Nick Horob from Harvest Profit Discusses Employee Equity

VO: Get ready for your semi-regular dose of random ideas from the guys at Codelation. We like to talk about big ideas companies that are winning, and those that aren't along with current events in our crazy world of software startups. So come along with Erick and Josh, who challenge you to think big, start small and turn your ideas into something on this episode of, from idea to done.

Josh: Hey everyone, I'm Josh

Erick: And I'm Erick. And in this week's episode, we're going to talk about when you should give your employees equity. And so we have a special guest on the show this week, Nick Horob of harvest profit. Nick, can we start out just kind of get a little background of you and your business?

Nick Horob: Sure. So harvest profit is a set of farm management tools, software tools that help farmers get more visibility into the numbers side of the farm. So, so much about farming is focused on weather and agronomy and how to raise more crops. But at the end of the day, farming is a manufacturing business and there haven't been a lot of tools on the business side of the farm. So what exactly is, it costs me to raise a bushel of corn or a bushel wheat. Um, you know, what's my break even price. If I, if I sell today, where am I at?

Nick Horob: Um, you know, just a lot of the, the financial analysis tools that almost any business has access to a variety of them. And they've really been lacking in the, in the agriculture space. And so we want to enable our customers to make more proactive and confident decisions and, and without knowing the financial ramifications of it, it is difficult. And just a real quick background in agriculture. One crop one crop year tends to contain three different financial years of transaction. So far more would, would buy some other fertilizer or seed the year before they raise the crop, they would buy some more inputs the year that they raise the crop and they would sell some of the, typically sell some of the crop that year. And then they would also typically sell some of the crop the following year. So you have financial transactions from three, three separate tax years, three separate calendar years going into one crop year. And that's really muddied the water for, for this financial analysis for farms over the years. And that's what we're really focused on helping that he can't make competent decisions if you don't know the financial ramifications. Uh, so we're providing better visibility with our software tools.

Josh: That's awesome, little known secret for quite a while. Now I can remember how many years it's been, but we've been fortunate enough to help Nick with a proof of concept and some early stage stuff. And once you share a little bit about kind of where you're at right now, Nick, with your team and the growth plans for, for profit.

Nick Horob: Yeah. So right now we have five and a half employees. So that's myself, three software developers, uh, co uh, dedicated customer support person. And then a, um, Claudine she's a retired, she had retired and wanted to get back working part-time. And so she, she works with us as more kind of like an office manager, um, administrative doing some customer success stuff. So five and a half people right now know we're right at the border of, you know, personally, I'm, I'm more of a visionary type person. The, you know, the operations the day to day project management. I wouldn't say it's necessarily my strong suit. So we're, we're kind of right at the point now where we're either gonna stay a similar size or, you know, it's just not like we're going to add one developer. You know, if, if we add any more development talent here, we probably need some, somebody in an operator, you know, project manager, you know, I was talking to somebody yesterday about, you know, how we could do and what our next step would be in. You know, I was painting the vision of our next hire being a unicorn. And that is somebody who can do, you know, some product ownership, so help guide the product, some project management, a little bit of marketing. And then I, as I realized that, yes, that'd be quite the hire we make there, but being a small team, everybody needs to be a little bit mold by multi-discipline.

Josh: Yeah, absolutely. Um, so I know you've, you've kind of dipped your toe in the water in terms of, um, uh, sharing equity with employees. Why don't you talk a little bit about kind of how you got to that point, how that kind of folds into the compensation package and just how you're approaching that overall as a company?

Nick Horob: Sure. So we have, we're organized as an S-corp and so here there's different, you know, if you have anything we say here, you know, obviously isn't legal advice, but you typically have, at least in the us, you have LLCs corporations that are organized as escorts and then C corpse. So each word tends to come with in different types of employee incentives. And so we actually, I actually did something that was unique in all of our hires to date. Uh, and this is coming to an end now, but all of our hires today have gotten what's called Phantom equity, which really doesn't grant a whole lot of rights to the employee. Um, but it, it, it becomes equity upon a change of control. So they would get their share of the company if we ever sell. And, uh, the unique thing is we did a, I think it was a zero strike price.

Nick Horob: So what would typically happen? Like, let's say you go work at a company that's going to IPO and their last valuation was at a billion dollars and you get a certain number of shares that would be valued at that billion dollars. And so if the company goes from 1 billion to $2 billion of equity value, you participate in that game, but if it goes below a billion, you don't participate in any of that game. And so we've been, uh, we've been at, you know, an early enough stage where our employee options of how to zero strike price. So it's, uh, they participate in any enterprise value games from dollar, zero up. And, you know, the, the important caveat there is we're essentially giving those options that have value. So you have to get a 4 0 9, a valuation what's called and that, um, so then that equity, when it's granted would have value in it. So it's taxable to the employee versus one of the reasons where, you know, stock options make so much sense is they essentially have no value to the employee. So there isn't a, there isn't a lot of taxable consequences there.

Josh: So your employees don't have equity until there's a liquidation event, is that correct?

Nick Horob: Correct, yeah. And we went with a, a one, so I think it's called a one-year cliff and then four year vesting after that. So the employees don't actually have any of those Phantom stock shares until year one. And then 25% of them would automatically vest on their first anniversary date and then it's broken out. So over the next four years, they would vest, uh, you know, straight line investing over the next 48 months. So 1 48 every month until their five-year anniversary date. And if there is, if there's a change of control during that time, they would automate all best.

Josh: Okay. So if, if, if I'm in 13 months into employment in harvest profit, I would have a little bit over a 2% Phantom stake in the company if the company exits, is that what I, what I convert all of that to,

Nick Horob: Yeah.

Josh: Okay. And what made you go with the Phantom stock versus a, oh, you know, like a warrant or, you know, just straight equity in the company.

Nick Horob: So, you know, wanting to basically just to keep our attorneys so we could have done two things, Phantom stock or restricted stock. That's what, uh, the two options that I was given, um, we might convert to a restricted stock because there is the, when the Phantom stock turns to, if it gets catched in it's at operating income. So it's a capital gains. And so we might want to revisit that. So it has no bearing on my outcome, but it has a bearing on the employee's outcome. So that's where, you know, I hesitated wanting to do that because it would take a fair amount of legal work to, to redo that. But now we have the resources where that's not, not as big of a deal, um, but really just keeps things simple. There isn't a whole lot of rights that come with that. Um, you know, they don't get, uh, if you have to have like a shareholder vote, you know, they don't have to participate in that vote. Um, there's no K one, so there's no, you know, you don't have to issue, uh, you know, K one tax documents to them and really just keeps things just the simplicity of it is, is the prime benefit.

Josh: No, absolutely. I think, I think that's a really great upside for the employees given there's a liquidation event. And, um, I think kind of keeps them engaged and moving without, you know, I've done it in a few businesses where I've granted, you know, straight equity in the, just the end of year tax prep and the K one and just everyone know how is that, how that impacts them is always kind of a pain in the butt. So I can definitely appreciate, you know, looking out for your employees that way.

Nick Horob: No, the one, the other thing that I've learned, I don't have any personal experience with this, but you, you went, uh, publicly traded companies do so phantom stock, it mirrors, it kind of behaves as a, a stock option, but a true stock option is, you know, let's say you have the ability to buy shares of stock of ABC startup at $10 a share. So if you leave, oftentimes there's a short amount of time where you can exercise those options and to exercise those options, you literally have to buy the shares at $10. So, you know, yeah. I hate to say given where we're, when we're recording now here in the second quarter of 2020, you know, there's probably some, some people that left a startup like Airbnb, you know, it was a no brainer for them to exercise their options. So they might've gone out and borrowed, you know, a couple hundred thousand dollars, so they could exercise their stock options.

Nick Horob: And now all of a sudden, you know, they might be way underwater there. And so, um, that's the other big thing is just how has, uh, you know, how do things get treated there from the employee leaves and how simple is it for both the employee and for the, the employer. And I tend to think, you know, if you're just, uh, if I just had a complete self-service self-serving view, I would maybe have done the, the more of the stock option plan, because a lot of those people that leave, aren't going to, you know, they aren't going to exercise the options and, you know, those Neil, then that equity would just be kind of back in the pool for, you know, for all owners to, to share the benefit of, and that when the employee leaves, that's where I hear that a lot of the traditional stock option plans really put them in a really uncomfortable position on, um, you know, short windows to exercise.

Nick Horob: And it's my understanding that, that, that short window to exercise is just kind of been the default. There's no necessarily there's no real logic for it. And so, you know, I'd like to think that, you know, if you do have an S Corp, a C a C Corp, that traditional stock option plan is probably going to be what you're going with. And if you're raising money from institutional investors, you're going to have a seat you're more than likely going to have a C Corp. And if you can, um, you know, my suggestion anyway, would be to look at extending out those exercise windows and making it. So it isn't a huge burden on your employees because at the end of the day, an employee, that leaves that feels like that, you know, they didn't get treated well, you know, they're going to share, you know, you, you just don't want people to Harbor those negative feelings in my opinion. So

Josh: How, how do you treat when, you know, if your employees, they don't have voting rights into the organization, how do you treat, you know, kind of major decisions, whether that's, you know, going and pursuing some debt financing or, you know, any other big decision that may have impact on the business around cashflow? Do you, do you bring them back into those conversations or how do you, how do you approach that

Nick Horob: As of right now, I'm, I'm pretty much the, when it comes to a lot of the business details, the finance details, I'm, I think that's probably one of my strong seats. And so I, I do that pretty, pretty solely. Yeah. I make those decisions pretty much on my own. Uh we're you know, we have, one of the employees is formally on our board. Uh, another one of the employees is going to go, is going to be on our board. And, uh, you know, one of my goals frankly, is to start to, to delegate a little bit more of those decisions. Um, but you know, when it comes to product and software more, we work on next, you know, that's more, you know, that's definitely more collaborative and, you know, I think my sole decision-making probably isn't ideal. And, um, you know, it just kind of the nature of the beast, you know, started as a side project of mine, you know, started working on a full time, hired one person here, one person there, and it was never a, I was already working on it for two or three years before I hired the first person.

Nick Horob: And so it wasn't necessarily like they were stepping in as a co-founder role. Um, and so I'd like to think my situation is slightly unique in the fact that I, you know, I never really had that true co-founder, um, that would essentially be, uh, appear in making decisions. But

Josh: Yeah, that totally makes sense. You know, we, we know your, your background and kind of the, uh, the financial space and everything. So, uh, totally understand those pieces. You know, when you talked about, um, product, um, kind of product design and kind of roadmap there too. Uh, how do you guys make decisions when you, when you start talking to new features and, um, you know, putting, putting resources into something new, I, I follow you on LinkedIn. You always seem to have, you know, something new that's in the works, something new that people are interacting with and sharing in terms of new feature sets with harvest profit.

Nick Horob: So, you know, unfortunately we're, we shoot from the hip a lot when it comes to product decisions and we have a feature requests backlog. So, you know, our junior developer was in there a couple of, you know, a week ago, and he picked off a couple of small things that he could work on and just autonomously, you know, just did those. Um, but we're writing, you know, right now we're in the midst of working on some longer-term stuff we've been working on for a long time. So we really haven't had a lot of those product decisions. Uh, I really think that, you know, especially with our team size, we, you know, intuition is our guide. You know, we just hear things enough that are, you know, what can we work on next deal? Let's look at the, the feature requests backlog, and, and that's just make a decision and move forward.

Nick Horob: I, I really liked the philosophy of base camp and this pro product management philosophy they've laid out in this free ebook called shape up, which you just work in these six week cycles. So you have a user story, and you're gonna get some version of that story down in six weeks, and you have limited time or flexible scope fixed time. To me, that's really what we want to, what I want to start, start driving towards is that regular cadence where you have that deadline that essentially is just enforcing you to limit the size of your beds. Because we have worked on a few features here, you know, luckily all of them have worked out, but we've worked on some that have taken us a long time, you know, well, you know, not just weeks or months, but you know, well over a year. And I I'd like to try to get away from that and, and reduce the size of the bets that we're making on product.

Josh: So it kinda kind of last question for you there, you talked about your product backlog. Is that something that comes from internally is that come from customer support? How do you, how do you decide what new features come in to the company?

Nick Horob: This one is really the one I was referring to. There is just external feature requests. And then I'd like to, I'd like to start working on an internal feature requests where we have, uh, if we could template, you know, here's a user story, here's some really rough wireframes, here's what it would do. And then, you know, that base camp book calls those, you know, you're shaping the features and if we can throw those into a backlog and then, you know, pick off those, then anybody on the team could, could make a suggestion. Um, so we could have this, these two different buckets of internal and externally generated to choose from.

Josh: Sure. Well, Nick, thank you very much for taking some time with us today. Um, how can people find you, uh, how, w what do you, what are you looking to promote? What can we help you spread the word book for harvest?

Nick Horob: Yeah. So if you just go to harvestprofit.com, you can see what we're all about. We have a pretty active blog. I'm also on Twitter, quite a bit, a lot of farming focus, talk, you know, just some general business talk as well. That's Nick Horob, uh, is my hashtag is my, my, uh, profile there. N I C K H O R O B. So yeah, we'd love to hear from anybody, if there's any interest in agriculture, feel free to reach out if there's, uh, you know, any questions on business software. Definitely love chatting about it.

Josh: Awesome. Thanks again, Nick. We really appreciate you coming on the podcast and we'll talk to you soon.

Nick Horob: Perfect.

Erick: Well, I didn't talk at all on that episode, and that's kind of pretty, okay. I mean, the topics we covered as a business owner, giving employee stock options, like I've got very limited insight there. And then we kind of jumped into app development and project management, both things I know nothing about, and they're not really my role, but as an employee of a similarly small software development team, I'm really glad that you were even just having the stock option conversation.

Josh: Yeah. Sorry about that. I really just kinda ran with it. You know, it's not, uh, not a lot of people know about, you know, how ownership in a company works, things like warrants, Phantom stock, or preferred shares, not exactly, you know, common, a water cooler talk. I think what people mostly know about, you know, equity is, you know, shows like shark tank.

Erick: And one of the things that I never knew about or considered were the different types of employee options. I mean, new business vocab for word for me today was Phantom stock.

Josh: Yeah. It sounds a little scary, doesn't it? Yeah. The, the one thing I know is that what I've done in the past is, you know, granting equity has all sorts of tax implications. There's annual filing rules and issues. If you own more on a certain percentage of the business. So it's not something to go into lightly. And one thing like I sh there

Erick: Is if you kind of saw a different in his employee effort or morale on the team when he was giving employees, you know, board membership and these Phantom stock options.

Josh: Yeah. That would definitely be a good thing to dive into and how that looks from a recruitment and a retention standpoint kind

Erick: Of after that, he jumped into that app building process. And again, I work for a software developer main company, and I do none of the actual dev work, but I really just kind of enjoy listening and learning to you guys, chat shop.

Josh: You know, that the question that I asked was more from the fact that I watched Linka and Nick on LinkedIn, and he does a great job, you know, sharing what they're working on, what the new features look like within harvest profit.

Erick: You know, I, I creep on Nick too, and I think he's pretty, he's really good. So watch on socials and it's an enjoyable to just kind of see their journey. And like I said, they're kind of similar worlds as us and I like to watch their, their evolution of a business and let the last thing that I kind of forgot to even talk to Nick about was, you know, they were a great customer success story for us as a business. Can we kind of talk a little bit about the work that we did for Nick?

Josh: You're fortunate enough to work with Nick when harvest profit was just an idea. You know, he was working as a farm consultant said, Hey, I want to build a calculator to sell more farm consulting. And well, it kind of went the other direction is to stop farm consulting. And now he runs a software company. Um, but we really, um, worked with Nick to get the prototype and first few versions of the app into the market. And since then he's been able to grow it into really a farm software power.

Erick: And I know I said that this was the last thing I was going to talk about, but I forgot one thing. And Nick, I said to follow him on the socials, but he's been such a good leader for our community during all of this COVID stuff. I just wanted to take a moment to thank him publicly for his leadership. And I suggest other people just kind of follow some of his examples. You did that, giving us a little bonus to spend on local businesses. And every other thing I've seen in poster in this, I really agree with,

Josh: Oh yeah, I a hundred percent stole that idea from, from Nick. Um, and I know he's inspired others to pay it forward as well. Um, he's done just a really great job with this company and I just always look forward to see what's next from Nick, from harvest profit and just a really great guy all the way around.

Nick Horob: Yeah. Well there you have it. If you know a startup that could use our advice, have them subscribe on their favorite podcast platform.