Dr. Shashikant Gupta, or Shashi as he is called, co-founded Apex Co-Vantage with a radical idea: that business should be a force for good. What he means by that isn’t really about sustainability or reducing our carbon footprint or donating to charity (although he established the Gupta Family Foundation to do that).
Shashi recently joined The Savvy Entrepreneur show to explain that, instead, the culture that his company lives and breathes is based on three simple core values: (1) integrity (2) human dignity and (3) the relentless pursuit of excellence.
These might sound like typical big-company mission statements. But the way he has implemented them has been described as “zen.” By integrity, he means that everybody in the company is always empowered to tell the truth and not avoid the facts. People have been fired when they have told customers things that aren’t true. Employees at all levels of the company do not to “whitewash” information, and are empowered to speak to managers at any level about disagreements or things of concern.
By human dignity, he means that every employee conducts themselves in a way that enhances the other person’s dignity. And by that, he means that the stronger or more powerful you are in the company, the gentler you should become. And this applies not only to other employees, but to customers and to vendors. For example, the company has no vacation policy — you can take as much as you want, and no one keeps track. And the employee handbook is a slim four pages.
He and his co-founder refused outside funding in order to build this culture and avoid the pressure to only make money. And the result is a company culture that employees, customers, and vendors alike sense is palpably different.
But his company isn’t a non-profit; nor is it struggling financially. He is clearly and rightfully proud that his company lives these values, and yet is highly profitable.
Below is a transcript of the fascinating story of Apex Co-Vantage and how they have built a company that many dream of working for! Or, if you prefer to listen to the show, just click here.
Doris Nagel 0:42
Welcome to The Savvy Entrepreneur show.
If you’re an entrepreneur or a small businessperson, this show is for you.
I’m Doris Nagel, your host for the next hour. I’m a serial entrepreneur and I’ve counseled lots of startups and small businesses over the past 30 years. I have seen lots of mistakes, and I’ve made plenty of them myself.
The show has two goals: to share helpful information and to inspire to make your journey as an entrepreneur faster and easier, and maybe just a little bit more fun.
To help with that, I host weekly guests to share their stories and advice. And this week’s guest is Dr. Shashi Gupta. Now, Dr. Shashikant Gupta, or Shashi, as he says it’s okay to call him. is the co- founder and chief executive officer of a company called Apex CoVantage. He has guided Apex’s numerous trailblazing technologies over the years, in such diverse markets as publishing, media and entertainment, electric gas and water utilities. That has also included the development of several cutting-edge software products.
Shashi has a very interesting philosophy. And that forms the basis for the culture of the family of companies that fall under Apex co Vantage, which is what we’re going to talk more about today. He says his philosophy balances the cognitive power of the human mind with the processing power of computers. Prior to founding Apex CoVantage, Shashi was a consultant to the US government where he developed computer models to address nuclear waste disposal issues.
He holds an MBA and a PhD from Michigan State University. He’s channeled his strong sense of social justice by establishing the Gupta Family Foundation, a private foundation that supports organizations helping disadvantaged people become more self-reliant. What a wonderful goal.
Shashi, thanks so much for being on The Savvy Entrepreneur. Welcome to the show.
Shashi Gupta 2:55
Thank you, Doris.
Doris Nagel 2:57
I want to talk about your philosophy of creating the business culture that you’ve created at Apex CoVantage and its family of companies. But first, tell us a little about what your company actually does, and the backstory on why and how you founded it.
Shashi Gupta 3:18
Sure. We started in 1989 with the objective of creating all kinds of information that were on paper into digital form. So, anybody who’s read or looked up JSTOR, that’s our work. We’ve done a lot of case law conversions into digital form. We have also converted a large number of newspapers into digital form, so that they are more accessible. And we have converted rare books and papers of such people as Thomas Jefferson into digital form, so that this valuable information is no longer stored in vaults.
It’s become available to everyone around the world. We are concentrated largely on the publishing sector. And we take books from the manuscript stage and make them ready to publish in print and in electronic form.
Doris Nagel 4:28
Who are your typical clients, how do you find these clients?
Shashi Gupta 4:35
Our typical clients include data aggregators, like JSTOR that I mentioned earlier, as well as publishers of academic books. And we find them through two separate channels. One is we go to trade shows and exhibit our services and our technology at those shows. We pre book appointments with prospective clients and give them demos of what we have to offer.
A second way we find clients is to get information on companies in our target market from sales databases and then we run email campaigns and follow up with phone calls. Our goal is to engage the customer or the prospect in a short 15-minute conversation. Because once we do that, our hallmark is that we balance the cognitive power of the mind with the processing power of the computer, in every technology we build.
What that means is that, at any point in time, there is an optimal balance between the mind and the computer, which leads to the highest efficiency, and the highest level of quality. And if you shift that needle too far off that balance point, you get inefficiencies, and you get degradation in quality.
Doris Nagel 6:09
I think it’s interesting to think about this as a needle or a gauge. But let’s back up just for a second, because I know that culture is something you’re really passionate about. Why is a business’s culture so important, and how does this play into the gauge that you’re talking about?
Shashi Gupta 6:36
It’s that and more. The culture is very important, because it provides the guiding light for every decision, large or small, that confronts us daily. Because we have a strong culture, it’s very easy to make decisions. And also, the decisions made at different parts of the company are going to be consistent because they’re all aligned to the culture of the company.
So, for example, we started the company with the concept that business should be a force for good. It shouldn’t be a force for greed. This principle becomes the North Star for the company.
Beneath that, we identified specific values that we would sign up to. The first value we signed up to was integrity. That is empowering everybody in the company to tell the truth and not avoid the facts. And how important is that in today’s world?
The second value was human dignity. In all our interactions, we should conduct ourselves in a way that enhances the other person’s dignity. That’s unlike what we see today, where the stronger somebody gets, the more roughly they treat people who are not as strong. Our view is, the stronger you get, the gentler you should become. And this applies not only to customers, but also to employees and to vendors. In all our interactions, this is our guiding light.
The third principle that we signed up to is a relentless pursuit of excellence. And just as an aside, we came up with this slogan before Lexus came up with their slogan of pursuit of perfection.
So, with these values, the first challenge is to live by these values, not just state them. And that has to show in every action from the leadership down to the lowest level of the company.
In our company, for instance, people refer to me just as Shashi, even though they are the maybe a data entry operator. They everybody refers to me as Shashi, which is beautiful, because it just says at one level, we are all equal. At a human level, we are all equal. And that culture has now sunk into every level of the company.
And if you’re familiar with India, which is a very hierarchical society, this is tremendous. It is absolutely unusual to find that an employee at any level calls the CEO by their first name.
Doris Nagel 9:41
There are many things you could potentially say about a business and its culture. How did you decide on the three values that you mentioned?
Shashi Gupta 9:57
There are two answers to this. One is that when I was growing up, I saw businesses do things that I was not very happy with. I didn’t like the kind of compromises they make, the kind of oppression that they impose on other people and other competitors.
So, the idea was to try to build a company that is totally different. And as we build a company, a place where we can be proud of what we do, we can be proud of how we do it. And we can be proud of what we do with the profits that we make.
But once we started building the company, it dawned on us that these are also life’s most important principles. So much so that our foundation activity now promotes these three values as well.
Doris Nagel 11:03
I’m sure it wasn’t always easy to live these values consistently. Talk about some of the challenges and mistakes that you’ve made along the way as the company grew. Give us a flavor of how easy or how challenging it sometimes is, in specific situations, to be able to continue to live your values.
Shashi Gupta 11:20
Absolutely. It is a challenging journey. Because when people come into the company, they may not fully comprehend what these values mean. Maybe they don’t think that they are real. They are definitely real in our company.
For example, we had a CEO of one of our businesses who was a Harvard business school graduate. And he didn’t understand that we really mean integrity when we say it. He came back from a customer visit. And when he relayed the conversation, I said, “But that isn’t really correct.”
And he was surprised that I was bringing this up. And I said, “Okay, it’s happened once. Don’t do it again, just tell the truth.” And the second time that he didn’t tell the truth and I came to know of it, we fired him – yes, the CEO– on the spot.
So, the challenge is to actually live these values.
Doris Nagel 12:24
it sounds very admirable. But I suspect sometimes there are s things that happen that make it very challenging sometimes for leaders or employees in the company to actually follow those principles. Give an example or two of those inflection points where you decided, yes, we’re going to live this culture, rather than maybe deciding to compromise.
Shashi Gupta 13:00
In all fairness, when you have a company with 3500 employees, not everybody can live by these values. The first thing is, you have to be tolerant and not become too extreme. The example I gave was at a senior level, but you can’t have that kind of a black and white rule for everybody in the company.
So, the first challenge is, how do you balance keeping the company as a whole aligned to these values, while accepting that everybody at every time won’t match up to these values? So balancing is important. It’s what I call removing the sharp edges.
Doris Nagel 13:50
There is the challenge that removing the sharp edges becomes a slippery slope, where you take little steps slowly away from what the original goal is. I’m sure that’s sometimes challenging to balance.
Shashi Gupta 14:07
There is a Chinese saying that true strength is in a blade of grass. When the wind blows, the grass bends, but the moment the wind stops, it immediately goes to face the sun, because that’s its nature.
You’re right, it could be a slippery slope — except for the fact that our true north is very clearly defined. And even when it is compromised, it’s only a temporary compromise. So, for us, I think rounding the sharp edges is not as risky as it could be in an environment where these values are propounded but not lived by.
Doris Nagel 15:00
Are there any specific examples or stories that you can share that help illustrate what you mean?
Shashi Gupta 15:10
In the early days, we recruited people based on whether we thought they would be well aligned with our values, because that is what we were trying to achieve is a company built on values. And we realized over time, that maybe we had gone too far on this spectrum. And some people who were really nice people who are aligned with the values but took that as an excuse for not performing.
And so, five or six years into this experiment — which is what we call Apex – it’s a social experiment. So, five or six years later, we realized that had to put capability and competence and skill at par with the values. So, our selection process was a challenge in the beginning, I would say, and a misstep.
Doris Nagel 16:46
When it comes to living company values, it’s really important that you build a company around people who live those values. How you hire people, in light of your culture and trying to make sure that those people are a good fit with your business culture?
Shashi Gupta 17:03
We first in the recruiting process, we first make sure that the person is skilled and capable for the position we are hiring them, we do a good background check to make sure that they would be good members of a team. And then in the final as a final step, we take a few minutes to talk to them about the culture of the company. And most of the time, people have a very positive reaction because today, I think many workers are hungry to be part of a team that is living for something more than making a buck for the owners.
Doris Nagel 17:50
I agree with you. I think especially the younger generations are definitely looking for meaning in their job – something more than just a means to buy more things.
Shashi Gupta 18:05
Precisely. You’ve said it so well.
Doris Nagel 18:10
There are a lot of things in a business as you work in the business on a day-to-day basis that that affect your culture. You can make statements about a company’s culture, but living it requires lots and lots of little decisions.
And sometimes when companies try to establish a culture or change a culture, they forget about some of those little decisions and little things about a company.
Can you give an example or two of some things about your culture that maybe had unintended implications or things that that you hadn’t expected as you built your business?
Shashi Gupta 19:03
There were a few instances. Part of our culture is that we operate on an honor code. And there is very little structure in the company. We have had cases where somebody who was really intelligent, a really good worker, but they just felt uncomfortable because of that lack of structure. They just didn’t fit.
Another example is at a much higher level. When we started Apex, I anticipated that India would become a powerhouse in the software space. We positioned ourselves to participate in that tsunami — it really was a tsunami in the late 90s. We had network with all the people in the business, and so on.
But unfortunately, the way the business evolved, it was almost like a bonded labor. People from India were brought to America, they were given very tiny stipends, their passports were taken by the employers, and they had to sign a bond that they would not leave the company.
Because of that — even though we had spent five or six years preparing to participate in this tsunami — we decided not to get into the software business from India. It really became a staff augmentation. So that’s an example of a really significant decision that we made are our culture which impacted the business.
Doris Nagel 21:04
Developing a culture when you’re very small and nimble is a different process than when the company gets a lot bigger. Talk about some of the changes or challenges that you face as a company grew in maintaining your company culture.
Shashi Gupta 21:28
From the very first, we were pushing this culture down the chain. As the company grew, it wasn’t me or Margaret, the founders, who were promoting this culture-based practice, but it became people down the chain also promoting the same values.
For example, at our 30th anniversary celebration, I heard from the lowest ranks and up talk of our culture and the fact that their supervisors and their seniors were all living with the values. So, the culture has to be woven into the fabric of the company. That is the only way to maintain it.
And I can’t say that we have succeeded 100% of the time. It’s just not possible. Like I said earlier, you have to allow for some exceptions without losing your true north.
So, it is a big challenge to maintain business culture, particularly one that is kind of different from the norm. And as you grow, that becomes more and more of a challenge. You’re quite right.
But right from the beginning, we were pushing the culture down the organization, so that as the company grew, there were champions of this culture at all levels, who promoted the values for all the people being brought into the company. That’s the best way I know how, and it’s worked fairly well for us.
Doris Nagel 23:25
You mentioned before the show started that it’s very difficult to change a company’s culture, and that your view is that you really need to start it right from the beginning. Can you expand on that just a little bit, and why you think that?
Shashi Gupta 23:48
Culture is like a personality of a company. And it’s very hard to change who you are midstream. I It’s much better and far more effective to weave the culture and the values into the fabric of the company, right from the beginning.
I won’t say it’s impossible to change the culture, but it takes Herculean effort, and total focus of the owners or the founders or the level C level people in the company. If they really want to change their personality, they first of all must recognize it is going to be hard. The spotlight is going to be on them, and they’d better walk the talk every day, every hour, because the rest of the company will observe this. And the chances of the culture being absorbed within the company is going to be higher the more everybody sees that the owners — the founders — are living by those values.
Doris Nagel 25:12
Lots of companies have tried to change their culture. Or at least they say they want to. I like your observation is that the culture is really a reflection of the personality of the leaders, and it is very difficult it is to really change a person’s personality.
But the reality is that a lot of companies out there are thinking about changing their business culture. What advice would you offer them in terms of trying to change their culture? And what things can they do maybe to be more successful at least in changing small parts of their business culture?
Shashi Gupta 26:13
I would say that the first requirement is to know why you want to change the culture.
And I would argue that a very good reason to want to change culture is that you want your employees to really get more out of their jobs — to impact their lives in a positive and a much broader way. In a traditional world, you do the job, create some value, and then get compensated for it. And that’s the limit of the transaction.
Whereas if you decide that quality of life, in the company and even out, of every employee in the company, that’s a mission that will help you to take on the task of changing the culture.
And then of course, you have to have your own definition of what you want that culture to be. As I said earlier, we chose values that we believe are very central to life itself. But you might have a different set of values. And so, it should be consistent with the way you want to impact your employees’ world or their lives, hopefully in a very positive way. So, if someone starts on a path of trying to change the company culture, have a good reason for it.
Second, clearly enunciate what you mean by the culture that you want to move towards. Finally, walk the talk. You have to live it yourself. Every day, every hour, your employees are looking at you with skepticism. And you have to act in a way that overcomes that initial skepticism.
Doris Nagel 28:14
Having worked for several large organizations who said they wanted to change the culture, I can tell you that the cognitive dissonance is abundant most of the time.
Usually, companies decide they want to change their culture because maybe they do an engagement study with their employees and are fairly shocked at how unengaged their employees are. Or maybe they’ve gotten feedback from customers. I would say less often from key vendors and suppliers and other partners seldom drive this, sadly. But certainly, when customers say we don’t want to do business with you, or you didn’t win this deal because of something about your business culture, that’s a big wake up call.
But the cognitive dissonance between what’s being said — the mission statement that we put up everywhere — and the things that business owners or leaders do is usually huge. There’s often a very big disconnect.
I think sometimes it’s like people hoping for a magic diet pill. A lot of us say we want to lose weight or be in better shape. But what we really want is this magic pill because we don’t want it to be a lot of hard work. We’re really busy and we don’t want it to really change much about our lives, but somehow, we hope there’s a magic pill or an easy button that will fix it all.
I kind many companies are similar when it comes to culture change. They think that if they write a mission statement and put it in enough places that somehow things are magically different. And I think you’re saying is that it doesn’t work quite like that, right?
Shashi Gupta 30:14
Yes, you’re quite right. But I think it’s fair to recognize that the leadership in large corporations have many forces pulling at them. They have to think about shareholder value, they have to think about next quarter results, and so on. So, culture is not the central focus.
If you really are keen on creating a certain culture in your company, you have to understand what your priorities and what the compulsions are. For example, we made a decision very early in our history that we were not going to take any outside investment. If somebody invests in your company and the only connection with you is that investment, all they’re interested in is seeing the return. And if that is the environment you are in, it’s going to be very difficult to create a culture or change the culture of a company towards a more holistic view of the business enterprise. We wanted to build a company not just as an opportunity to make money and enlarge the stakeholder value, but also to become a force for good.
Doris Nagel 31:44
I agree with you. Maybe some business owners are not always completely honest with themselves about what they want, or what they say is most important.
I’ll go back again to the getting in shape or the weight loss example. Lots of us say we want to lose weight or get in shape. And yet, when it comes to deciding whether or not to have that nice piece of chocolate cake, you decide you really what you want to do is enjoy the chocolate cake more than you want to lose the weight.
And I think that happens a lot in business, right? I think we all say we want to do or be certain things. But I don’t know if that’s always the truth.
Shashi Gupta 32:38
For an entrepreneur, I think the myth that Apex has shattered is that a company living by a certain set of values has to compromise on the money they make. And that’s not true at all. A company that lives by its values can actually be more profitable.
I’ll give you an example. Early on, we were bidding on a large project for an electric utility. It was a large enough project that I went for the final presentation. And we were awarded the job. I reached out to the person, and I said, “There were many large companies. IBM was one of them, Convergys – some very large enterprises all bidding on this job. So how come we gave it to us?”
And he said, “Because I could see in your presentation that yours was a company founded on values. We could sense that you would be looking after our interests first, and not just looking to increase your bottom line.”
So that got us a contract that we otherwise wouldn’t have had a chance to win, would it not for this culture that we had created, and it coming through in the presentations by my team.
Doris Nagel 34:19
I’m sure that your culture is one that customers and some of your partners have probably commented on. Talk a little bit about customer reactions and partner reactions to your culture.
Shashi Gupta 34:36
We’ve had customers spend the morning with us in our company in our offices, and make remarks like, “You know, this place is palpably different.”
There are so many small things that they pick up on. For example, our mandate to the person who sits at the front desk, in keeping with the values we just talked about, is that any visitor should be treated with tremendous dignity. In many offices, especially a decade or so ago, the person at the front desk, if it were a woman, she would not feel comfortable offering you coffee or serving you tea.
But in our company, the person who’s in the front office knows that it’s not servile. It’s because you are treating your guests with dignity. And so, it just feels different. And people tell us that it’s palpably different.
Doris Nagel 35:45
I read an article about your company in the Chicago Tribune described your culture as a Zen philosophy. Do you agree with that characterization? And what do you think they mean by that?
Shashi Gupta 36:04
What I understand from Zen is that it’s not force, but gentleness, that gets the best results.
It’s treating your employees with respect, assuming that they will do the right thing. Most companies write volumes and volumes of employee manuals, imagining everything that the employee could do wrong, and then a provision protecting against that.
Our employee manual is four pages. Basically, it says things in a lighthearted way, but with the impact that is needed. For example, “As we all know, sexual harassment is bad. Don’t do it.” Simple. And likewise, “Please take adequate vacation. Make sure you strike the right balance between work and home life.”
We don’t even have a vacation policy. People can take as much vacation as they want.
Doris Nagel 37:14
so how does this actually play out in reality? So, let’s say an employee in your company feels like they have been harassed. What happens?
Shashi Gupta 37:24
There was an incident in our India office, where were some women were harassed. As soon as the CEO in India, learned of it, he jumped on it, and made sure that women were comfortable and disciplined the people who were responsible for this.
It hasn’t happened very often. Maybe in the last 30 years, we’ve only heard of two or three cases like this. And I think that’s because, again, it starts with the culture. Harassing somebody is against the principle of human dignity.
Doris Nagel 38:10
Usually, the problem these days is that people don’t take enough vacation. So, if someone isn’t taking what their coworkers or their bosses think is enough vacation, what happens?
Shashi Gupta 38:26
When I observe somebody who is not apparently taking vacation now — because we only require the person to inform their superior, and the coworkers who depend on them, that they are going on vacation. So, it’s not widely known, who has gone on vacation and who has not.
But if I observe somebody — and I have observed this — not really taking enough vacation, I have sat down with them, and said, “Look, you have to balance, home life and work life.” And so, I would encourage them to take vacation.
At times, I’ve even given them like a bonus to go on vacation — you know, like a cruise ticket or something.
Doris Nagel 39:16
That’s a good idea.
I’m sure you’ve done a lot of reading about business culture. Are there some resources or books that you can recommend, I mean, who’s writing some of the best and most interesting things about business culture out there that you’ve seen?
Shashi Gupta 39:38
You know, for me, it all came from inside. Because if it comes from inside. It’s true to who you are. And my uncle, who has been my spiritual guide, has been a source of inspiration.
I have read a lot as well. I like the Dalai Lama’s writing. I enjoy Robert Bach, who has written Jonathan Livingston Seagull and illusions. And then the other guy who wrote Zen and the Art of Motorcycle Maintenance – I find his writing fun, and like his general philosophy. You can then draw on things like that to define what you want for your company.
But my feeling is that it comes from within oneself. And these values are not unique to the business. They are values that shape one’s life as a whole.
Doris Nagel 40:40
What advice for small businesspeople who are focused on trying to build a culture, looking back on your own experiences?
Shashi Gupta 40:54
First of all, we are in business to make money. And growing a company on values. Company means you make more money, not less. So, start with that conviction.
And then be sure that the values you put forth, that you are living them every day. And something else — it’s a subtle difference, but it’s very impactful. That is, don’t pursue profit for its own sake. Pursue the values, being confident that the profits will come, and in a generous manner.
Doris Nagel 41:41
If people are interested in connecting with you, maybe to learn more about the services that Apex CoVantage offers, or maybe just to brainstorm with you about business culture, what’s the best way for them to reach you?
Shashi Gupta 42:07
The best way would be to write me an email. My email address is sgupta@apexco-vantage.com.
Just in the name, you see, we chose CO -Vantage, not advantage. The name signifies our philosophy that every transaction should benefit both parties.
Doris Nagel 42:36
I’m glad you pointed that out — it is consistent. I didn’t realize that the name was so mindfully chosen.
Shashi, thank you so much for joining me this week. It was really a delight having you on the show. I enjoyed your insights and can’t wait to hear more about the story of how your company continue to grow.
Shashi Gupta 42:04
I would encourage your listeners to if they want to have a discussion, do feel free to reach out. Because at this stage, it’s very rewarding for me to be able to share what I’ve learned with people who are starting the journey that I started 35 years ago. It will be my pleasure to share my thoughts with whoever contacts me.
Doris Nagel 43:30
Thank you for that generous offer. And I hope that several listeners do take you up on that offer — offers like that don’t come along very often. So, thank you for that. And thank you again for being on the show.
We have just enough time left this week to talk just for a few minutes about an issue that a couple of my clients have wrestled with: sweat equity. It’s an issue that comes up fairly often, especially for startup companies.
Sweat equity is contributing services in exchange for part ownership of the company that you’re providing those services to. A lot of startups are strapped for cash, but they need a lot of things done that the owner can do himself or herself. So, they might barter with someone say getting your website set up or marketing services or some consulting or regulatory services, even accounting or bookkeeping or legal services even. And in exchange, they get a small piece of a company or something called stock options, the right to buy shares in the future.
It’s also something that comes up when there are multiple founders. So, let’s say there are two founders just to make it simple. One has cash to invest, but already has a day job that he or she doesn’t want to give up. And the other one has time to get things rolling, but not much cash.
In either of those situations, it’s important to think through the issues, and get good tax and legal advice before charging ahead.
Many founders are very surprised to learn that sweat equity is almost always viewed by the IRS as taxable income. So, the IRS basically views the labor is provided, that it has value to the company, and the person providing the labor is compensated.
Even if that person doesn’t get paid money for it, they received something of value –otherwise, they wouldn’t be doing it. And so, having already received compensation, the IRS views that as something that they’ve gotten compensation for in exchange for the services and they need to pay income tax on the compensation for the fair value of the services provided – what they normally would’ve gotten paid for doing it.
To make matters worse, the IRS also takes the position that the free services provided are not a deductible expense to the business, but instead need to be treated as a loan (if it is one) or a capital contribution.
So how do you minimize this problem? Well, there are a few ways one is to make the sweat equity arrangement and documented before the company is incorporated. Now that may work if you have two very smart co-founders, provided they’ve gotten good advice and structured things properly.
But that doesn’t generally work for occasional services that are provided by sweat equity contributors. You may not even know you need those services, or that you aren’t going to be able to do them yourself, or that somebody is willing to do them in exchange for equity. It’s usually something you discover that you need and can do as you go along.
You can also stagger or delay the taxes by using a stock vesting schedule where the sweat equity contributor gets compensated over time. that minimizes the taxes really care what most startups do if they’ve gotten good tax advice, it’s just sweat structure the sweat equity contribution as a loan to the company, either as an outright loan or as something called a convertible note.
I’m planning to have a future show dedicated entirely to the topic of issues related to convertible notes because there are increasingly popular, but essentially it whereas a loan is a promise to pay back, a company pays back this individual with money at interest, which really isn’t sweat equity. At that point, it’s alone, or the convertible note allows the person the sweat equity contributor to convert that money that they’ve loaned to the company or donated to the company into shares at some future date. possibilities possibility is to structure the repayment as an interest in future profits of the startup rather than as equity.
But again, that’s not really sweat equity, per se. So, any one contributing sweat equity, I think it’s necessary to point out needs to look into something called an 83 b election that allows you to pay taxes on the value of the stock that you get right away where the value of the company and its shares are preserved, presumably pretty low in value, or maybe even minimal. Rather than paying taxes when you sell the shares later on in the company, hopefully is worth a lot more. Other things to be sure to be careful of are making sure you’ve documented the arrangement and that you’ve assigned reasonable value to the work performed in low payment. The bottom line, this is a complicated area, sweat equity contributions can certainly be structured as a win-win.
But if you’re a startup or a small business, looking to swap at services for a small share in the company, you’ll really want to plan this carefully and good, good tax advice. Otherwise, it could end up costing both the startup company and the sweat equity contributor a lot of money that neither of you expected.
That is our show for this week. Thanks so much for listening. And thank you especially again to our guests this week, Dr. Shashi Gupta, the co-founder and CEO of Apex CoVantage, talking about building and maintaining a company culture or that works for your business.
You can find more helpful information and resources on my website at globalocityservices.com. There’s a library there of free blogs, tools, podcasts and other resources.
I’d love to hear from you. I welcome comments, suggestions, challenges, or connecting to shoot the breeze. Email me at dnagel@lakes radio.org. I promise I’ll reply.
Be sure to join me again next Saturday at 11am Central noon eastern time, we’ll have another great guest and topic.
But until then, I’m Doris Nagel, wishing you happy entrepreneuring!
Leave a Reply