 of us a countdown. Okay. That's how you make an ESOP. Thank you for coming today. We are Lullabot and it's very nice to meet you. And my name is Brian Scowren. I'm Lullabot's president. And today I'm going to be moderating a panel discussion titled rewiring Lullabot a retrospective on the how and why of becoming employee owned. So in case you didn't know back in January of 2021 Lullabot made a transition from being privately owned to being an employee owned company under an ESOP model. ESOP stands for what does it stand for? Employee stock ownership plan. That's right. And so I am joined today by members of Lullabot's leadership team and we're going to talk about the the transition of being employee owned, how everything went down and you know what we learned along the way. And fortunately it was a little less painless a little less painful than what's pictured here. That actually used to be our 404 page on our website but we launched a new website so check it out. So let's start with very quickly in case not everybody knows let's start with who the heck is Lullabot? So this is Lullabot. This is at our most recent company retreat. A lot of people in the Drupal community know Lullabot already. We've been around since 2006 exclusively focused on Drupal. This was by the way our silly picture at our retreat in Palm Springs back in February. We're about 70 people now and as of 2021 all of these people are now employee owners which is pretty cool. So so joining me today is you can see that that jumping person in the back or I don't know are you just standing? And Karen I think is in the front row yeah front row. So let's start with intros. Seth. Hi everyone my name is Seth Brown I'm Lullabot's CEO current CEO. There have been two before me one of whom is also here today Jeff Robbins and so I'm the third CEO. I hail from Carbondale Colorado and my background was an agency background. There was a local agency that I joined as sort of the third person and we sat in a server room in 2003 and and that company grew to be 60 people and so having been through that growth I came to Lullabot and had something to offer as Lullabot started to open up their client services part of the business and transition from being a consulting company. So that was kind of where I fit into Lullabot in 2010 and yeah I'll turn it over to Karen. Yeah I'm Karen Stevenson I'm currently the CEO of Lullabot. I did engineering I did architecture did a lot of step with Drupal, CCK, date, calendar all those kinds of things and joined Lullabot in 2009 but before I was doing all that I was CPA for 20 years which turned out to be really handy when you're doing an ESOP because you need a whole lot of financial stuff which so turned out to be pretty handy. Yeah and so one way to think about Seth and Karen on this panel is Seth is kind of the voice of management and executive leadership and Karen is kind of the voice of tax legal administration and but now Karen is actually chairperson of our board of directors as of this year so she can speak from that perspective as well which is super exciting and yeah and we were gonna close out this panel with a third person who could speak from the HR perspective named Chris Conraddy but unfortunately she got ill right before the Drupal con so she couldn't make it but she's very very much here in spirit and we are collectively going to try to be one Chris and answer HR questions as Chris would and we'll probably not do nearly as well as she would but yeah so to kick this off I want to you know sort of ask the question who's here let's get a sense of the audience so we can know kind of like who we're talking to and and what you all care about so quick show of hands who here owns or manages a digital agency all right who works at a digital agency okay good amount of people who who is with another type of organization okay and lastly who is with Lullabot right oh good amount thanks for filling the bleachers nice well okay let's get started so first question very simply what is an ESOP and how does it work and I'm gonna throw that to Karen okay so as as we mentioned at the beginning ESOP means employee stock ownership plan and the idea is it's a type of organization where the employees own the company you know every company has an owner and traditionally our historically our owners were Matt and Jeff who started the company and we wanted to have a transition to a point where the employees own the company and there's a lot of different ways that you can do that and the ESOP is a very structured very well thought out way of managing it and actually what happens is we create a trust the trust is actually a retirement plan and the retirement plan owns the company and then all the employees are beneficiaries of the retirement plan so it's it's a kind of a funny thing employees are not directly owners of the company they don't get little shares of stock themselves but they participate in this retirement plan and they accumulate value over the years and when they leave they get whatever the current value of the company is and they get to take their part of that when they leave so they transition from you know regular in being regular employees that don't have any stake in the outcome to people that are definitely have a stake yeah and since it's a retirement plan is I is that governed under like for Rissa right it's actually very much like a 401k except it's a plan that just owns the company stock you know in a regular 401k you have lots of different stocks that you have in your 401k this particular one there's nothing but Lullabot stock in there and in fact all the Lullabot stock is in there that's why it's a hundred percent ESOPs are not always 100 percent sometimes they're partial but in our case it's a hundred percent so a hundred percent of the ownership of the company now belongs to the ESOP so that sounds complicated so what so what what's involved in in a transit transaction like that like how do you how does the company go from being privately owned to being yeah an ESOP like how does that go down the first thing obviously is figuring out if that's what you want to do and there was that was a long kind of lengthy process of talking to a lot of people talking to professionals that have organized these kinds of things talking to other companies that have done it figuring out how it worked talking to employees of the other companies have done it to see did it mean anything to them did it was it worth it that kind of thing so it was a really it was a really slow process the ironically we Matt started talking about this several years ago and originally thought we wouldn't be able to do it till maybe 2026 and then the COVID came and everything kind of changed and we started talking about it again and realized we could do it and it was it was kind of kind of surprising to us that we could do it sooner than we thought we could do it but we could and so we we took action at that point and and made it happen ironically the the attorney that guided us through the thing at early early on we said you know how complicated is this how much time is it going to take and what did he tell us he's like oh yeah you'll you know you know what won't have to do much you'll think about it a couple times we'll fill out some docs for you and then you'll be an ESOP and don't believe attorneys don't believe it yeah right yeah it was it was involved it was very involved it was well worth it but it was it was very time-consuming and complicated about how long did it take start you know let's begin doing an ESOP to okay now we are an ESOP I think Matt and I became really engaged with the legal team probably six months before we actually and then Karen got very very involved probably four three or four months out and so was it certainly takes a it exerts a huge time cost on the executive team and so that's something to consider if you're a you know owner thinking about doing this is can you carve out enough time to give this the attention you know away from your other responsibilities and the pandemic was kind of unique in a couple facets for us one business was great for digital agencies after a certain point and then we also received PPP money as part of the payroll protection plan which we were definitely concerned at the time that we put in for that but then we ended up not needing it as the market sort of bounced back after March of 2020 and so we we ended up using that money to help fund this ESOP process which you know cost north of three hundred thousand dollars you know to actually do all the legal work the administrative work at hire the TPA pay the trustee like all those things and that's just the year of zero expense and then there's also ongoing costs of around sixty thousand dollars a year that the company pays but the amazing thing about being an escort ESOP and we can talk a little bit about the the differences but to whatever extent you are an ESOP so you know 10% or a hundred percent like well about you you are forgiven in your taxes your federal taxes on your profits up to that point so for us you know we're a hundred percent ESOP we don't pay federal taxes and that money helps us a lot in terms of paying for all of these expenses that savings as well as built wealth for the employees and helps you to buy out the exited owners we can talk a little bit more about that yeah I was I was gonna ask so you know given it's this multi month process and there's a lot of work involved you know at a high level like really briefly can you kind of talk about what were some of the things that we had to do in that process that we're so time-consuming yeah there I would put it into two or three buckets of things so one bucket of things was understanding ESOP and making do you when you set up an ESOP you have to make a lot of decisions there's a lot of ways that you can implement ESOP and we had a whole lot of we are sort of a recipe of you could do this thing or this thing or this thing and we had to understand what the options were as best we could without actually knowing what we were doing and so you have to make all these decisions you have to understand how the ESOP works and you have to get all that all those decisions in place so that's kind of one bucket of work that took a long time the second thing is you have to get all the stock back from all the existing owners because if you're going to give the stock to the ESOP you have to have it back again and basically what's happening if you I don't know if anybody here has ever been through a purchase or a sale of a company that's effectively what this is so you've got to do all the things that are involved in a purchase or a sale of a company including all the due diligence you know all the records you know all your taxes all your sales you know all your clients you know what how do things look do you have a management team and that was a big one what management team do you have in place in our case our owners were exiting but we had a management team in place that was going to stay and that was critical like if the owners had also been the management team and they were leaving that would that would have been really difficult to make that work but we had a management team in place that was going to stay so that made it something that was doable but you have to go through all the work that basically is involved in a purchase and the idea is one of the very first things you do is you hire the trustee and the trustee is basically looking out for the interests of the employee you know this is a retirement plan there's a lot of rules around all this the retirement plan cannot overpay for the company so they got they need to make sure that it's been priced fairly that they're you know that there's a reasonable price for the company that it makes sense all that kind of thing so you have to get a formal valuation done you have to do all the due diligence work as though you were selling the company to the trustee and at the same time you're buying back the company from the owners so you've got all that work going on so you've got this repurchase of the stock from the original owners and then this deal to sell the stock then to the ESOP and ESOP is going to do all the due diligence on their side of it so that's where all the work comes from and it is a lot of work yeah it's a lot of work a lot of work yeah and that third-party valuation is really interesting because when you're doing this transition as management or owners you're sort of both the buyer and the seller so in that regard you really have to be the seller and give all of this information and disclose but then a price comes back and the DOL and the IRS are very interested in the employees getting a fair price it's I think they call it adequate consideration and it's you know a legal standard that gets bandied about and argued about and fought in case law but overall if you are exiting as an owner to a sale to another company or to you know a private market private equity you're likely to get more for the company than you will selling to an ESOP because of that factor because the DOL and the IRS have exerted their you know considerable influence on making sure that these prices are fair to the employees buying the company so to speak the DOL for those that don't know the department of the labor and IRS internal revenues yeah well yeah and to close out this this sort of what is an ESOP section so we were we were actually just talking before this we had this question what are some well-known ESOPs there are ESOPs everywhere there are tons of ESOPs out there and we sat down and we were like what are some well-known ESOPs and we didn't really know so but I think we brainstormed a few that we you know that are pretty well-known public's is one right public supermarkets King Arthur flower what else new Belgium brewery was one and then they sold but they were employee owned and you can you can go from being an ESOP back to being a private company or to being a public company there's you know it's just another sale of the company Cliff bar is partly an ESOP they have an ESOP a public company can have an ESOP own a certain amount of the shares and Cliff bar is one that does that yeah most of the companies that are ESOPs are private yep which makes sense if employees own it it's by definition a private company it's not a public company so because of that a lot of a lot of these names are probably not necessarily names everyone would recognize but it's really all kinds of industries so there's a lot of grocery stores there's engineering firms there's construction companies almost anything that you can think of there's there's probably an example of someone that's an ESOP yeah manufacturing it's very big in manufacturing especially like if it's in the US because it's a great way to attract and retain labor and that's a big challenge for manufacturing companies in the US one other point I was gonna I was gonna make about we you talked about the idea that the owner wouldn't necessarily get as much money selling to the ESOP as they would to to the broader market you know just selling out to some third party but the other consideration that comes up and the reason that I think the ESOP has really been successful and is a really interesting solution is no it was it was the if you've got a company and you want to maintain the culture of the company and you're worried about what happens because a lot of times if you sell to a third party you know the bets off what's gonna happen after that if somebody spends a lot of money for a company they're gonna come in they're gonna cut costs they're gonna be kind of stringent cultures probably gonna change yeah a lot of things are probably gonna change and if you have built something and you would want to see it live on kind of as the thing that you created an ESOP is really nice and again it all the key to the whole thing is you have to have management that continues through the process so as long as you've taken care of the management piece that works but it really is an interesting solution if you want to do that yeah and you must have known what my next slide was why an ESOP and yeah I mean the you know the the mechanics of an ESOP are at some level pretty complicated and not always exciting depending on your background but you know I think one of the things that is exciting about an ESOP is you know the the motivation around it why an ESOP and I'm gonna throw this one to Seth you know what was that you were there from the genesis of the ESOP idea what what was the why behind it yeah I mean a lot of credit on this front I think goes to to Matt and Jeff they saw that you know at some point they were going to want to transition out of their you know day-to-day roles in Lullabot and wondered how Lullabot could remain a going concern could keep our culture we had been approached over the years with acquisition offers that we declined partly because the the offeror you know was looking to make a talent acquisition and had basically said openly well we're gonna bring in you know these six or seven engineers and then everyone else well but we're gonna let them go you know or something like that and of course we'd be like no we would never want to do that right Elia sorry inside joke I should never do that in front of a large audience but anyway so you know Matt and Jeff really wanted to at some point exit and also have a way to perpetuate what they had built the culture that we had as a company and an ESOP sort of came forward as the best way to do that Matt got really interested in some of the work that Jack Stack had done with the great game of business and staking the outcome and started going to conferences and then he brought us to conferences and we got interested and it was a very vibrant community like if you engage in the ESOP community it feels a lot can feel a lot like Drupal con you know you go and everyone is so excited and passionate about employee ownership we had several Lullabots go this year Nick you were there and I think some others that may be here that were there but it's very inspiring to go to an ESOP conference because you know at one level it's this really nerdy esoteric like you know finance and tax structure but at the other side of the like this is literally the anecdote to everything that's wrong with capitalism right like you're actually sharing ownership and risk against the people who are doing the work and you're also aligning the incentives of the shareholders with the incentives of the employees 100% which is a huge problem for a lot of businesses right like oftentimes what the shareholders want is not at all what the employees want and those things can come into conflict in you know obvious ways so I think I think there's there's some wonderful things about an ESOP and the more you do get involved in the community and start to understand what's really at stake the more exciting it becomes and sort of the less of an esoteric like you know thought exercise it is so now that we've like actually been through it though and now that we are an ESOP and we're seeing the impacts do you feel like it's achieved those original goals that we sort of had in mind these lofty ideals of what it would be yeah I mean I would look to the lullabots probably for some validation here but I feel like it has I mean at one level it's sort of like when you when you're first starting out as an ESOP when you're a baby ESOP you know people kind of look at their first share price when they get their first statement and they have this moment where they're like doing the math thinking huh okay this in four dollars and I could get a Starbucks like thank you and it's a little more than that but it's not significant but the idea is that it's gonna grow literally by you know this year triple percentage our stock price went up 366 percent this year in our first official year of starting to pay down debt and be an ESOP so I think as you grow and the employees start to see that this value is building you know if you think of it as sort of the analogy of a house purchase you know if you were to buy a house with no money down right like you don't have a lot of equity to begin with on that first day especially if your house was valued properly but then as you own the house as you continue to work on it and as the you pay down the mortgage and the house starts to increase in value you know all of a sudden that equity value starts to go up in the house and so our stock price is a derivative of the equity value that we all have in in Lullabot and so we're now that we're starting to see that increase I think that part is getting more concrete and more real but I still feel like at our first retreat Jared made these wonderful shirts for everyone that we used to have a bot camp that we'd go to every year and our first year as an ESOP Jared our creative director our chief creative officer made us shirts that said owners can't and there was just a different feeling at that first retreat as an ESOP where everyone was like holy cow we own this thing this is our company and I felt like the types of questions that I was getting from people which had often been over the years more of along the lines of their professional development or you know suddenly those things flipped around and it was like this great idea for something that I really think could move the chains for Lullabot and I'd like to see if we can that's a football analogy sorry it's probably a wrong audience but you know that like you know this this could have a real impact on the business and that change was really evident and inspiring even at our first retreat and even before this was as tangible as having received our first statements and I think that's continued to grow so yeah I think it really has been successful in that regard and it also accomplished something that is very difficult for privately held companies but is very real which is at some point the owners want to exit and there's just not that many ways to do that in a private company where the stock is not really bought and sold you know you can shut it down you can you know leave it to a child you could try to you know sell it to people that want to buy those shares but then they have tax implications for owning that that stock it's very complicated and so that's why so often in M&A you end up selling to another company and this is a way to not have to do that which is quite magical in fact actually that's another point that I was going to bring up is and you could you could literally sell the company to the employees like give them stock or sell them stock but that actually creates a lot of additional problems if they directly on stock they've got taxes they've got problems to deal with the value of that thing goes up and down it pushes up their personal income does all kinds of complicated things it and it's taxable gonna be gonna be taxable income to them whereas in the ESOP it got effectively the same thing it's not taxed it's not you know it's it's it's a retirement plan it's not taxable income to them until they take it out after they retire and even that even after they retire they can roll it over into another retirement plan because it's retirement money so they can put postpone the time that they would actually have to pay taxes on it you know pre far off into the future which makes a big difference yeah it's a it's a really elegant solution for us as a complicated complicated as it is yeah and you know the follow-up question I had here which I think is an obvious answer but you know in retrospect would you do it again and I think for all of us yeah one question is there were there any other alternative solutions to like achieve the same goals that were considered a longer way or anything is there anything out there that you know achieves employee ownership that is not ESOP I mean you kind of talked a little bit about that Karen but I mean as an escort you can have a hundred shareholders so if you were a you know small medium-sized digital agency you could start having your team buy stock you could gross up their pay in order to allow them to pay the taxes on that stock you know they could file their taxes like we used to have to do as shareholders of low about in nine or ten different states and deal with all of the the challenges that they're in but there's you know again it's there's liability there's tax implications there's all kinds of things that you circumvent by having this trust sit in between the owners or which are the beneficiaries of the trust and the trust itself and the company so you know that yeah there there are alternatives and we we had actually utilized several of them a lot of low abouts who were here before the ESOP had stock options all of those had to be bought out when we made this transition you know all this doc had to be sold back to the company so you know there are ways to do this and I'm sure everyone in this room who owns an agency has thought about them but I just think that the ESOP kind of just solves problems you didn't even realize you were going to have that's the magic of it it's like there's so many years you know since 1974 we've been doing this you know everything sort of been litigated it's a fairly stable accomplished you know space and it's a good way to do this and you can't really anticipate all the challenges that you're gonna have but ESOP law has sort of already done that and it's often built into these plans that are pre-approved by the IRS essentially with within you know certain range of choices that you can make and your law firm sort of helps you navigate all of that yeah so I'm gonna shift gears a little bit now so we've been talking from the perspective of management and ownership you know pride exited ownership let's talk about the impact on employees and you talk a little bit about this in terms of you know the cultural impacts that we saw but I'm kind of curious how much like let's talk about governance a little bit how much control do employees have over the ESOP or the company you know how how does the ESOP health and hiring and retention you know those sorts of things like what's what's been kind of the employee impact I realized that's a weird question with employees sitting right here in front of us but yeah we probably talked to any law about employee afterwards but we are also low about employees we are yeah you know we are employee owners too yeah yeah so I mean I'll do governance and you do retention okay so governance does change in some ways but not in the ways you might expect and so what do I mean by that well when you have a trustee they're gonna want to see a board of directors and they're gonna want that board of directors to be comprised of several independent board members who are not at all connected to you or the you know the ownership of the company right they want independent eyes and and the standard that an ESOP board is held to I think is in many cases is of a prudent expert so you actually are held to a pretty high standard of jurisprudence in terms of your your need to watch over and be aware of what's going on in the company so there were some famous cases where there was nepotism afoot and you know a board of directors would be packed with someone's family and nobody was paying any attention and meanwhile you know the rogue CEO who was you know say the son of the family went off and did something incredibly you know illegal or irresponsible and then the other family members who were holding these passive board seats actually got sued and were helped you know actually liable for not having paid attention and so the standard for ESOP board members is actually fairly high and we so we had to go out and find those independent board members and and get them to join and actually pay them it's a professional role the team knows them now they've come to our retreats and ultimately the board is you know the authority I sit on the board as CEO Karen is chair of the board but then we have three other independent board members who are the majority essentially and they comprise certain key committees like the compensation committee so they look after our pay to make sure that it's fair relative to the rest of Lullabot and the other employees and they do other sorts of things where Karen and I might have a natural conflict of interest as both managers and board members you know those things will go to the independent board to be handled and I as CEO and Karen as COO and Brian as president report directly to the board and if one of us is to leave the board is actually the one that would replace us they would be that you know the board would be in charge with finding the new CEO or now we would definitely have the ability to advise in that process and Karen and I would be involved in the decision and we've always talked about wanting those that to come from inside of Lullabot but it's still those sorts of things become considerations when you're thinking about governance of an ESOP and if you've been you know a single private owner of an agency that could be a big change for you right if you you know because you're essentially a hopefully a benign dictator of your own concern at that point but when you be if you were to become an ESOP you're gonna have to take on an independent board and so that changes things it doesn't change things though in the way that I think some people might expect or think which is well doesn't that mean that we all vote on anything right like the idea that now we're a completely flat organization in a democracy and any decision that the company needs to make should be voted on by all the shareholders and that's not actually the way that the ESOP works and not the way that most companies work and ESOP in in one sense is just a fairly normal company it's got a board of directors it's got a leadership level it makes decisions and there are certain things that shareholders do by law get to vote on and those things are like recapitalization sale of substantially all of the shares of the company those sorts of things so there's a few things which you know and this doesn't even come back to ESOP law this actually goes back to just general corporate law right there's certain rights as shareholders that you have if you're a stock owner in Starbucks you know where you would vote on these things if you were you know a shareholder so the shareholders vote on similar things to you know that you might in a public company but it doesn't you know necessarily translate to the day-to-day or tactical or even strategic operations of the company which are still in the hands of the executive team in the board. Which part am I answering now? Well retention yeah hiring and retention yeah so so the other part of this is the question is do we have we seen any impact on retention and hiring and I would say absolutely a lot of people ask questions we we say pretty prominently in our ads when we hire that we're employee owned and people often ask about it they don't already know about it they they're curious they want to know what that's all about we know it in at least a couple of situations it's been the deciding point between one job and another has been oh this one's employee owned that sounds better the ability to accumulate some stock so it's done that we went through the great resignation when a lot of companies saw a lot of people leave we did not see a lot of people we had a really we really hung on to people and I don't know that that's because of the ESOP but I it may be one of the factors that caused people to say it was definitely correlated yeah I think I think it does help I mean the great recession statistic that Chris had was you know 37% turnover for most companies and we were around 10% I think 11 officially but yeah so it's it's you know and that's been a typical number for us since the ESOP so we've had pretty low turnover and yeah I think it is attractive and interesting I almost think the spirit of it can be as important to some people as the actuality and hopefully the actuality is gonna get more interesting over years as the ESOP continues to grow in value but I think you know there's many lullabots who you know might say something like eat the rich and actually heard that recently and at a retreat and I hope they don't mean me because I promise I'm not but yeah it the spirit of equality is very real and the sense the equity is genuine equity in a financial and sort of stock sense of the word do you want to elaborate on that a little bit like you know one of the questions that we had is does this ESOP factor into our DEI efforts you know is this do we consider this to be part of our diversity inclusion and equity efforts I I think yes probably hopefully being owners of the company is is a part of making everyone equal making putting everyone on the same footing giving everyone the same opportunity to participate and benefit from the things that they're doing I think that's one of the things that's really exciting about the ESOP is that and in terms of like the equity that we're building not to get too in the weeds with it but is it actually does everybody accrue equal equity value or is that like how does that yeah the typical way that ESOPs work and we were kind of stuck with the typical way that ESOPs work because if we veer too far off of that we run the risk of we're gonna have to have sets such example is forking like we've got a standard plan that's been approved by the IRS and if we want to change the plan we'd be forking and then we have to maintain our fork and that gets really complicated and the idea is we want to maintain things that other people are doing that are proven that are approved all that kind of thing and so the typical way that in I as far as I can tell is not even just typical it's like almost the only way that stock is allocated is based on wages fortunately our wages in our company are pretty equal we work pretty hard to not have a huge gap between the wages at the top and the wages at the bottom but the way that it generally works is in our case we have 50,000 shares that we allocate each year and this is not a purchase employees don't have to purchase it they are given so that's benefit number one so they get the stock we take the 50,000 shares we divvy it up pro rata based on wages and the other advantage of doing something like wages is if somebody was working part-time they would get a smaller piece than somebody who's working full-time that kind of thing which does seem reasonable so we allocate the shares based on wages but again in our case that tends to be pretty equal yeah so it would on its own you know allocating equity based on salary is could be very unequal so it really needs to be paired with yep with you know some some good thinking around you know what is your salary equity right so yeah that's an important aspect of it there's legislation to around the 409 I think it's 409 P which has tests to make sure that the ESOP is not being distributed unequally so like let's say you were a normal public company and your CEO to average salary ratio was something like 350 to one or something crazy like that right in that scenario you would actually trip the 409 P clause which which does not allow you to have disqualified persons who hold more than 10% of the stock or families that hold more than 10% so there's all sorts of legal mechanisms that the IRS and the DOL have used to sort of constrain corruption nepotism and the other ways that the ESOP could be misused and it has been misused some people might remember a very notable ESOP named Enron and that you know subsequent to Enron there was a lot more scrutiny on ESOPs and the ways that they could be misused and legislation has kind of caught up to make sure these things don't happen but yeah the other thing about the DOL so one in three baby ESOPs get audited and you don't really want to be audited it's kind of like an IRS like you don't want the attention of the DOL in the IRS so following the standard plan following the standard playbook is a way of sort of not raising your hand and say hey look at us we're special you know because the people that are going to pay attention are not the ones that you really want to have interactions with kind of you mean is it akin to yeah sorry the question is is the 409 P clause like the safe harbor I don't I don't know if it's technically the safe harbor but it is definitely 409 P basically there's only one thing that can happen if you fail the 409 P your your ESOP is gone it doesn't it's gone if there's no work there's no way to fix it you've lost your ESOP so it's pretty stringent yeah well on that note let's talk finances and I are there we talked a little bit we've been you know sort of moving around you mentioned some of the expenses around starting up the ESOP now that we are an operating ESOP what are there any extra expenses or different expenses as compared to the company now as as we said before we don't have to pay income taxes fortunately and that's because the owner of the company is a retirement and retirement plans don't owe income taxes so that's fundamentally what's going on there but on the other hand we we have to have a trustee we don't have to have an external trustee we chose to have an external trustee there are some companies that act as their own trustee but it introduces again the chance that you're going to get yourself in trouble having an external trustee just gives you an old little extra buffer of somebody who isn't you making sure that you're following the rules and that you're being fair to the employees and all those kinds of things so we have an external trustee and they charge us every year we have to get a valuation every year a formal valuation because that's a whole part of the every year we do a valuation and then we issue statements to everybody and say here's what your stock is worth now we're just expecting to get our statements here pretty soon anytime now and then we have to have a third-party administrator and that's third-party administrator is actually does things like manage everybody's individual accounts and figure out how much how much stock gets allocated to who and who has what and how much is bested and they produce the statements and all that kind of stuff so principal is our is our third-party administrator so we have those three professionals we have legal expenses which come and go depends on if you know once we got past the initial legal expenses of the initial creation of the ESOP there's ongoing legal expenses questions come up either the valuation company may have questions the trustee may have questions or we may have questions we pay for the legal expenses no matter who has the questions but so that can come up and then we do have to think about cash because ultimately one of the things we have to worry about is what's called the repurchase obligation it's not an issue yet it will become an issue at some point because the whole point of this thing is that when people leave they can get paid and this is this is actually one of the beautiful things it's it's a problem and something to think about but it's also one of the beautiful things about the ESOP so if we had sold stock individually to employees we'd still have that problem how are we going to you know how are they going to actually get money for their stock ultimately with an ESOP it's all very structured it's all written out we know exactly what it is there's actually formulas that you can run the third party administrator has programs that we can run to anticipate what our what our repurchase obligation is going to be when we need to how much money went you know based on expected dates of you know expectations about turnover and retirement and all those kinds of things they they have all the calculations built in and so as we grow we have to be thinking about a repurchase obligation basically part of our responsibility is make sure that we've got enough cash so that when people do need to get paid out that there'll be something there that they can get paid out which again with a typical individual private company is not something that's in place so um oh there's a question there's a million shares allocated over sorry the question was why 50,000 shares per year oh and the vesting okay yeah we can talk about both of those so first of all the shares are allocated over a period of 20 years there are million shares so 50,000 shares per year which gives you a decent runway most companies statistically will change hands every you know 10 to 15 years so that's sort of building that into the expectation as far as vesting goes so you get your shares each year but you vest over six years and so there is also that that's both a way to retain employees but it's also a way to be able to afford your repurchase obligation it's it's a mechanism to give you enough time to build up the cash that you're going to need to be able to start buying people out it also avoids what you might call the quit and buy a house problem which is like if you started to have a really valuable Sharon and Esau and you could just cash out tomorrow and it would you was sitting there as like this big Easter egg thing I could I could just cash out and have a down payment for that house you know this avoids that problem because sorry this doesn't but there's also another clause here which is that you get bought out over a period of time so you vest over six years and then you also get paid out over five and so the paid out over five is a way to avoid that problem of like you know I'm over 55 I'm gonna go ahead and cash out my Esau right now and one lump sum because I want to go do something buy a house or whatever and so there's a waiting period so and we are we're approaching the end of our time here I believe but I do want to kind of close and say you know all everything that we've talked about is complicated there's an extra layer of complication which is international employees that we we didn't even get to talk about but you know let's sort of end I would love to hear both of your answers around any surprises like what any surprises or delights now that this is done what didn't match your expectations both good and bad and then we'll wrap it up there I talked a little bit about this when I was interviewed for the Talking Drupal podcast but one of the surprising things to consider if you're becoming an ESOP is what impact will it have on innovation in your company and one of the you know one of the reasons that an ESOP is good is because everyone has ownership and wants to see the company grow innovate expand all those other things but at the same time when you're a privately held you know company with a single owner that owner can pretty much pivot the company tomorrow if that's what they feel like doing they can they can decide to invest the company's profits in whatever they want to you know they could decide they want to build apps instead of Drupal websites or something like that and just completely switch and when you're an ESOP you're beholden to your shareholders to your board like there's all of these other layers involved and so I think one way to think of it is you know you're no longer the the cigarette boat that can just pivot on a dime you're a much larger vessel that can turn a little bit more slowly and with a lot more oversight and control so I think that that can cut both ways when it comes to innovation you have you know maybe more inspired a team hopefully but at the same time you know there's a little bit more inherent red tape in being an ESOP and that can in one person's vision doesn't necessarily get to dominate the conversation and what the company is going to do and so that's a different dynamic and I you know I think that's worth considering Karen surprises yeah well one surprise was was the time wasn't really expecting how much time it would take but again still feel like it was 100% worth it and as far as the pivoting and everything the alternate to that would be to say less risk right I mean this is all about kind of reducing the risk a little more steady company a little slower growing a little more carefully thought through then you necessarily were when you had one owner who was only playing with his own money basically you know you're playing with everybody's money so you need you need to be careful but again I I think the biggest surprise to me was I had not really known much about ESOPs and I knew a lot about different ways that people exited companies and things like that but had never really thought about it as boy this is a really nice way to transition a company to the next step to the next stage it's got a lot of a lot of good things going for it awesome well thank you both we'll wrap it up there we are I know there may be questions okay it's a great point yeah growth is way more baked in and people are more accepting and and open to growth as a as a motive motivating factor for our business so we're wrapping up there cuz we're a little bit over time but thank you everyone and thank you for coming we were straight from here we're gonna go to Lullabot's expo hall booths so if you have we didn't have time for Q&A if anybody has questions feel free to grab one of the three of us or any Lullabot employee and talk and then Lullabot has a party tonight at seven o'clock at Coop DeVille and come out thank you very much