A Masterclass On Hiring A CEO To Run Your Company ft. Andrew Wilkinson

25:13If 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. 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 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. I was really proud of what we're doing and that'll solve everything.

25:47And I realized that really doesn't work very well. And now I would say my hammer is finance or operations. So really what I'm doing is I'm looking at a business and I'm going, 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 be honest, I feel a little depressed as I say that. 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.

26:22Let me give AeroPress as an example. 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. I love building great products. I love being involved with that and 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.

27:02You don't deserve... You need to go throw away your Herman Millichair 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 talk about, though, 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. 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 interviewed Gerard from AeroPress, he told me what he wanted to do with the company.

27:41and 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 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.

28:19And they've said something like, 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 this is like an email 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 that fit with them. What else are you looking for in that interview?

28:51Not along, what's their hammer, what else? So, I mean, the most important question is, do you get the creepy crawlies after you walk away? Do you feel in any way, any cognitive dissonance, any weirdness? Does your stomach feel off? Someone can be incredibly charming. I often get this. Psychopaths, for example, they're very charming people. They are wonderful to hang out with. But you might walk away and be like, there's just something off, something in their eyes. Have you had that? Yeah, and I'll tell some stories. But I think the most important thing is, would you let them babysit your kids?

29:28I think either of you guys, I would let you babysit my kids. 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 really critical. Do you walk away energized?

30:04You can really like somebody, but if you don't walk away energized, that's not great. And then also, are they down to have alignment? Are they down to have skin in the game? Because ultimately, the worst type of CEO would be this. So let's say Sam's hiring someone to run Hampton and they say, I want a million dollars a year base salary. And you're like, okay, well, can we do some bonuses? Do you want equity? How can we create alignment and they just want 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.

30:43And 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? If they're from a Silicon Valley Company, New York Company, Middle 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.

31:17But the number one thing is the big company people, You really don't want the flashy person who's got the LinkedIn with five years at Accenture, followed by IBM, followed by whatever executive role. I find that when you take 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 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.

31:59Let'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 ship and all the systems and stuff. You put them back in 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 running a company to exercise, not 20x the size. You would think 20x is better, right?

32:32No, 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, I think of it as like, there's 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 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.

33:06Then there's someone who came in and scaled it to a bunch of stores, right? I think that was still Steve. That's kind of a different skill set. He It went from one store to, say, 20 stores. And then they scaled it to thousands of stores. And then they managed a public company. These are all different skill sets. Each of those levels are a whole different set of skills. 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? You pass the baton.

33:43What 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 two 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 five and 10 years. And every once in a while, you got the special cases that can go the distance.

34:16And even those exceptions, even Mark Zuckerberg, who's been running Facebook for 20 plus years, he has Cheryl. And Cheryl does a bunch of stuff so that he can keep inventing the next burrito. He's like, great, I'm going to focus on AI. I'm going to focus on Metaverse. And somebody else will do ad operations at this point because that's not what I want to be scaling up. Or the Google guys did the same thing with Eric Schmidt. They brought in effectively a CEO 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.

34:48And you have always given me advice. 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 once a month, and then once a quarter, and then once a year. and I was like, well, I was gonna like keep working there and talk 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 those first 100 days supposed to look like? Yeah, and then after six and 12 months, what's it look like? Because this is the hard part where emotion typically takes over logic.

35:30Totally, and it's terrifying to use the baby analogy. You imagine 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 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 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. So 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.

36:14And 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're in charge. Let's do a check-in in a month. And then I would just completely check out. And I'd say, look, if there's any emergencies, you can always call me and get an opinion. But do you give them a guide? Are you compiling everything in Notion? I don't know. Maybe not quite a guide or something, but you're doing a lot of brain dumps. You're going to spend a couple 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 five ten 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 two weeks then you're checking in every four weeks then you're checking in every three months and then if you want you can go to six months or a year and i 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.

37:28And then worse than that, the swoop and poop. 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 got to do your diligence if you're going to give this person your business baby you got to know they're not an epic piece of shit right that's very important but if you've done all that we can talk about all the diligence stuff so you got to get comfortable that passing your business to this person is going to be okay Hey, this episode is brought to you by Mercury.

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39:14Mercury is a financial technology company, not a bank. Check show notes for details. 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. It doesn't necessarily mean they're doing a bad job. It could be a macro problem or there could be some other headwind.

39:49So 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? Maybe not. 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 4-Hour Workweek, Tim Ferriss had this whole thing about anything less than$5 ,000 does not require my opinion.

40:31And 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. 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 us? Dingus. Dingus isn't even Canadian. It's actually 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.

41:11So 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 time, 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.

41:48And 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 there's this idea of trust but verify so I'll trust my gut that's my first screen and then I'll perhaps introduce them to one or two other people I trust so Chris might talk to the CEO as well someone else from our team we'll 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.

42:31They're called business intelligence advisors, kind of like CIA, but with a B. And they're incredible. They will interview, 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 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 five 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 positives, what are the negatives, and then also, have they ever been accused of a crime?

43:11Have they ever had a track record of not paying bills, legal records, all that kind of stuff? So I think that's really important. And we made a really bad hire about 10 years ago. And the guy basically was 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 I think that's just so critical. That's amazing. It sounds like between the recruiter and the reference check, the background check people, you might be spending anywhere between$50 ,000 and$100 ,000 of transaction costs in recruiting a CEO.

43:58I'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 going to pay for both the good recruiter and the background checks? And what would you do if you're the person who is more at the$300 ,000 a year profit and maybe can't afford those transaction costs? How would you do it? DIY? Well, I would just follow the same process. 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.

44:39right? Any snaky person can find three buddies who can 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.

45:17Oh, eyes cold. It's such a great trick. It's such a great trick because if they don't respond, people will almost always respond because they don't want to shit on somebody if they have anything good to say. But if they have something bad to say, it gives them an out. Because a lot of people, I found, are worried about legal liability. They don't want to go and 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 ask someone anything. If you don't reply, I'll assume you hate yourself and your family.

45:51Yeah, 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 pay less for someone like that.

46:27I'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, I'm going to give them basically what they want 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 I have a business that's doing$300 ,000 of profit. And I can comfortably afford a CEO base salary of$150 ,000. 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.

47:25But 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. 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$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.

48:02It 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 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? 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?

48:45And if they don't want to do that, then sometimes I'll even loan the 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 stock. 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 don't even consider it as part of total comp.

49:16Here's the kind of thing I'd hear. So they say, I want to make 400 grand a year 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 worth$400 to$500K 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? It 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.

49:58And 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$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 as 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.

50:43So 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, 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. A quick question as we round up to what the downside of all this is. 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?

51:28Is 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. For me, when I was running Metalab, I started five other companies in the first three years because it was irresistible to me. 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. Sam, you seem super focused. Maybe you're better off just having one focus. You wake up every day, 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.

52:31Because for me, I could never consider working for someone else. 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'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 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 might be able to read in a book, but a lot of the nuance of what you described is from hard lessons that were things that went right, many mistakes of things that went wrong, and the lessons you've learned.

53:17So we all got to benefit from 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, the business is going to do well. It's going to do better than if I was doing it. I get all of the reward without any of that work. And it's a totally 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.

53:53So 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 two 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 it's a necessary tax you have to pay once the business is big enough that you can support this.

54:36And then leave them alone. That's the other thing. Most people don't leave them alone. They say, well, it didn't work. In the first two weeks, they did something I didn't agree with, so I had to fire them. What's the balance there? You leave them alone, but you don't leave them completely alone. And I think for you guys, they send you a finance-only update 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'd do a report every single month. And they would write, here's what's going on in the business. Here's the numbers.

55:05And 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 monthly or quarterly and check in. By the way, this is the number one thing I get emails on. Literally every single day I get questions about it on Twitter and on email. And so I actually wrote a PDF, like a checklist basically on are you ready to hire a CEO and how to hire a CEO?

55:40And if you sign up for my newsletter, It's neverenough.com slash 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 slash what? Newsletter? Newsletter, yeah. And we'll link to it. And yeah, we'll link to it down here. All right, dude. Thank you. That's the pod.

56:12Looking back.

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57:12For more information, check out Mercury.com. Mercury is a financial technology company, not a bank. Check show notes for details.