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Kodiak Cakes Flapjacks Stack with Berries

UB Insider #53: How Kodiak is Giving Employees a Slice of the Cake

About this episode:

At the 2017 Expo West Natural Foods Show in March, Joel Clark, Kodiak Cakes Co-Owner and CEO, announced a plan to make employees at Kodiak Cakes owners. In this episode of UB Insider, Clark talks about that decision, how it works, what it actually means, and how it affects the company. Subscribe to our podcast or download this episode on Apple Podcasts, Stitcher or Google Play.

Transcript:

Lisa Christensen: Hello and welcome to UB Insider. I’m is Lisa Christensen, online editor at Utah Business magazine. At the 2017 Expo West Natural Food Show in March, Joel Clark, Kodiak Cakes Co-owner and CEO announced a plan to make employees at Kodiak Cakes owners. Joel is here to talk about that decision, how it works, what it actually means and how it affects the company. Welcome.

Joel Clark: Thanks for having me. It’s good to be here.

Lisa Christensen: So tell me about the decision.

Joel Clark: Well for me, I was always definitely one who wanted to provide ownership for employees if I could. And I know there are a lot of people, people kind of on both sides of the fence on that. Some people are like no, you’ve paid people for doing a job and that’s great. And some people are like, if you can, if you can create a plan and provide some equity for people then go for it. And I was always on that side of the fence. And so for me it was really an easy decision and something that I’d always wanted to do.

Lisa Christensen: What does that actually mean for the company and for employees?

Joel Clark: Well it’s huge for the company because when you own something you are naturally a lot more devoted to it, right? You pay more attention to it, you work harder for it and you can focus more. And so we looked at it in a couple of ways. Yeah, we have an opportunity to give back some of the value that employees are helping us create at Kodiak Cakes. But we also looked at it as an investment.

It’s one of our big strategies to invest in our people and build a great culture. And so we looked at it as, if we can invest and provide some equity for employees, that will come back to us. They’ll naturally be able to work harder and focus more and care more about the company. That is definitely something that is happening and I really do believe that it comes back to you when you do that.

Lisa Christensen: So how do you actually structure something like that?

Joel Clark: Well we had to do quite a bit of research on this to make it work. It took us quite a while. We talked to a lot of different companies that had done it and learned about quite a different ways that you can do it. So we did, there are kind of three ways you can do it. One is kind of like a phantom stock arrangement where you don’t actually give ownership, but you basically contract that you’ll provide somebody with x% of the company like maybe if it sells some day. Or maybe if you have the option to buy them out.

Another way to do it is like stock options, like a traditional stock option where someone needs to buy the stock, the shares. And that’s a downside because someone has got to come up with money to do that. So that can be hard on people. So what we ended up doing what’s called a profits interest which is where you’re able to grant the shares at no cost. And the reason you can is because you’re giving the shares to them at a zero value. So in other words, the value that the company is already at? They’re not getting any of that. They’re only getting a percent of the value above when you give them the shares. So they get to share in the value that they help create which is really, really cool. So anyway, we did a lot of research. We talked to a lot of attorneys and other companies that had done it and finally came up with a plan that we felt made a lot of sense for us.

Lisa Christensen: Why did you decide to do this now?

Joel Clark: Great question. We recently took on a little bit of private equity financing and that kind of helped us to get to a point where we were like, okay, we’ve got some investors involved, maybe this is the time to share the equity, create the pool and start to allow others to share in it as well. So the timing actually worked out really well. It’s something that we always wanted to do, but maybe we weren’t ready to do it. And so now it made more sense.

Here’s another reason why – we’re growing really, really fast right now. And so we’re in high growth mode and we’re looking for really great people. We’re building our team and we’ve got huge goals for Kodiak Cakes. And so we’ve got to find great people. We’re looking for the best people that we can find. So that’s another reason why. So for us, finding the best people was important and rewarding them with some equity is a great way to attract awesome people.

Lisa Christensen: What kinds of complications did you have or are you still trying to navigate in this shared ownership process?

Joel Clark: Yeah, I think there some obvious downsides because everyone is an owner now, right? So some of the complications are, when do you give people the ownership, new people that come along? When do you give them ownership? And how do you get it back if they leave? Those are some of the things that you really have to think through. So for us, we came up with some stipulations on how long someone needs to be there before they’re eligible. And then probably the biggest one that people are fearful of is what if I give someone ownership in my company and then they leave two months later or a year later? So that’s where you need to come up with a really great vesting plan or some ways to get it back if someone leaves or they don’t work out.

So we worked through all of that. And a typical way to do that is to create a four-year vesting schedule. So someone in the first year they may not get anything if they don’t work out of they leave. Then they don’t get anything. Then over the next few years they can vest a little bit of their stock over time until they’re fully vested. So it’s a good way to get them to stay the whole time and really add value like you want them to. And it protects the owners of the company because then they’re not just giving away ownership for people who don’t work out. Another thing that really is great about a plan like this is that it helps you, everyone gets a lot more expensive when you offer equity to somebody. Now they’re a lot more expensive. So it forces you to really be careful about you’re hiring. So it helps you really hone in on finding the right people that fit your culture, that fit your goals, that share your goals, that are progressive and focused on their careers.

Lisa Christensen: So that must be especially difficult right now being as you’re in, as you mentioned, a really high-growth mode. So how do you find enough people and give them all the proper vetting while still growing as fast as you want to?

Joel Clark: That has been a challenge. You’re right. You’re growing fast, you need people fast. Sometimes you have a role and you’re like oh my gosh, we need to get someone in there right now. But we kind of made a decision, a conscious decision and we said hey look. We’re going to find the right people even if it means we have to slow down just a little bit to do it. So we’d rather slow down just a little bit and find the right people rather than compromise on the wrong person to keep the growth up. And I think that’s what companies need to do because managing culture is just huge.

If you can manage your culture and build a really, really great culture then it has such a long-term benefit for the company because people want to stay there. They want to work there. They want to give more. They want to give everything that they have and focus and be their best. But if you mismanage your culture or kind of stop managing it and take some shortcuts or hire people that you question whether they’re a good fit, then over time that has a big negative impact on your company. Your culture ends up in a place that you didn’t want it to be and people don’t enjoy being there. And so you’ve got to create a culture that people want to be in and then they’re able to give more. They’re able to add value like crazy.

Lisa Christensen: So a byproduct of this is that you are enriching and protecting your culture?

Joel Clark: Absolutely. Yeah, that’s a great point. It’s a great culture more or benefit or addition to the culture. We talk a lot about how we want to empower people. We want to invest in people. And this is a great example of just putting our money where our mouth is and really doing it and showing people, we actually care about you. We really, really appreciate you being here and giving everything you have to help us build this company. So it’s like us really showing that we really love our employees, we really care. We want them to enjoy their work and share in some of the success that they’re helping us create.

Lisa Christensen: Well it’s been a few months since you’ve made that announcement. How have things changed? Or have they changed at all at Kodiak given that you’ve had some of your employees on for years and you’ve been able to see them grow up to this point, how has it changed?

Joel Clark: I think there have been some subtle changes in terms of how committed people are. You kind of see that. I noticed right after we announced it that there were a few more people staying later and focusing a little bit more and wanting to show us that man, this is really cool and we’re going to do a great job. We’re going to be the type of employees that you want us to be.

When you own something, that can be behavioral changing. It really can. It can help you really focus and feel like you have a home and that you’re really part of it. And it helps like, from when there are issues too. People don’t just run away from the issue like, it’s not my problem. It’s everyone’s problem. And I have definitely noticed that, that people have felt like the upside is theirs, the good things are theirs. But the downside is that they’re taking more ownership in helping us get through an issue, for example. And I think that people feel more accountable to each other. That’s another thing that we’ve noticed. It’s like, if someone is maybe, I don’t know, perceived to be slacking off a little bit. Or maybe, you know, they’re showing up late or wherever, I think everyone kind of notices that. I think we’re all kind of like, accountable to each other and it’s positive pressure on focusing on what we’re doing and accomplishing our goals.

Lisa Christensen: What advice do you have for other companies who are also considering distributing ownership?

Joel Clark: I would say to absolutely to look into it. I mean, there are definitely situations where it wouldn’t make sense necessarily, but for our business it made a lot of sense. And I think there are a lot of businesses where it does make sense. I would tell people that if they’re thinking about it, then pursue it, look into it. Start talking to other companies that have done it. Talk to attorneys and start understanding what it’s like.

People are afraid of the downside of doing it but there are ways to totally manage through that so it becomes a really positive thing for the employee and business owner. So I would say to go for it. Start looking into it. Call people who have done it. That’s what we did. We spent a lot of time talking to people who had done it and we got more and more comfortable with it over time. Yeah. I think it makes a lot of sense for a ton of companies and I think for us the outcome will be awesome.

Lisa Christensen: Okay, well, great. I hope to see great things out of you guys in the future.

Joel Clark: Great. Thanks for having me.

Lisa Christensen: Thanks for coming in. Thanks also to Greg Shaw for production help. Let us know what you think at news@www.utahbusiness.com or reach out to us on social media at @utahbusiness. You can also subscribe to our podcast or catch up on old episodes wherever you get your podcasts. Thanks for listening.