No Employees Allowed

No Employees Allowed

By Francis Pedraza

January 2022

I’ve started many hiring interviews with the question: “What’s the difference between an employee and an owner?” As candidates start to ponder, they might say something like “going above and beyond.” “Yes, but why...?” I press, “Why do owners go above and beyond, and what does going above and beyond look like?”

People respond to incentives... They change behaviors. An employee’s incentive is to show up, follow the rules, check the boxes, get paid and leave. An owner’s incentive is to create personal wealth by making the business more valuable and defensible in the long-run. So yes, owners follow the rules and check the boxes too, but they can also create the rules and checklists in the first place... They are capable of “jumping outside of the system;” thinking about the business from first principles and questioning how it could be designed better. They not only run the machine, they build the machine. They execute, but they also imagine, strategize and create. They can take orders, but also give orders. They both follow and lead.

Once you’ve seen this, you can’t “unsee” it. There’s an essential difference between these two types of people. You meet them in the world, often not where you’d expect: sometimes you’ll meet an employee in the board room, and an owner behind the restaurant counter... (and wonder how long it will take for them to swap roles.) It not only shows up in the big things — in management meetings, long-term planning sessions, demo days, etc. — but in small things... in the proverbial “taking out the trash.”

No Employees Allowed

When recruiting talent, our policy is “No Employees Allowed” — we’re looking for those rare candidates with an ownership mindset that they’ve developed over time, through adversity. When we extend an offer, it isn’t a job offer - it’s an opportunity to become a “partner” in the business with us.

Our strategy is simple: owners are the best talent, the business with the best talent wins. But executing on that has forced us to reject conventional strategy on fundraising and compensation, and replace it with something... retro-futuristic: a partnership.

“Retro” because partnerships are an old idea. For example, Goldman Sachs was a partnership before it went public, and in some ways it still is. “Futuristic” because we applied three design principles that not only solve for our unique circumstances and constraints, but which are universal. If we succeed then perhaps other companies will follow suit...

The Goldilocks Option

Why would an owner want to become a partner, instead of starting their own business? Because not everyone with an ownership mindset is ready to take full entrepreneurial risk; to go out into the jungle, where the wild things are... If the alternative is being an employee — even an overcompensated, underworked and pampered one, in a cozy and cute walled garden — partnership wins. Partnership is the Goldilocks' third option that’s always been missing: Cog in the machine?... Eww, no thanks. Superhero taking on the world alone... Ugh, too much. Join The Avengers? Just right!

Three Simple Principles

Our Partner Pay Model (PPM) has been through seven major iterations since we started the company in October 2015: here it is, if you’d like to review the pay tiers. Three simple principles have guided its evolution...

The first is Transparency. Every partner receives the company’s financial reports at the end of the month, and we expect each other to ask questions until we understand them. These reports not only include how various teams spend their budgets, but what everyone else is getting paid, so that everyone knows that no exceptions have been made to the model. We don’t make exceptions because it would create a perverse incentive to negotiate, which would erode and ultimately destroy the model.

The second is Meritocracy. The more value you create for the company, the more you should be rewarded — and vice-versa. Every partner is encouraged to think in terms of P&Ls and ROI. That means asking questions like: how much do I cost, how much does my team cost, how much are we investing in this area... how much revenue is being generated by this, and how much future revenue do we anticipate? You should always be able to explain how your actions drive company performance metrics. Value creation is sometimes hard to measure, so for Performance Evaluations we incorporate 360* feedback for qualitative inputs. Your entry pay tier and promotion path is determined by these evaluations.

The third is Alignment. The corporation is an alignment technology: it aligns the interests of all stakeholders — in our case, partners, agents, equity investors, debt investors, vendors and clients — to create value.

For short-term alignment, you receive your base comp; for medium-term alignment, benefits and a performance bonus; and for long-term alignment, equity that vests, pays dividends and becomes liquid over time.

All compensation is tied both to your individual performance and overall company performance. As the company’s performance has improved over the years, we’ve increased our base pay. The better we perform this year, the larger our bonus pool will be. So we keep putting our money where our mouth is...

100% Partner Owned... and Liquid.

Now about that equity...

Equity is the real game. Employees care about cash, benefits and bonuses - in that order. Equity is still an alien concept for most people. But owners care about equity above all, everything else is secondary... Because owners understand that almost all great fortunes are made with equity - indeed there are very few reputable, legal ways to generate generational wealth without it. So if we want to attract and motivate the best talent, we’ve got to put our equity where our mouth is. And we have.

Who owns the company? The majority of our equity is held by the partnership. Unlike the vast majority of technology startups, we’re not seeking to raise additional equity financing. Our long-term goal is to buy back all remaining shares from our early equity investors, so that the company is 100% partner owned. After achieving profitability last year, we began using debt to buy back stock: and we’ve already bought back about 13.5% of the company for $5M.

To keep recycling shares into the hands of current partners, former partners can hold onto their stock for a maximum of 3 years before the company has the right to buy back their shares at the most recent buyback price. So we’ll stay a meritocracy, and never end up as a gerontocracy.

Starting next year, we’ll be phasing in liquidity by extending our buyback program to existing partners, targeting full liquidity by 2026. So once your shares vest, you won’t have to wait until some unknown future date to see your equity’s paper value turn into real money in your bank account.

As we generate more profits and strengthen our balance sheet, we also plan to introduce dividends - perhaps as early as 2024.

Contrast this with the typical VC-backed technology startup that ends up 70% owned by investors, 20% owned by founders and C-levels, and 10% owned by everybody else. With every additional hire, the pie shrinks. An incentive exists to over-hire. Liquidity exists at some unknown date in the future, contingent on events outside of your control. Exercising your options is expensive and difficult. Massive losses create massive risk that your equity value is wiped out. With every additional round, you experience more dilution.

It’s an insider's game. And most of the equity value is trapped in the past — if you aren’t one of the founders or earliest team members, you’re not going to own very much, no matter how much value you create later on. That’s why, when other companies say things like, “It’s always Day 1!”... they don’t really mean it. They are gerontocracies, not meritocracies. But when we say “The founding moment is always now”... we mean it. And the proof is in the cap table.

Beyond Incentives: Soul & Myth

I began by talking about incentives driving behaviors in the same way an economist might... While that’s true, over time I’ve learned that the opposite is also true: behaviors also drive incentives.

It’s an attitude thing. Owners empower themselves. They don’t wait to be empowered. That’s why it’s a fallacy to think that the only reason everyone isn’t an owner is that they haven’t been given a chance. Certainly when organizations give people a chance, and reinforce that within an ownership culture, they attract more owners, so they outperform... But ultimately that mindset shift, from employee to owner, is a spiritual conversion.

While this might seem Calvinist, it’s not: heroes aren’t born, they’re made. But not in “hero school” - in adverse conditions. That restaurant worker who starts acting like an owner might someday end up in the board room. Not just because she started working harder, but because she started thinking differently, and behaving differently - because her whole identity changed.

Someone truly excellent is just going to continue being excellent, regardless of incentives. But that excellence is so valuable that incentives follow it... Hence: behaviors drive incentives. Our paradoxical bet at Invisible is that by creating nearly ideal incentives for owners, we’ll attract the kinds of people who don’t really even care or need incentives.

Most owners aren’t really rational actors. They want to achieve incredible success and enjoy worldly pleasures, sure, but they care even more about their soul’s journey. They want to make an impact in this lifetime, and hold the highest humanitarian ideals.

Incentives are not enough. The best people want to be a part of an epic quest. If that’s you, please read our story. Then, if the myth we’re living in resonates with you and you’d like to join us on this quest, I invite you to apply and look forward to meeting you.