Episode 41: Should Start-ups Give Employees Equity, Netflix the last of the Water Coolers, Kmart's Success and Reece Witherspoon's Business Genius
The guys go deep into why start-ups should give employees equity, Netflix's incredible run and the brilliance of Baby Reindeer, is Kmart Australia's best ever retailer, and Reece Withitherspoon.
First, some housekeeping
Luxury Escapes has a Ben & Jerry's ice cream fridge in their office.
Adir: “Never invest in a company that has a foosball table in the office. Table tennis is okay.”
Read Adir’s article in the Australian Financial Review: Why the student protests make me optimistic about the future.
Adir thinks Google Maps is no longer reliable in traffic, partly because he was late to recording this podcast, but also because it underestimates the length of time it will take you to turn right at an intersection.
Daily Blooms, where Adir is on the board, sold out of Mother’s Day bouquets in every Australian city this year.
Adir cancelled all of his subscriptions through the App Store and then re-subscribed through the tools themselves. The family plan of YouTube Premium is $32.99/month, $10 cheaper than subscribing through the App Store.
Adam was 29 when he wrote Pigs at the Trough and Adir is shocked at the quality of the writing (he picked it up because he left the book he was reading on a Virgin flight).
Grand Theft Auto V is now the second-highest-selling video game ever, behind Minecraft and above Tetris, after selling 20M copies of the 11-year-old game in the last 12 months.
Adam and Adir are doing their first live show! Join us on June 14th at Fortress in Melbourne for food, drinks, games, and a live recording. Tickets are $79 - book here.
Should Start-ups Give Employees Equity? (Yes)
Envato raised eyebrows recently when their $372M acquisition by Shutterstock was coupled with news that they didn’t have an employee stock ownership plan (ESOP), restricting the new-found wealth mostly amongst its founders.
Spanx founder, Sara Blakely, famously sold a majority stake to Blackstone in late 2021 for US$1.2B when she owned 100% of the company. So, should start-ups give employees equity?
Adam’s view is that it’s a no-brainer and not a question of if you do it, but how you do it, because “if there’s anyone we don’t want to lose, they should be on ESOP.”
Luxury Escapes employs a performance rights plan, so if an employee leaves before shares have vested, they’ll get them at the buying price.
There are typically a few types of ESOP:
Options - High risk, high return. The money you’re going to get from options is whatever the price is when you sell it, minus the price that it costs.
Performance rights - If you give $100K in performance rights, you get $100K (with options, if the price goes down, you get nothing). You can add stipulations to performance rights (“you can do whatever you want”).
Adam: “The most important thing for any manager is that you need to make sure the person getting the equity values it at least what the company values it at. If we give one performance right at Luxury Escapes, in my mind that’s worth at least $3, because we’re going to be far more valuable in the future. But if the employee values it at $1.25, then I’d rather give them cash, because the cash costs me a dollar.”
Adir: “Start-up companies are not self-propelled and they’re carried forward on the shoulders of the staff, especially management. And I think those staff should benefit from the wealth they’ve created. We should not devalue the contribution of paid employees, but they just get less because they’re de-risking themselves with a salary.”
Some advice to people in their 20s and 30s: “Take as little cash as you need to survive, and if you believe in the company, skew as much as you can to equity. The founder will love you for it and it will make you rich. Taking the cash will not make you rich.” Not to mention the tax benefits of paying a lower rate on a compounded amount.
Netflix and thrill
Baby Reindeer, the viral sensation written by and starring a stalking victim, has become one of the most-watched shows of all time. It’s scored 98% on Rotten Tomatoes and had 60M views in the last month alone.
With broadcast TV’s decline, is Baby Reindeer the reinvention of the proverbial water cooler TV discussion?
Adir compares streaming with broadcast TV: “All these streaming giants are trying to do is replicate linear TV. They have all of this long-tail content that sits on their platforms, but it’s heavily skewed towards a few shows, namely things like Netflix Originals. People think they want the choice, but they don’t. People really just want someone to say ‘this is the good stuff, watch this’, which is what linear TV was anyway.”
Adam sees a network effect within the content itself: “The more people that watch it, the more enjoyable it is. You get the scale benefits of production costs per viewer going down as a show grows in popularity, but the show itself improves as more people watch it because you’re able to engage with others about the content.”
How Kmart delivered its record half
Referencing an article in the Australian Financial Review by Patrick Durkin, “How Kmart is now more product maker than retailer”, the guys discuss whether Kmart is Australia’s best retailer after reporting $600M of earnings in the last half.
Did you know Kmart has over 300 stores, an incredible 80% of its sales come from its Anko brand, or that the former managing director, Guy Russo, is the Chairman of Guzman y Gomez?
Adir says Kmart’s direct-to-consumer (DTC) approach is what other Australian retailers should be looking to emulate: “If I was Myer, I would be buying or launching DTC brands. It is so obvious to me that that was the right strategy.”
Boeing CEO getting a pay rise
Outgoing Boeing CEO, David Calhoun, who has overseen endless drama, including the door of a commercial jet literally flying off the plane, has picked up a pay bump. Calhoun is receiving US $33M, inclusive of a stock grant, and will get a $45M retirement package later this year.
Adir believes that huge companies simply can’t run like normal companies due to their size, so “what you can do is set a culture of what is acceptable and how we do business at this company.” And the problem may be that the culture is not as safety-focused as it should be for a company like Boeing.
America’s sweetheart, Reece Witherspoon
When thinking about blossoming celebrity movers and shakers, Reece Witherspoon is often forgotten. But she’s quietly built an entertainment empire and is believed to be the world’s richest actress [will Adam be cancelled for saying “actress”?].
In 2021, Witherspoon sold part of her production company, Hello Sunshine, to a Blackstone-backed media company, Candle Media, led by former Disney executives for US $900M. She still maintains 18% shareholding, makes $1.2M per episode of The Morning Show, and oversees Reese's Book Club, which has 2.5M members and saw 42 of its picks make The New York Times top 50 bestseller list.
Amazingly, before she highlights a book, she obtains the film rights for the book, which uniquely leverages her influence to create hits that then go on to become successful movies. Reece Witherspoon: “the modern-day merchant banker.”
Five other stories worth following:
Is Google’s “AI Overviews” going to be an SEO killer? Some articles predict that the new AI feature could hurt any business that depends on search engine traffic because with so much AI-derived context at the top of the page, there’s less incentive to click links. Some predictions say search traffic could drop 25% within two years.
OpenAI dissolved its AI safety team focused on long-term risks, following the departure of key leaders Ilya Sutskever and Jan Leike last week, raising major concerns from more cautious AI factions that want safety as a focus while drawing cheers from those that want acceleration at any cost.
Nvidia stock has tripled over the past year as its AI chips have become the gold standard for large language models like OpenAI’s ChatGPT. In February, Nvidia announced record quarterly sales of $22B, up nearly 4x from a year ago. But the competition’s catching up: last week Microsoft said it planned to offer its cloud customers an AMD alt to Nvidia’s AI processors.
While Boeing deals with a few issues on Earth, its first crewed spaceflight is tentatively scheduled to blast off this weekend after years of delays that cost it $1.5B. It’s Boeing’s final hurdle before NASA can certify its Starliner spacecraft for routine flights to the International Space Station.
Crypto’s spotlight is on the SEC as the regulator is on a deadline to make decisions that could supercharge the industry. The commission is set to approve or deny spot ethereum ETF applications from VanEck and Ark Invest/21 Shares. Experts say ether ETFs could draw up to $45B in investment into the second-largest coin in the first year.