get paid monthly for X number of months and for a long time. That way, it eases the burden on the business and the business partner of the purchase. It helps me have a little bit of an income coming in every month, and that is a good route to go, but no you’re right, if I would’ve rewound the clock, heck yeah, I would absolutely figure out some sort of widget.
S: I had actually created something myself when my first agency Netconcepts was in year eight. That was 2003, I had started my agency Netconcepts in 1995. I was working on a client engagement, consulting engagements, Kohl’s department stores hired us to help them with their SEO.
S: Yeah, that certainly was a big name client.
J: That was in ’95, are we masking keywords in the footer?
S: No, back in ’95, I wasn’t doing SEO just yet. It was in the later ’90s that I started doing SEO. This was in 2003 when I was working on the Kohl’s engagement, and that I saw an opportunity and have done something, and that was a software as a service, but it didn’t start out that way, it was just a problem I was trying to solve, to show that I was not going to ruin their site with SEO. They thought that SEO was going to make their site horrible, and the brand would be sullied and so forth, you input keywords everywhere and stuff. I’m like, “No, this is not going to be horrible, look how good it’s going to be. Wait a second I can’t show you how good it’s going to be, because you aren’t giving me any access to your backend or anything.” What I did is I created a little proxy server based tool that would inject SEO changes into a version of their site that I would grab real time from their server. So that I could show them how SEO was going to look on their site real time. I thought wait a second, I could actually use this in a production environment because we had another client Northern Tool at that time that was quickly facing a code freeze for the holidays. After September, whatever it was, they were not going to be able to make any changes to their website like backend stuff until next year.
J: Yeah, because they didn’t want to ruin it before the Christmas season.
S: Yeah, they don’t want to make a mistake and end up destroying their holiday revenue with some sort of code errors. What I did it to work around this issue because we weren’t able to implement URL rewriting in time, there was just going to be no way––they were running an old version of IBM HTTP Server on WebSphere Commerce, it was just a convoluted mass, like wait a second, the stuff that I coded over at Kohl’s, or to show Kohl’s that I wasn’t going to ruin their SEO, that was my code, that was my IP, and I could repurpose that in a production environment for Northern Tool, and we did. Thus GravityStream was born, and we ended up over the next couple of years generating the majority of our revenue from that tool instead of our consulting revenue. So it was pretty exciting.
J: Isn’t that amazing, how that happens, like you develop a tool as a solution for your own need, and also end up with a tool.
S: Yeah, that’s pretty amazing.
J: Did you end up selling the tool separately, just out of curiosity, what happened to the tool? Okay, so you sold the whole company.
S: Yes, so Netconcepts, and the GravityStream technology went with it. Covario was my acquirer, they spun off their tools which included my tool as a separate––spinout is what it’s called, and it was called a Rio SEO the company still exists. Covario got acquired by Dentsu Aegis, the multibillion dollar ad agency conglomerate that owns iProspect, and a whole bunch of ad agencies. They bought Covario, so I made money both times, when I sold Netconcepts and then when Covario was sold, I made money again. That was cool, but Rio SEO still exists. They don’t have GravityStream anymore, that was rebranded to, I forget the name of it, Organic Search Optimizer, something like that, and then they just over several years, decided to stop selling it for whatever reason. I was not involved, I had negotiated a very short earn out, I think that’s very important, and we should talk about earn outs here. My earn out was six months because I was not going to tolerate anything longer than that. As soon as the check cleared, I was out of there. I’m unemployable, nobody could employ me, I don’t care what the salary is, it’s not going to happen.
J: So when you were preparing to sell the agency, leading up to that in the conversation in your own head, what were your thoughts before you went to think of like, “Maybe we should go sell.” Were you just kind of done with doing it the way that it’s been done?
S: Yeah, this actually is interesting because I tried to sell my agency twice, or I tried to sell it the first time and I failed, and then the second time I succeeded. The first time was in 1999 when I decided I’m going to move to New Zealand. I don’t know what exactly inspired that idea, let’s chalk it up as intuition, it was divinely inspired, and I’ve never been to New Zealand.
J: You saw Lord of the Rings.
S: I knew nothing about that, that movie hadn’t even come out yet. I just had this intuition that it would be a great place to live so I applied for residency, permanent residency and I got in. So then I convinced my wife at that time, and my kids, let’s do this, we can actually do it, we can all get in as permanent residents, and they all acquiesced and it was magical. We stayed there for almost eight years. In the internet industry, you can do this thing from anywhere. It’s pretty amazing. In fact I am right now recording this interview with you in Tel Aviv. I’m in Tel Aviv, you’re in where?
J: San Diego.
S: I am normally also in southern California in Santa Monica but I’m here in Tel Aviv for five months. I can do that because I’m in the internet industry, and why not? Why couldn’t I do that? Why not assume that you have the time, and location freedom until you’re proven otherwise. So take those big leaps.
J: I would say you should, like I would say not only is it a good idea, but it’s almost like you’re really making a mistake if you don’t.
J: A few jobs allow that kind of flexibility and you really owe it to yourself, take advantage of it.
S: For sure, a couple of key points of from that whole story, one is when I tried to sell the company the first time when I was leaving for New Zealand, nobody wanted to buy it and that was because I was inextricably linked to the company, and if I was high tailing it out of there, going halfway around the world, what are they buying exactly? I did not differentiate the company as an asset from me, and my IP, and my blood, sweat, and tears, and my continued involvement. I couldn’t sell the business, it was a blessing in the end because I was able to really grow Netconcepts from half a world away, still maintain US clients, we actually had Birds Eye as a client, and they stayed with me even after I moved halfway around the world, and so you really can pull it off, but if you haven’t thought through that your business needs to be able to stand on its own without you, it needs to be built as an asset, you can’t just kind of quickly retrofit that and then sell the business. It doesn’t work.
J: Yeah, it takes time.
S: I learned a valuable lesson from, and then the second time when I tried to sell, 2007 a good time to sell the business, I moved back to the US, so that it would be easier to sell the business because I’d be US based at that point, but I wasn’t going to go with the business, or at least longer than say six months. That’s how we ended.
J: At that time you knew.
J: It’s important stuff to know because I think that there’s a lot of different ways out of stuff. But a few other things are consistent, and I think the same goes for our organization. We hired a consultant early on, who was like, “You have to put a fictitious face to the company.” I was like, that feels creepy and wrong. What I think you’re saying is, don’t make yourself the face of the company, so much so that you can never walk away. I’d say that was a great early on lesson learned, and good thing you figured that out in ’99, and you’re not having to wait until 2000, later when you’re trying to sell the organization.
S: Yeah, for sure. The earn outs that you’re facing right now, so you’re getting a payment every month, and if it’s confidential, you can’t share it, no worries, but I’m curious, how far out into the future do you have to go before you are done getting paid by the company?
J: I think there’s two parts to that answer that are important to notate as number one, what is your expectations and involvement with what you’re getting paid? And how long are you on the hook to be waiting for money? I stayed on for six months as a paid consultant, and it’s a way to structure a buy option to provide a sweeter purchase and structure myself as a 1099 and move the tax liability to me off of the organization, and there’s pros and cons for both sides, but that was a 6-month deal where I was intrinsically tied for six months that I had a responsibility.
S: Were you full time?
J: No, in fact the expectation was very low. As you know or anybody else who has sold an organization, it’s hard to give any time back to something that you see the exit door, and that’s where it becomes like, what’s the point of keeping an “employee” around? For me, I went to some speaking engagements for the organization, I made myself available by phone, so that if somebody have some questions, I make introductions, and you know what? I still do that. I actually have a speaking engagement in August, where I’m not getting paid because I kind of looked at it like, well it’s not costing me money, yeah, it’s going to cost me an hour of my time but I bet you I can find something else to do in that city that I need to do, so I can find a reason to have to be there, and I can help out the organization that I am still tied to, because if this company goes out of business in three months, then yeah, I lose my money, there’s nothing for me to really go after at that point, I mean I guess maybe technically, but that would be a real jerk move. From my perspective, man, I have a lot of trust with my business partner for sure. A huge amount of trust that he is going to run a good ship which he does, he is a great operations minded person, and that he is going to stay true to the agreement, and that he is going to continue to be in business. I think if we weren’t eight years old, and stable, I would be more worried, not the business is not quite a business at eight, or nine, or 10 years old, but that doesn’t happen as often, especially once you’re kind of established and you have a good routine. For me, risky on my end but allowed the flexibility, I didn’t want to put too much of a burden on the other side of the fence. To go start to go start a nonprofit and burden somebody else for you to go start a nonprofit just didn’t quite sit right, but I don’t know that I’d recommend what I’m doing.
S: Okay, so one statistic that comes to mind here that I think is really amazing, in a business that is 10 years old, has really beaten the odds because 97%, I believe 96%, somewhere around there of all businesses 10 years in have gone out of business. Isn’t that amazing?
J: For a good reason, bad management, over hiring, market turn, putting too many eggs in one basket. We’re an organization, we were extremely diversified in a customer base. So we didn’t have one or two clients. You have to run your own risk assessment right, you’ve got to run your own risk assessment. You’ve got to put your finance hat on and be really smart about the risk that you’re taking when you’re exiting and I looked and said, “We have 80 or 90 clients that fairly equally make up all of the revenue.” Man, the odds of that company going out of business is pretty small, it would take some pretty stupid mistakes that hopefully we’d already made at that point in time.
S: Well assuming that your retention is pretty good, if you managed to retain clients on average for two years, then you’re golden, but if your churn is really high like they only stick around for three months on average, then that doesn’t give you a whole lot of buffer even having 70 or 80 clients. I’m guessing that you have a pretty good retention rate.
J: Annual contracts to boot which helps.
S: Yeah that’s good. Very good, so earn outs are all also oftentimes known as golden handcuffs because you’re essentially getting bribed to be handcuffed to that organization that you are so desperately wanting to leave.
J: For nickel handcuffs, or silver handcuffs, it depends on how valuable the handcuffs are, but yeah, I know you’re stuck.
S: Yeah, are we talking about we years from now, you’re still going to have that earn out happening?
J: Ours was more than a year less than three deal. It’s not forever, and I didn’t do a clawback, I mean there’s all sorts of ways you can structure yourself. Go hire an attorney, there’s no question about it. If you’re going to sell your company, do not do it without consulting with a legal professional, and go find someone who has sold a company, preferably several people, and ask them what they did, and why they did it, and how they learned in what they would do differently. I’m in the Entrepreneurs Organization, EO and I reached out to a bunch of people and said, “Hey, who sold their company and what did you learn? Give me your experience.” A bunch of people hopped on the phone, and we talked it through, and that really helped me understand what I was in for because I’ve never been down that route before. I did the same thing with the school in reverse order. Before we started the school, I reached out to a bunch of people who had started schools and said, “Hey, what was it like? Can you give me some of your experience? If you could go back and turn the clock, what would you do differently, and how would you move forward today if it was today and you were starting versus when you started?” I think that’s just generally good practice, and hand both at the beginning of something, and at the end of something, in fact, probably in the middle, you probably should be doing that constantly.
S: That’s a good idea. Now you mentioned a term that we should probably define for our listeners, you mentioned clawback. Let’s not just move on from that, let’s quickly define it for our listeners because if they haven’t bought or sold a business, they won’t have necessarily know the term.
J: Yeah, you don’t really use clawback in your everyday vernacular. Clawback is that that kind of, I’m scared that I’m selling this too early, and this is kind of where I think the clawback came from. If somebody said, “Well wait a minute, what if you sell this company for a bajillion dollars right after you buy me out.” There’s some magic thing happening in the background, that you are somehow unaware of, and there’s a general fear that oh my gosh, they’re going to make all this money, all my energy and sweat equity went into this, and my money went into it, I’m not going to get that benefit of that windfall in the future. What they developed legally is called a clawback which is where you can say, “Hey, I agree to sell to you, however, if you do X, Y, Z, so if you make this much in revenue, or if you sell for this much money, and you can set parameters to it, I get an X percentage of that.” it can work in a couple different ways, you can say, “If you make X millions in year five from now, I want 10% of that X millions, and if you don’t make that many millions, then I don’t get anything extra, or if you sell for $50 million, I get 15%, if you sell for $25 million I get 5%, if you sell for $20 million, I get zero.” I mean you can structure it in all sorts of different ways, but it’s basically your way to reach into the future, and clawback some future profits that you feel you had something to do with. It’s like a redo button of like, whoa, wait a minute, if I’d known today what I know now, I would have structured this differently, that’s what a clawback does for you.
S: Yeah, like, I can’t believe you had somebody waiting in the wings to sell the company for so much more, and you bought me out before you executed that, that was really sketchy of you, and let’s undo that and cut me back in.
J: Be glad you got out of that partnership by the way, if that is the reality of your world, then that is not a healthy business. That that’s to be considered as well, if that is something that happens, and there’s other problems.
S: Yeah and well they say that, in business, if you’re going into a partnership, it is a business marriage, and you better really love the person you’re in business with because it’s going to get really ugly if things go sideways.
J: Yeah, I call it a business divorce when you leave.
S: Let’s jump back to this concept of a 501(c)(3) versus a B Corporation, and one concept that I really like, that I have not heard a whole lot about in recent years, maybe I’m just not hanging around in the right circles, this is the idea of a triple bottom line, and that would apply I would think not only to a B Corporation, or a 501(c)(3), but any business, any corporation, any LLC, partnership, even sole proprietorship should ideally run their business with a triple bottom line perspective. Have you heard of this concept before?
J: I have heard this concept, and if I’m not mistaken, it’s kind of the more defined win-win-win.
S: Yeah, so it’s more like just, we don’t care only about the economic impact in terms of the decisions that we’re making to maximize profit, and revenue, and all that but also the social and environmental impacts. That’s why there’s a triple bottom line that’s not just the economic bottom line, but the social, and the environmental as well, and I think that’s a really good way to but in the world.
J: And it seems so many of those things are tied together. I always scratch my head at the idea that social good is a separated maneuver from growth profitability and equity. I think organizations like Nordstrom, my first career was at Nordstrom, I was a financial analyst there, great organization. That organization does really good things for the world, like they really are genuinely interested in contributing to the community in the sense that they raise money for different charities, and organizations, and they run 5Ks, and they do fundraising fashion shows, and events, and that organization itself just flat out donates and then they do employee match on their paychecks, and so they have all these initiatives that are geared towards building a better and stronger community, and being more inclusive, and that helps drive a cultural shift and a certain embodiment where when you interact with somebody from that organization, there’s no way you’re getting away from that. That person that you’re interacting with, in part of their DNA is giving back and you pick up on that, that impacts the relationship that you have that individual as a consumer, with that person who is possibly the sales person in the situation, and I think that there’s a financial impact to that transaction as well. I’ve always thought those things are intrinsically connected, but I do hear a lot of time where people are like, no, you have to be one or the other, and I think we need more of like you’re saying, we need more of the triple bottom line approach. Everybody wins in that scenario.
S: Yeah, and there’s this concept in economics called externalities. These are things that you can pawn off the cost to the environment, or to society as a whole. Like you dump pollution into the river and save some money that way, the externalities are this cost of polluting the river is going to be borne by the society at large, paying for clean up, or maybe the government, maybe our tax dollars, EPA, that sort of stuff so.
J: I completely agree, it just makes total sense. I was just thinking to myself about this externality thing in relation to when you support a nonprofit organization that somebody picking up the slack of some other part of the world that needs to get solved.
S: It’s like when you drive down a highway and you see the sign that says that the cleanup of this highway is being managed by or provided by Zappos, or whoever the donating company is, sponsoring company in that part of the highway that is like an externality that’s on the other way, it’s like the people driving down the highway are not thinking, and just being unconscious, throwing their junk, their rubbish out the window, and littering, and then somebody has to come and clean that up off of the side of the road, and it might just be a company that you come to love like Zappos, which is such a cool company. A former client. That is pretty darn cool when a company goes above and beyond, and cleans up somebody else’s mess instead of providing a mess for somebody else to clean up.
J: Well in my world, I look at it like, so you’ve got these organizations that may look to education and they may say, it’s your responsibility to build a good education system, they can create individuals who are capable of coming out into the workforce and doing work, or going to college, and then coming into the workforce and being productive, and then you turn around and say, “Well yeah, but you should be investing back in this because this is your future worker.” Oftentimes like in San Diego, we have this huge shortage of welders, we don’t have enough welders, there’s thousands and thousands of welding jobs open right now down at the port, and they can’t find enough welders, well there’s not enough like baked into the system investment into helping students who would potentially be really good at welding and would love it as a profession, know what welding is, or understand how welding works, or know that there’s an apprenticeship or that you would go to a community college. The organizations might think, I don’t need to invest in that, that’s the school’s job, or that’s the taxpayer’s job, or that’s the whatever person’s parent’s job. But now because we have a shortage of welders, the cost for each welder goes up, basic economics, supply and demand, so now those organizations are paying more for the same welder that had they invested a fewer dollars into the system, they would have ended up with more welders and wouldn’t have a shortage problem today. There’s that kind of externality component that can play out in real life pretty fast. I always encourage people to really take a deep look at if you’re running a for-profit organization, where in the periphery are there things that maybe you should be aware of in investing in whether that’s homelessness in your community where your office is, because there’s a tax burden on the city to have to help ease the homeless situation, all the things that come around homelessness, and the challenges that can come around homelessness from mental instability, emergency room visits, helping people that are addicted to drugs and alcohol. If that person doesn’t get help, then they end up on the street, and they end up needing the police respond and the fire department respond, and then they go to the hospital, who do you think pays for that? The taxpayer pays for that, ultimately you as a business pay more for that, and maybe that’s something you should think about as an option for saving tax revenue in the long run by investing and helping the solution today with an organization that’s helping to solve the problem. That’s just kind of how I started to view the world, now that I mean the other side. I don’t know that I ever really viewed it that way, but now that I’ve been on both the business side and now, on the nonprofit side, I’m saying “Holy crap, there’s this huge connection that I didn’t see, this bridge that I’d heard but hadn’t really realized,” I’m not the first one to say this. This isn’t my profound wisdom, this has been I think what a lot of smart people in the nonprofit world have been screaming about for a long time, and it just hadn’t quite settled in for me, until recently.
S: Yeah, you know while you were talking about this, I remembered how the homeless were being kind of driven out of the area in Venice Beach area. Homelessness is a big issue in Southern California in particular, Venice in Santa Monica. I go to Gold’s Gym in Venice and I see homeless people that are getting hassled, and ejected by the police because there’s a big Google office right next door. The homeless are not welcome because Google is there with all these Googlers, Google employees and stuff, I can understand how Google engineers or whatever would not feel totally safe because some of the people there are not looking too good. On the other hand, I think it would be very nice of Google to do something positive for these people instead of just relying on the police to keep running them out of the area. So that just occurred to me.
J: I mean you never know, I used to be homeless and that’s something that I share periodically when I’m trying to help people understand that you don’t always know what you’re looking at, what their past and history is, and what got them to where they are today. When I was 16, I ended up on the streets, and not a choice of my own, it was a bad home situation and the next thing I knew, I had no home. How well do you think I looked? It’s an educational thing, I think that to your point about the Google location, they need to educate their engineers and their employees on what is homelessness about for real. What is actually the issues with homelessness, and then they need to invest in those community programs that are helping those individuals, and not necessarily like you’re saying, just reliant on the government if you will, or the local municipalities to “clean it up” which I hate even thinking about it that way, it’s not litter, they’re humans that need various types of support. You’re right, I think that there’s an opportunity here to both better your employee base by educating them and having them be better citizens, but also better your environment by choosing to invest in the organizations that are making these differences because man, I guarantee you, there’s some Google engineers who used to be homeless, they may not talk about it, but I am for certain there are. You’ve got that many employees, some of those folks were living on the street at some point in time. It’s time to start maybe addressing the fact that we all have burdens. Every one of us, every person listening to this podcast has had stuff going on in their life, and that’s just the way that life is, and we’ve all had to deal with our burdens in whatever those might be, and I know you have an interesting backstory, and I’ve got an interesting backstory, and I’m pretty sure every person I talk to, I sit down and say, “Tell me about that the difficult times.” Man, don’t we all? It’s a good moment of reflection when you start thinking about kind of what are the grander things that we’re moving towards in business for-profit, or nonprofit, it doesn’t really matter, it’s still an important activity to do with yourself.
S: Speaking of my backstory, most of my listeners I guess would probably not know this, I’ve mentioned this probably a few times, but not at not very often, that I was a foster child for most of my high school years. My childhood was pretty tumultuous and difficult. I had been bounced around a lot as a child, and for much of my childhood, I was with my abusive grandfather, and then I ended up in foster care when he when he got ill, and then he eventually passed away. At that time I thought, foster care was––that was a terrible situation for me, but it was, in retrospect a wonderful gift, I got a great foster mother, not everybody is as lucky as me but my foster mother I still have a wonderful relationship with after all these years. I send her flowers on Mother’s Day and all that, and we usually see each other once a year. Most people would never have known that I was a foster child except just two years ago, I decided I would start going public about that, and talking about foster care, and foster kids, and debunking some of the myths about foster kids. I did I think about five different TV appearances about foster care, and sharing my story, and I’m happy to do more. May is National Foster Care Month, so when May comes around, I try and get more TV appearances to raise the issue and get people more aware, and potentially helping these kids who need help.
J: Thank you for sharing, I applaud you for being able to find it within yourself to talk about it, it’s hard to talk about these things. I think that it’s very vulnerable when we share kind of those moments of our lives that other people might look at with a little bit of a side eye, and maybe have a question, and that’s a challenge, but it’s important. Personally, I just want to say thanks for sharing because I had no idea.
S: Thank you for saying that, and thank you for sharing about your homeless situation when you were 16, that takes a lot of guts and vulnerability, and my hat’s off to you for that.
J: Did you graduate from high school?
S: I did. I’m curious, are you speaking about the topic of homelessness on stages, or on TV or anything like that?
J: Way back when I did it, so right after college, I did a stint of speaking in high schools about life and making good choices. I didn’t graduate from high school, I had to go back and get my GED before college. I did my first cutting my teeth on speaking circuit, I was a full time financial analyst, and then I travel to go speak at high schools. It was fantastic, I got a chance to share my story, incredibly therapeutic, incredibly challenging, and then I kind of walked away, I wouldn’t say walk away, it just didn’t come as relevant in my life to talk about it as much unless it was something that came up. I sat on the Ending Homelessness Committee in Seattle years ago, and that didn’t work, we didn’t reach our goals by any stretch, but certainly that time, I shared my story a lot then it really kind of settled down until this school project, and trying to explain to individuals why I’m so passionate about this educational solution we have. I had to rediscover that part of my story and say, “Look here’s the deal, I’m the kind of student who needed this because when I went to school we had one counselor to 500 students.” We had 2000 students in my high school, and four counselors, what is that person supposed to do with somebody like me? They didn’t even know I was homeless for months and months. They had no idea because I didn’t talk about it, why would you go talk about that stuff? I0t’s not exactly something you’re proud of. I’ve had to rediscover the story, and it’s been challenging. It has taken a little bit of a toll emotionally, I think, in the last year having to retell my story over and over again because it’s important for people to understand why I’m doing what I’m doing, otherwise I can’t expect them to want to be involved. I’ve now again become back in the mode of it’s good to share this, I’ve got this, let’s readdress some of these problems.
S: Yeah, so it’s like, this is part of your backstory that led you to wanting to create this nonprofit and help these high school kids. Now, you need to get out there and share that story all over again.
J: Can’t get the big checks unless somebody knows why you’re really in it. You can’t just say it’s because you think it’s a good idea, you have to be able to say it’s a good idea and here’s why I’m so passionate.
S: Yeah, makes sense. Alright so if somebody wanted to contact you, donate, volunteer, help in some capacity, how would they get in touch?
J: Yeah, we are always looking for people who want to give input, I love getting people’s opinions on how we can best build our project, there’s a couple of good ways, you can connect with me on LinkedIn, I’m pretty active on LinkedIn, Jabez LeBret, and then our schools is Sisu Academy sisuacademy.org. Sisu stands for, it’s Finnish for grit, determination and perseverance which seems pretty fitting for the adventure we’re embarking on right now.
S: That’s awesome. Well thank you so much, Jabez. Thank you listeners, now I hope you’ll go out there and follow your passion, and take a risk. Do something amazing for the world and we’ll catch you on the next episode of the Optimized Geek. This is your host Stephan Spencer signing off.