A Masterclass On Hiring A CEO To Run Your Company ft. Andrew Wilkinson
All right, this is a guest masterclass with our buddy Andrew Wilkinson. We're inviting him on because if you're world-class in something, I want to learn from you. In fact, I had emailed Andrew a while back being like, hey, I have this company, it's working. We had scaled into the tens of millions in revenue, but I just didn't want to run it anymore. I was tired. I wasn't the right guy for it. I was half in, half out, and I was just fantasizing about selling it or the day where I wouldn't be running it anymore. And he's like, dude, you need to hire a CEO. And to me, that always felt like something that's easier said than done. Hire a CEO, just find somebody to take over my baby. But he's done it. This guy's got 40 companies. He's got CEOs that run them. He doesn't have to run any of them day to day. The portfolio is worth $500 million. So if there's anybody to learn from, it's Andrew on this. And so he comes in and he shares, uh, how he interviews them. Who is he looking for? How does he structure the compensation? And so we go into step by step how to hire a great CEO for your business. It worked for me, it worked for Andrew. I hope it works for you. So enjoy this guest masterclass with Andrew Wilkinson.
I feel like I could rule the world. I know I could be what I want to. I put my all in it like no days off. On the road.
Okay. We asked Andrew Wilkinson to come on and do one specific thing, which is teach us how to hire CEOs. He owns— Andrew, you own what, 40 companies now? The total portfolio is worth almost $500 million. And yet you're a pretty chill guy. Whenever I text you, you answer. You're always having fun. You're not stressed out, overloaded, overworked like every other CEO I know who's a CEO of one company, but you have 40. And so I think the way you've been able to do that is by hiring great CEOs for all your companies. And it's actually worked. Me and Sam want to learn this from you. So you're here today to teach us that. How'd you even realize that you needed to hire CEOs?
Yeah, so I would say it's not that it's less It's not less stressful, it's just different, right? So I just have different problems. So someone running a company might be, uh, you know, putting out a fire that's, that's burning that day. I put out fires that burn over the course of a month or two, and they're bigger fires. And then someone else might spend a lot of time dealing with company politics. I end up dealing with, you know, CEO comp packages. So I want to say, to begin with, You know, this is not necessarily a greener pasture. It's just a different pasture. And I think you really only want to oversee CEOs if that's your skill set. If you're drawn to being super, super high level and hands-off, which some people, let's be real, they're not. They're, they're like, they want to be Jiro from Jiro Dreams of Sushi. They don't want to be the guy who starts Chipotle. They want to be on the line. They want to be making food. Uh, and so it ultimately comes down to your personality. And for me, my personality has always been, I'm incredibly lazy. So from the time that my mom told me to wash the dishes, I was furious. I was always trying to find ways to pay my brothers to do it, find systems to wash the dishes more effectively. So I had to do less work. And so I always joke that I'm Teflon for tasks. And if you start delegating in your company, which most great entrepreneurs do, you ultimately reach this point where you ask yourself, was there anything else I can delegate? And that final level of delegation, that final level of abstraction, that's hiring a CEO, that's hiring one to hire 10. They go and they run the entire company and you just talk to them quarterly, sometimes annually. And there's some CEOs I have that I haven't even talked to in 2 or 3 years.
You have something between 30 or 40 companies. Do you have 30 or 40 CEOs reporting to you?
No, the way that we do it now, so it's crazy. At first it was like 5 companies. So I had 5 direct reports, uh, that are CEOs, no big deal. And then over time, as we've scaled up, we've had to form operating groups. And so we have these operating groups and they have their own CEOs who report into us. So for example, all of our digital services businesses are run by a guy named Pradeep. I meet with Pradeep kind of biweekly, monthly, whenever I need to., and he oversees a group of like 6 companies.
Even if you're not going to end up with that kind of portfolio, 40-company structure, I've had this with you, which is I think a more common problem. I remember emailing you saying, hey, I have this business, it's working, so I can't— there's no, there's no reason to shut it down. However, I don't want to keep working on it. I liked it at the beginning. I don't love it now. I want to go on and do new things. How do I do this? Do I have to sell this? Like, should I just sell the company? Do I— can I hire a CEO? And if so, where the heck am I going to find somebody who I could trust? To do this. So even on a one-company level, I think that's where most founders are going to be. That, uh, you know, step one is abstract yourself out of a single company. So let's, let's start with that. You, you said something, you're like, it's pretty common, everyone loves their business in year one. I forgot what's your exact quote.
So yeah, every time I talk to a young founder, they're like, I'm going to run this till the day I die. Doesn't matter what the business is, they think they're going to be, you know, they're like, uh, Mark Zuckerberg for 20, 30 years. And then you talk to them in year 7 or 8, and almost all of them are just like, how do I escape this hellish waking nightmare?
Like, would they not want to be there? I'm going to run this till I'm 28, till the day I'm 28.
Totally. So, and it's really interesting because, um, people generally think about it in a very binary way. They're like, okay, there's two doors. Door 1, keep running my company. Door 2, sell, get rich, and live on Mojito Island. Right. Uh, but there's actually a door 3 and door 3 is hiring a CEO, right? So you're, you're in a marathon and you can either ditch the marathon or keep running it. Well, it turns out that you can actually incentivize someone else to keep running the marathon on your behalf. And I mean, this just goes back to what I was talking about before, right? So there's, there's all these different levels of delegation and we all understand, at least if you're a good entrepreneur, that if you don't like accounting, you just hire an accountant. Well, if you don't like running your company, door 3 is you just hire a CEO. So, you know, my, my story on this is I started Metalab, which is a design agency, uh, about 20 years ago. I feel very old to say that, but about 20 years ago, and I ran it for, as CEO for almost 10 years. And I had a great exec team. Like I was able to delegate quite a bit of it. I was running other companies at the same time, but ultimately the buck stopped with me. And for the first 3 to 5 years, it was really exciting. Like I was learning new skills all the time. I was scrappily, like, you know, sending the invoices and negotiating deals with clients. And I was flying all over the world and it was all new and exciting. But, you know, at a certain point, you know, after like year 8, year 9, I didn't want to fly to San Francisco anymore. I didn't want to have to like shake hands and kiss babies and do that. And I remember Chris, my now business partner and at the time CFO, would come to me and be like, dude, you gotta fly to San Francisco. Every time you go down there, you close like a million dollars of new projects. But I didn't really want to do it because A, I was exhausted. It wasn't new anymore. I didn't want to travel. It didn't suit my lifestyle, but also I was already rich. I was already making enough money. And so the business was kind of starting to plateau because I wasn't willing to go that extra mile. I was just saying, you know what, we'll just do whatever comes in. I'll do a San Francisco trip once a quarter and we'll close what we close because I don't want to do that. Well, the beautiful thing was there were young scrappy people who, to them, the idea of flying to San Francisco and taking a client out for a steak dinner was a dream come true. They'd never done that before. And so for me, I was looking at it and going, okay, running a 5-person agency versus a 50-person agency, it's a very different job. And it was a job that I sucked at, you know, I really, to this day love running 5-person companies. I love running, you know, I can get to about 15 people comfortably, but I wasn't enjoying it when we were 50 people. And I read every book about management. I did courses and I just kind of whipped myself. Why am I not a great manager? Why can I not be like Peter Drucker reincarnate? And so I would always just fantasize about selling and I kept trying to sell the business and then we'd be like right at the last month. And then the, uh, the buyer would change the terms or something would go wrong in the business. And so I was kind of starting to lose it. I didn't want to be running my company. I wanted out, but I, I couldn't sell it. And so around that time, I ended up reading a book about Warren Buffett and I found out about Door 3. And here we are. I started hiring CEOs. I made a ton of mistakes, which I'll talk about, but it's, it's enabled me to create Tiny, which I never would have done before. I'd probably still be, you either miserably running my business or I would've sold for, you know, a much smaller amount of money.
We'll get into like the actual tactics really quick though. The green pasture thing you're talking about, it's always, grass is always greener on the other side. And like you and I joke where you're like, well, I don't want to say what you said, but you'll just like be teasing about running a small company and how that could be way more fun and being the CEO of a small company for a long period of time versus trying to like go big. What's the grass is always greener for you?
Well, I mean, I think I, there's a great Bob Seger quote, which is, I wish I didn't know now what I didn't know then. Right. So for me, I think, think about it like this. I might've given this example before, but imagine if you love chopping wood, right? You just do it because it's fun. You're in your backyard chopping wood and then your neighbor pokes his head over the fence and says, hey, Dude, can I get a quarter wood? I'll pay you for it. And you realize, oh my God, this is a business. I've taken my passion and I've created a business. And now I'm selling wood door to door. I'm working with my 5 best friends. It's a blast, right? I'm suddenly making money. I can afford to go to the bar. Life is good. And then you flash forward 20 years and you wake up and you're a lumber magnate. You own 5 sawmills and all you do every day is you sit in a little air-conditioned box looking down at the floor. You have all these robots working for you and all these hundreds of employees, and most of your time is spent doing Excel, right? I think that is the sadness of building a large business and delegating. Your hands are not on the tools anymore. And so for me, what's been sad about building the machine is I've built the machine that's freed me to do what I want. But the irony is I end up doing things I don't want as a result, because ultimately I was a designer. I love putting on headphones and being in Photoshop and designing websites and writing. And so for me, it's been searching, where do I get the flow state that I used to get running a 5-person company?
Let's put, let's role play it here. So I have a company, I want to hire a CEO. I realized I can do this third door and I'm like, you know what? That's the right move. I should hire a CEO. Well, where the heck am I going to find a CEO that I could trust that's going to not only not ruin it, but actually, you know, hopefully grow the business in some way. What's the, what's step one?
So step one, you have to really assess, is your business big enough, right? Uh, is this the right thing? Is this the right time? So ultimately you want to ask, does your business have product market fit and can it actually afford a CEO, right? Is this, uh, is this a corner store, like where it's kind of an owner operator kind of business where you just kind of have to run it and if you leave, all the profit gets eaten up by somebody else. Or is this something that's really scalable? So I generally, as a rule of thumb, will say you probably shouldn't hire a CEO until your business is doing $300,000 or so of profit. And if it is, that means that you can swap yourself out and you can afford to hire someone a reasonable base salary, and then you can incentivize them to grow the business. And so one of the, one of the really interesting things that people kind of obsess over is they say, well, You know, a CEO could cost $500,000. My business is only doing $3 million and $300,000 of profit. And what they kind of miss is that generally a CEO is paid a base salary, but most of their comp comes from bonuses. And the bonuses are based on the business growing. And so it's one of those things where it's like, if your business is doing $300K of profit, you can basically take $200K or $300K of that, invest it in the base salary for the CEO. And then all of their additional comp will come from the growth of the business. And so you've aligned them with your goals.
So first thing, is my business big enough? So you said two criteria: product-market fit, meaning we know what the hell we're doing. We're not in the figure it out, figure out the product, figure out the market, uh, figure out the— what is the offering and changing that every three weeks because it's not working. Like, you have a reasonable continuous cycle of supply and demand for what you're doing. And And then you said profit around $300,000 as the kind of, that's the minimum bar.
I would say so in there. I mean, occasionally you can, let's say you've got a friend who's super scrappy, who wants to sink their teeth into something and you've got a small business that's like a, I always call them like an ember. It's not really a fire yet. It's an ember and someone needs to come blow on it. You could do that, but I think there's a lot more risk there. You really want a machine that's operating. You want a car that can drive on the road. Before you put someone in? And then the other question is, can you make someone rich? Right? Because ultimately, people who are good, great, exceptional CEOs, they're looking for opportunity and upside. And by nature, the fact that they're a hired gun CEO tells me they're not necessarily an entrepreneur. They don't want to take total risk. They want a nice salary. They want bonuses. They're not necessarily willing to risk it all. But often they want to know they can get rich in a, in a CEO way. So they can make single-digit millions for the first time ever, uh, if everything plays out, or maybe they can get a big payout if the business sells or gets to a large scale or whatever it is. But ultimately you want to know that you can make someone wealthy with it.
And so we'll do the exact comp stuff in a minute, but the second question you have, so first was, is the business big enough and do we have product-market fit? Then you also said. To me once, like, are you willing to walk away? I think there's a mental side of it too. Are you, are you ready to hire a CEO?
Yeah. And that's really hard. I mean, you know, do you— I remember I got to the point where I fantasized about giving the keys away to someone else. And when I finally did, I was elated, you know, but there's a lot of people who aren't like that. I can think of one of my friends, to him, his business is his baby. And when people mess with his baby, He gets really angry and he doesn't like it. And so you need to be willing to walk away and effectively look at it this way. As entrepreneurs, we are all, we're all birthing these, these business babies, and now you're giving them to a foster parent. Can you tolerate that? You know, can you cope with that? Someone else parenting your child? Because that's really what it is. And not only that, but you have to be disciplined for it to work. You need to either be all in or all out. You have to empower this person. You can't be sitting there looking over their shoulder. So I think those are the two kind of fundamental questions to this, right? Are you, are you, is your business big enough and are you willing to walk away?
But, but when you're accepting the, when you're saying, all right, I'm going to walk away, is it I'm walking away because this person's going to make everything greater than I could? Or are you walking away thinking to yourself, I know it's not going to be as good with me in it, but It could be 80% as good and I won't have to worry about it.
Well, let me put it this way. Let's say that you're an exceptional product person. You'll know the product won't be quite as good because generally people who are good at marketing and sales and operations and finance are just not as good at product. So you're going to sacrifice on the product side a little bit, but you're going to know the business itself will be so much healthier and grow at least from a financial measure. I found that going from being a checked-out founder operating your business reluctantly to somebody who's highly incentivized for growth, who's excited to do it, almost always the business like doubles in the first year. I've been astounded by how much I had been holding back my business.
Yeah, that's a great question. Great answer. That seems pretty consistent with what I've heard. A founder the other day was telling me after maybe 8, 9 years of running his business, he hires a CEO. He plans to stick.
I'm, hey, I'm here.
I'm available for the next year transition. He's like, yeah, they haven't called in a little while. You know, we beat our numbers, which I wasn't able to do the last 3 years. And everything seems to be going really well. Turns out, turns out they didn't need me as much. He's like a little hit to the ego, but also wait, isn't this exactly what I wanted? And, you know, he was sort of pleasantly surprised on the upside from there. So let's talk about finding the right person. How do you actually find a great CEO? What are you looking for?
So generally, I like to, I like to find someone who's run a same or similar business that's double the size. So let's say I have an e-commerce brand selling candles. Well, I, I don't necessarily need to go find a CEO who's run a candle business before, but I want to find someone who's sold a similar product online. And I will generally think about who are my comp— who are my competitors, or what companies do I admire? And then I'll go on LinkedIn and I'll just look for president, COO, sometimes CEO, but usually I will recruit a number 2. And it's that person who's been eagerly awaiting getting, you know, knighted as the CEO and they haven't stepped up yet. I find those are wonderful people to delegate the business to. And then separately, recruiters, and that's a topic we can dig into. People have a lot of opinions. I had a lot of opinions about recruiters that I've actually changed over time. But yeah, you got to— I find like broadening the spectrum with recruiters can be really helpful.
We have to get a quick shout out to Ty Burke, my old roommate, and someone I used to recruit, and I know you use them as well. You also use like crazy amounts of reference checks.
So here's what we do. So we buy the business, and as we're buying the business, we start asking the question as soon as we know we're going to buy the business or we're going to delegate. We hire a recruiter immediately. Now recruiters really pissed me off before. It was like realtors where I'm going like, man, why am I paying this guy $100,000 to open a door for me? I can just go on, you know, like Zillow and find the, the house I want to buy. And here's this middleman charging a lot of money. And I kind of felt like, why would I pay some guy to go on LinkedIn and message a bunch of people for me? I can do that myself. But I realized that I'm distracted and when I need to hire someone, I will often just go on LinkedIn or whatever for 10 minutes. I'll text a bunch of my friends. I'll try and think of people that I have, like in an Apple note that might be a good CEO. I'm not going broad. And so basically I've come around on recruiters. There's some really exceptional recruiters like Ty Burke from Search Partners who Sam introduced me to. He's one of my favorite. We also really like Matt Hollingsworth from Align. And what— the way I use a recruiter is just to broaden the spectrum. So even if I'm going to go on LinkedIn myself and look for someone, I might end up bringing the person to the table who we end up hiring. We now have somebody who's, um, reaching out to people I never would have spoken to, and then they're also handling a lot of that administrative work of pushing the process along. They're doing the initial interview, And one really fascinating thing I didn't contemplate before is a recruiter saves you an insane amount of time. Let's say that you have 10 candidates for CEO and every single one of those candidates you're going to have to do a Zoom with, and that'll take 30 minutes to an hour. Well, I think we all know we— you've all had that experience where you interview someone and in the first 30 seconds, you know, they're a dingus, right? And then you're just desperately thinking like, okay, how can I get off the phone as quickly as possible? Not waste time, but not have this person think I'm a total asshole. And so now I have the recruiter do that call and I get them to record the Zoom. And then I just watched the first couple minutes. And if I'm vibing with the person, then I'll move them on to the next stage. So if you think about from that perspective, your time is highly valuable and you've just saved 10 hours of time. What is that worth? I think a lot. And then in some instances, We've actually hired, uh, people that we brought in. That's fine. And I just pay the recruiter anyway, but in other instances, they've brought people in that we never would have found. So the guy that runs AeroPress, Gerard Meyer, we found him via Tai. And he was a guy where, uh, he had run SodaStream US and he just wasn't on my radar whatsoever. And he's one of our best CEOs. So I kind of look at the recruiters as a time-saving mechanism. They broaden out the, the people you look at, but ultimately it's just like a tax I pay to have someone else be incentivized to push everything along. And so I'm actually a big fan of recruiters now, but you got to use the right people. I find there's a lot of terrible recruiting firms, and we've used a lot of really bad ones over the years.
And the recruiting firm, uh, what do they run you?
So usually it's a percentage of first year salary I think it's about 20%. So, you know, when you're hiring a CEO and you've got total comp of, you know, $300 grand, $500 grand, it can be expensive, but I think it's worth paying for if you can find the right partner on it.
And you mentioned, uh, looking for a number 2 who's run a similar sized or similar, uh, similar industry company. Here's what I take that to mean. You tell me what I, what I missed. So let's say you're the candle company. You don't need somebody who's run a candle company to exercise, but maybe you want e-commerce, you want it maybe where Facebook was their primary sales channel. Maybe you want, uh, something like candles, like maybe selling to the similar customer base or a one-time, one-time purchase product, not something that's, you know, a total different kind of like buying psychology. Is that right? Just first on that part. Yeah.
You want someone who understands roughly how the customer thinks and then also channels by which that product is sold, right? So one fascinating thing I'll add too is when I'm interviewing them, I always ask myself, what is this person's hammer, right? So there's that great quote, to a man with a hammer, everything looks like a nail. And what I've seen with CEOs is their hammer is either marketing, sales, operations, or finance, right? They go to one of, or product. They go to one of those things and, you know, to the product person, we released the most beautiful product in the world. And if you build it, they will come. To the salesperson, it's let's build a 50-person enterprise sales team. To the marketing people, it's we're going to spend $1 million a month on Facebook ads. So you want to be listening incredibly carefully to what is the mechanism by which they grow companies, because usually that's the one. If they did it at their last company, they're probably going to try and repeat it. And so what you want them to do is when they look at your company, they go, oh my God, like, this is so easy. I've done this a million times before. I've taken businesses from $1 million in sales to $10 million in sales. I've done that, you know, between 1 and 5 times in a similar business.
So at this point, are you just constantly collecting people? I mean, is that kind of how you look at your job? Is I'm just always— I mean, because if you're having to talk to all these people constantly and you have 40 companies, that's like pretty much all your time.
I'm always thinking about that. I mean, my worst fear is we're going to be recruiting for a CEO role and I'm going to forget about that guy I met at that conference, you know, 5 years ago or whatever. So Chris and I have an Apple Notes that we share and we just keep writing down names of people we think are interesting that are executives. Sometimes they're even within our companies. It'll be people that are come up and coming in one of our other businesses that we've thought might be a good CEO for another business. But yeah, I'm always trying to scan. The horizon for people who are smart and I can bring in. But interestingly, often it is— every process is different. And when we hire a recruiter, only like 20% of the time is it someone, uh, now that we've brought in. Often it is someone that they go source.
I love the, uh, what's their hammer question, uh, because it's so true that the, the more experience somebody gets and the more successful somebody gets, they start to develop this hammer and to try to They go run around looking for ways that they can apply that thing they know to everything, whether it's the right thing or not. I think this is a good thing and a bad thing. Uh, I've seen the same advice given to kind of YC type of companies or in Silicon Valley where when you hire a CEO, if you hire a CEO that grew their previous company by creating a giant sales army, but you're trying to do product-led growth, it's a total mismatch. You might say, oh wow, they grew that company from $10 million to $200 million. And that sounds good, but if they did it in a way that's totally different than yours, very few people can repeatedly grow businesses using totally new methodologies for sales and marketing. And I'm curious also, what's your hammer? Like, uh, if you're a man, if you're a man with a hammer running around, what is yours?
Well, I would say I'm a man with a lot of different hammers. Um, I've gone really broad now because I've seen so many different ways of growing businesses. And I think I have a lot of tools in the toolkit. My old hammer was product. I would always just be like, oh my, actually, you know what? I do have a hammer. Okay. So, so my old hammer was product. So I would always do Field of Dreams marketing. I would say we're going to build the best product in the world. I'm a designer. You know, I was really proud of what we were doing and that'll solve everything. And I realized that really doesn't work very well. And now I would say my hammer is finance. So, uh, or operations. So really what I'm doing is I'm looking at a business and I'm going, if one— if we could just change one thing, what would that one thing be that would give the business leverage? And often it's something really simple. It's like, oh, pricing, right? Or they're just not selling ads properly. Something really boring. And to, to be honest, I feel a little depressed as I say that because you're a sellout, bro.
You're a sellout.
The designer from 20 years ago would be really sad, and I still love don't get me wrong, like, so when we bought— let me give Aeropress as an example. I, I just unboxed our new Aeropress Clear, and I just checked out the designs for a couple unreleased products, and that was the best day of my month, right? I love building great products. I love being involved with that, knowing that if we hadn't bought that business, that wouldn't have happened. But when we bought Aeropress, the boring assumption I made was I'm just going to do really good online marketing and e-commerce. It's really simple. They didn't sell online. That was my one insight. That was my hammer on that deal. And now the bonus, the gravy is we get to do amazing products and I get to—
you don't deserve— you got, you need to go throw away your Herman Miller chair and your Birkenstocks and go put on a vest, you nerd.
You're no longer— I know, I know, I know, I know. I want to self-flagellate. I want to, I want to talk about though, um, some of the things you have to accept about hiring a CEO and also when you interview a CEO, what you want to look for, because I think that's probably one of the most important things. One of the, so to go back to this whole hammer thing. So when I interview a CEO, I'm looking for whether or not I nod along. When I, when I interviewed Gerard from Aeropress, he told me what he wanted to do with the company. And I'd already had a lot of those same thoughts and I was nodding along and going, oh my God, he's putting it better than I ever could. And the reason that's important is because when you hire a CEO, you are a rider on an elephant, right? So when you're a rider on an elephant, the elephant is going to go anywhere it wants and you're just stuck. You can't tell an elephant where to go. It's way bigger than you. And ultimately it's going to follow peanuts wherever, wherever, wherever it wants to go. And so it's really important that you agree with their strategy. And one of the ways that this has failed for us is I've loved the CEO candidate and they've said something like, uh, hey, I was looking at the business and I really think we need to go hard into Facebook ads. And I would kind of scratch my head and go, well, we already kind of tried that. I was kind of thinking more of this is like an email marketing you know, marketing strategy that we should deploy. And they would always just double down, right? Whatever they say the first time is usually what they're actually going to end up doing, and they're just going to use their hammer. So that's incredibly important, is having that alignment and the fit with—
what else are you looking for in that interview? Not along what's their hammer, what else?
Or have you had that?
Yeah, yeah. And I'll tell some stories, but I think the most important thing is, you know, would you let them babysit your kids? Right. I think like, you know, either of you guys, I would let you babysit my kids. Right. But, and that's important. You're going to hand over your company, your baby to this person. So you have to have profound trust. And so often Chris and I, we look for people who are real. So they can be, I don't like slick people. I like people who their armpits get really sweaty in the interview. I like people who get kind of nervous and scratch their face when you ask them hard questions. I want to see that someone is a human and when things get tough, they will want to do the right thing. And so that's, that's like really critical. You know, do you walk away energized, right? You can really like somebody, but if you don't walk away energized, you know, that's, that's not great. And then also, are they down to have alignment? Are they down to have skin in the game? Because ultimately, you know, the worst type of CEO would be this. So let's say Sam's hiring someone to run Hampton. And they say, I want $1 million a year base salary. And you're like, okay, well, you know, can we do some bonuses? Do you want equity? How can we create alignment? And they just want like low-risk cash guaranteed. That's not someone you want to be working with. You want someone who is willing to have skin in the game and risk with you and work on the long term. And there's a lot of very shiny, fancy executives that basically want zero risk and they just want to make a shit ton of money. And you got to avoid those people like the plague.
Have you found any correlation between age or where they live? Like if they're from a Silicon Valley company or New York company, middle of America or wherever the equivalent stereotype is of Canada?
Well, I mean, I wouldn't say that there's anything about where they're from or even what they look like or how they dress or anything like that. Although I'll talk about that and the importance of matching your cultural DNA with their DNA. But the number one thing is the big company people, right? You, you really don't want the flashy person who's got the, the, you know, the LinkedIn with 5 years at Accenture followed by IBM followed by, you know, whatever executive role. I find that when you take a big, a big company person and you put them in a smaller company, they just don't know how to function. They're not bad. There's nothing wrong with those people. They just don't know how to function. They're used to having like, you know, an army of people doing everything for them. And it's kind of like, I always think about it like restaurants. So let's say that you have, you hire, let's say you have one restaurant with no systems and you go and you hire the chain restaurant. Let's say you find a guy who runs like an Olive Garden and you're like, oh my God, this guy really understands how to run like a tight tight ship and all the systems and stuff. You put them back in, you know, your restaurant and they're like, well, I don't know how to build the systems. I didn't do this. I just go to my handbook, my Olive Garden handbook, and they tell me how to do everything. So you kind of get that in big company people. So you got to avoid the big company folks.
One nuance that you didn't say but I'm pulling out is you want somebody who's run a company 2x the size, not 20x the size. You would think 20x is better, right? No, no, no, it's not actually better. 2x is kind of the sweet spot of what you're looking for.
Is that correct? Totally. Well, there's this funny, uh, I, I think of it as like there's a, a variety of different skills. And if you think, let's use Chipotle. For some reason, I always go back to Chipotle. But think about this. So there's the guy who invented the burrito, right? That's, that's kind of like, if you think about it, that's like the founder of the founder, right? Then there's Steve Ells, the guy that started Chipotle. He went, hey, Burritos are a great food. Let's scale this up. Let's turn this into a fast casual concept. Then there's someone who came in and scaled it to a bunch of stores, right? I think that was still Steve. That's a kind of a different skillset. He went from 1 store to say 20 stores, and then they scaled it to like thousands of stores, and then they managed a public company. These are all different skillsets, right? Each of those levels are some, uh, you know, a whole different set of skills, right? The guy who invented the burrito is very different than the person who would be great at scaling Chipotle to 1,000 stores. And so I think you really just want to be accepting of— you're almost running a, what's it called, like a— you pass the baton. What is that, a marathon?
A relay race.
Yeah. And so you might say the person that you hire, the CEO you hire to take your business from $2 to $10 million, You know what, at $10 million, you're probably going to bring in some new person to run the company then, and they're going to know their scale. And then you keep going through this. And occasionally you're going to get people who read a lot and learn a lot and are highly adaptable and can keep going. But usually, you know, a CEO is really effective for between 5 and 10 years. And every once in a while you get these special cases that can go the distance.
And even those exceptions, even Mark Zuckerberg, who's been running Facebook for 20-plus years. He has Sheryl, and Sheryl does a bunch of stuff so that he can keep inventing the next burrito. He's like, oh great, I'm going to focus on AI. I'm going to focus on metaverse and somebody else will do, you know, ad operations at this point. Cause that's not what I want to be scaling up. Or the Google guys did the same thing with Eric Schmidt, right? They bring, they brought in effectively, you know, a CEO to, to run that so that they could keep going and creating the next Chipotle.
Can you talk about transitioning? I think this is actually the hardest part of all this is transitioning. And like, you have always given me advice and whenever, and I believe your advice was right and I followed it, but at first your advice was basically just bail. And you were like, just talk to him like once a month and then once a quarter and then once a year. And I was like, well, I was going to like keep working there and talking to him every single day and like give feedback constantly and be in all these meetings. And you're like, No.
So Sam, is the question like, you've hired the CEO, what are, what are those first 100 days supposed to look like?
Yeah. And then, and then after 6 and 12 months, what's it look like? Because it's, this is the hard part where emotion typically takes over logic.
Totally. And it's terrifying to use the baby analogy. You know, you imagine you're, you have this beloved baby and then you watch the foster parent and they're playing a little rough with your kid and you don't quite like what they're, they're feeding them and well, they don't really know the nap time routine, right? So it's a little bit scary passing off your business baby to somebody else. What I, what I think you do have to rip the bandaid and let them jump in the pool. I think it's incredibly important that you assert to your top executives, this person is in charge and you can't come to me anymore. Right? So what I, what I like to do, what I would do in the early days is I would make the announcement, explain why I'm making the announcement, why I'm making the change. And then I would literally leave Slack. I would stop responding to texts from the executives. I wouldn't respond to email. And I would say to the CEO, look, you know, you're in charge. Let's do a check-in in a month. And then I would just completely check out and I'd say, you know, look, if you want, if there's any emergencies, you can always call me and get get an opinion. But do you give them like a guide?
Like, are you like compiling everything in Notion? Like, I don't know, like, yeah, you're just making a handbook.
Yeah. Well, maybe, maybe not, maybe not quite a guide or something, but you're doing a lot of brain dumps, right? You're going to spend a couple of days with them and go through everything. But, uh, you know, business is funny. Like everything tastes like chicken. Like a competent CEO will be able to jump into most businesses within 5, 10 days, be able to kind of get the lay of the land and get moving. So I don't, I don't do too much. Of that transition stuff. And, and then for— so first you're checking in maybe every 2 weeks, then you're checking in every 4 weeks, then you're checking in every 3 months. And then if you want, you can go to 6 months or a year. And I really think that the worst thing you can do is have them writing you a whole bunch of reports and constantly text them and engaging them and making them feel they don't have power. And then worse than that, the swoop and poop, right? Like, so you bypass them, you text your old VP of marketing, you say, I noticed you guys stopped A/B testing this on the homepage. What's going on with this? And then before you know it, your CEO feels you're undermining them. And all the executives go, well, I see who's still pulling the strings. You know, Sam's still in charge. I'm just going to go back to Sam. And then the water, the stress finds its way back to you. So I'm a big fan of just being I mean, you gotta do your diligence. If you're gonna give this person your business baby, you gotta know they're not an epic piece of shit, right? That's very important. But if you've done all that, and we can talk about all the diligence stuff, so you gotta get comfortable that passing your business to this person is gonna be okay.
Well, how many months or quarters of mistakes or misses do you let them have?
Well, it depends. I mean, you know, is it a hard business or an easy business? How stark is it? You know, was it the moment they started? Within a month, the performance went to shit. Is there a good reason for that? I think it's a really hard question. I mean, we've had very, very competent CEOs join hard businesses and the business gets worse under their purview. Doesn't necessarily mean they're doing a bad job. It could be a macro problem or there could be some other headwind. So I think that's up to you to assess. I always say, you know, you want flesh wounds, not mortal wounds. So Would I allow a CEO to spend $500,000 on some R&D boondoggle? Yeah, maybe. I don't want them to feel that I'm holding them back, but would I allow them to announce to all the employees that they're changing the business model and shutting down some critical revenue line? Uh, maybe not. You know, I'd probably watch something like that. And ultimately, I think it's important that you say— I'll never forget when I was reading The 4-Hour Workweek. Tim Ferriss had this whole thing about anything less than $5,000 does not require my opinion. And I think it's important you set that control with the CEO. So you say anything that you want to spend more than $300,000 on, I want you to come to me. I want you to discuss, right? So you can kind of build a bit of a bounding box around that.
We got to take a drink every time you say a cute Canadian phrase. We've got boondoggle, we have dingus, we've got creepy crawly.
What else you got for Dingus. Dingus isn't even Canadian. It's actually, uh, it's from Tim and Eric. Do you guys ever watch Tim and Eric? Yeah.
I want more of that. Go ahead, Sean.
Let's finish up actually in the hiring and diligencing stuff. So I have one more on the interview. So do you meet in person or are you trying to do everything in Zoom? Do you like spend, spend time, you know, any extended time with them?
Yeah, I like to meet them in person. I think there's something to looking someone in the eye. Seeing how their body language is. You just can't get that same level of diligence. I have hired people sight unseen many times, but for major hires, I always want to meet them in person. So in terms of diligence, this is the most critical thing, and this is where we've made the most mistakes, right? You can avoid endless pain if you just diligence people carefully. And this is, you know, anyone who's hired people at a company knows this, you know, Check references, top grading. There's all these different ways of doing it, but there's a couple, you know, there's this idea of like trust but verify, right? So I'll trust my gut. That's my first screen. And then I'll perhaps introduce them to like one or two other people I trust. So like Chris might talk to the CEO as well. Someone else from our team will assess, okay, do we get any creepy crawly vibes? If that's not the case, if we don't, Then we'll move into actual diligence. And we've learned the hard way. We've made a couple really bad hires that burned us. And so we actually use these former CIA guys to do background checks. They're called business intelligence advisors, kind of like CIA, but with a B. And they're incredible. They will interview, they'll, so they'll call up the person, they'll talk to them for an hour or so, and they'll write down every single thing they say. So if they say, oh, in college I was an athlete, They'll, they'll verify that if they say, oh, I left that company because XYZ, well, they'll go and look up that company and they'll message 5 people who might have worked with them. And so you end up getting this dossier on the person that gives you a high-level thing of what are the, what are the positives, what are the negatives, and then also have they ever been, you know, accused of a crime? Have they ever had like a track record of like not paying bills? Legal records, all that kind of stuff. So I think that's really important. And we, we made a really bad hire about 10 years ago, and the guy basically was like full of shit about a whole bunch of stuff on his resume, and it ended up being a nightmare. And so after going through that experience, I think it's well worth paying between $10,000 and $20,000 to get this deep reference check done. And so that, I think that's just so critical.
That's, that's amazing. Do you, uh, sounds like between the recruiter and the reference check, the, the background check people, you might be spending anywhere between $50,000 and $100,000 of transaction costs in recruiting a CEO. I'm assuming you can't do that when it's a $300,000 a year profit business. What is the minimum bar you use when you're gonna, when you're gonna pay for both the, the, the good recruiter and the, the background checks. And what would you do for the— if you're the person who is more at the $300,000 a year profit, um, and maybe can't afford those transaction costs, how would you do it? DIY?
Well, I would just follow the same process, right? So, you know, you're not going to be able to hire the recruiter and afford them, and so you're going to try and cast your net really broad. You're going to talk to a lot of different people. When it comes to verifying what the person tells you, the number one thing is Never call the references they give you, right? Any snaky person can find 3 buddies who can, you know, say that they're great or whatever it is. I always try and scuttlebutt. So I'll say, okay, my friend invested in that company and I'll ask them to ask the CEO why that person left or if they recommend. I also have this trick. I don't remember where I got it, but I love this one. You email a whole bunch of people who used to work with them or the former CEO they worked for. And you say, hey, I'm doing a reference check on this person. I'd love to talk to you about them. If you don't respond to this email, I'll take it as you didn't have a good experience. Oh, ice cold. That is such a great trick. It's such a great trick. Cause if they don't respond, people will almost always respond cause they don't want to shit on somebody. If, you know, if they have anything good to say, but if they have something bad to say, it gives them an out. Cause a lot of people. I found are worried about legal liability. They don't want to go and like, you know, say this person's a piece of shit and then that person sues them or something like that.
Dude, I'm going to use that line for any email I want. I'll just like ask someone anything. Like, if you don't— if you don't reply, I'll assume you hate yourself and your family.
Yeah, exactly.
Sales guys do that all the time.
That's the worst.
Okay, so you found the person. How do you negotiate and structure the comp package for the CEO?
So I always like to make the first offer because ultimately you kind of know what you're willing to pay and what makes sense based on who they are. And I think you kind of have to scale up or down based on their experience. So there's times where I've taken a risk where I've said, you know what, this person was, they're a VP marketing, but they really have CEO energy and I'm going to take a chance on them. I'm going to try and, you know, pay less for someone like that. I'm not necessarily going to put them into like full CEO comp. I'm going to try and go high variable, low base. But someone who's more established, you know, I'm going to give them basically what they, what they want. And, uh, and whatever we think the range is there. And then the most important thing is to use total compensation. So when you make the offer, so let's say, let's say I have a business that's doing $300,000 of profit. And I can comfortably afford a CEO base salary of $150 grand, right? So let's say this person is worth $300 grand a year, $400 grand a year. I'm going to go to them and I'm going to say, I'm going to pay you $300 grand a year, but it's going to be $150,000 base and it's going to be $150,000 bonus. And the bonus is if you get me to $600,000 of EBITDA. Right. And so you're basically using the profits that they've created to pay them the bonus. And you've created alignment between the two of you, but it's important never to just say, well, I'm going to offer you $150,000 a year plus a bonus. Because in their head, they're going like, no, I'm a $300,000 a year person. Right. So I always lead with what's the total compensation and then what needs to be true to achieve that compensation. I'm also a big fan of uncapped bonuses. So for example, let's say the target is, you know, $600,000 of EBITDA. Well, if they do $1.2 million of EBITDA, I want them to get double the bonus, maybe even triple the bonus. And that's worked really well for us. So the idea of saying, look, I'm going to offer you $300,000 a year, but it might be $600,000. It might be a million dollars a year, depending on how you perform. And then the other thing is equity is just hard. I'm not a big fan of stock options. I like to try and find people who are willing to— if they want equity, they're willing to write a check. So if a CEO comes to me and they say, okay, but I need, you know, I need equity, I need skin in the game, I'm going to say something like, okay, so you want $40,000 of equity per year. Are you willing to lower your compensation by $40,000? Or are you willing to write a check? You know, do you have Do you have a stock portfolio you can sell and you can inject the money into the business and I'll let you buy in at a really great valuation. And if they don't want to do that, then sometimes I'll even loan them money. I'll say, I will personally loan you the money. And then you're going to write a check and you're going to buy it. And I have the right to buy back your— if you leave, I have the right to buy back your stock at whatever multiple of the earnings at the time or whatever it is.
How do people react to that conversation? Because that's very different than where a lot of people are probably coming from.
Well, I want them to value the equity and they don't value the equity when they get stock options. They just look at it. They don't even consider it as part of total comp. So let's say that, like, here's something, here's the kind of thing I'd hear. So they say, um, I want to make $400 grand a year and, and I want equity. And I'd say, well, okay, how is the equity going to work? They go, well, I think I should have 5%. And let's say the business is worth $100 million. So they've now said, okay, I want $5 million. And you're like, okay, well, you're, you're worth $400,000 to $500,000 a year based on your track record and your experience and all that kind of stuff. How am I supposed to give you $5 million of equity? That just doesn't make sense. And so I always try and talk about it in terms of what's the cash value of the equity that they're receiving and how do we create a scenario where we have shared downside? And a lot of people in Silicon Valley are used to stock options. And the way stock options work is, let's say, Sam, you join my company and the stock price is $100, and I say, here's, uh, $100,000 of stock options at $100 share price. If the shares drop to $50, it's a lotto ticket and it's a zero. It's not worth anything. If it goes up, then it's worth a shitload. And so you end up with this kind of binary situation where they have this lotto ticket that pays out big or is a zero. And so what that means is if your value of your business goes down even 10%, they're basically at a zero. And so they're disincentivized. So I just, I don't love stock options. And in general, I only like giving equity to people who are willing to sacrifice something for it. Otherwise, you know, why, why wouldn't I just pay you a really fat bonus? If you get down to it, that's usually what executives want. They want to do an addition to their house, they want to go on crazy vacations. They like cash most of the time.
Quick kind of question as we round up to what the downside of all this is, is like everything you're saying, I think sounds— when I hear it, I'm like, this is the way. Is a fair argument against this that founder-led companies typically have more innovation or more soul and things like that, and that it's better to have one thing go big versus many things that are potentially okay. Is that a fair argument, do you think, or no?
Yeah, but I think, like I said in the beginning, I think it comes down to personality. Like, I think if you're— so for me, when I was running MetaLab, I started 5 other companies in the first 3 years because it was irresistible to me right now. I knew the right thing to do might have been to focus on the business,, but my personality is that I want to go do other stuff. So Sam, like, you seem super focused, right? And maybe you're better off just having one focus. You wake up every day, you, you think about one thing. But if you start finding yourself getting drawn into other businesses, it would be a huge disservice to continue to run that business, right? So I think ultimately it comes down to being true to yourself. You shouldn't, if you're listening to this, go Oh, I should go do this. You should only go do this if you're drawn to it. It's the same advice I give to entrepreneurs. They say, well, should I go and work at a company or should I be an entrepreneur? And I kind of go, well, if you have to ask that question, the answer is probably no, right? Because for me, I could never consider working for someone else. I, if I, whenever I had a job, I just wanted to shove the boss out of the way and take the wheel of the business. So I think to me, it's just, It'll be obvious if this is something that appeals to you. You'll know, you'll be listening to this, nodding along and going, oh my God, I can, I can do this. I just didn't know I could do it and not feel guilty.
Well, dude, this is awesome. We love having you come on. What do you think, Sean?
Yeah, this is great. And it's also earned information. So this is not something that you, you might be able to read in a book, but a lot of the nuance of what you described is from hard lessons that were, you know, things that went right, many mistakes of things that went wrong and the lessons you've learned. So we all got to benefit from, you know, your 20 years of experience kind of going through this process yourself. And I know for me, it was a huge unlock to be able to hire a CEO and do that successfully. And I was like, wow, this is cheat codes. Oh my God. I get the business is going to do well. It's going to do better than if I was doing it. You know, I get all of the reward without any of that work. And it's a total great trade for this person because I kind of didn't really appreciate how many people are entrepreneurial, but maybe not entrepreneurs. There are people who are great CEOs, but they also got two kids. They don't want to take full-on risk. So they want that kind of medium upside, low downside. And finding that fit has been pretty huge for me. So I think that's great. A lot of the things that you said that stood out to me, the golden nuggets for me was Find the number 2 at a business that's 2x bigger, but similar to the one you're in right now. Figure out what's their hammer, because that's probably it. Everybody's a man with a hammer and you just have to make sure that that's the right hammer for your business. And then pay up on the reference checks and the recruiter to make sure that you get enough candidates and then you find the right person because that's a, it's a necessary tax you have to pay.
Once the business is big enough that you can support this, and then leave them alone. That's the other thing. Most people don't leave them alone. They say, well, it didn't work, you know, in the first 2 weeks they did something I didn't agree with, so I had to fire them.
Well, what's the balance there? Like, you leave them alone, but you don't leave them completely alone. I think for you guys, they send you, what, a fi— a finance-only update every, every month? And then is there anything else to it, like a strategy planning thing, or do you do anything else?
So what we used to do is we do a report every single month and they would write like, here's what's going on in the business, here's the numbers. And that was just crazy. We couldn't keep up. And it also wasted a lot of their time. Now we get just the numbers to head office and we meet the CEOs annually. And then often there's certain CEOs we don't even meet because they're within operating platforms. So we just meet with the CEO of that operating platform, usually like monthly or quarterly and check in. By the way, this is the number one thing I get emails on, like literally like every single day I get questions about it on Twitter and on email. And so I actually wrote a PDF on here, like a checklist basically on are you ready to hire a CEO and how to hire a CEO. And if you sign up for my newsletter, it's neverenough.com/newsletter. I'm going to post the PDF next week, I think.
Awesome. Okay, great. I think that's the pod. Everybody should go check it out. Neverenough.com/newsletter.
Newsletter.
Yeah.
And we'll link to it in— yeah, we'll link to it down here. All right, dude. Thank you. That's the pod.
I feel like I could rule the world. I know I could be what I want to. I put my all in it like no days off. On the road, let's travel, never looking back. Life.