
An alternative to employee options/equity grants - InfinityX0
http://37signals.com/svn/posts/2987-an-alternative-to-employee-optionsequity-grants
======
ChuckMcM
I think its a creative solution in response to the employee ask, but it
doesn't seem to actually resolve the issue does it?

One of the reasons that equity grants work is that people are incented to grow
the company as the bigger/more valuable the company becomes they participate
in that valuation growth. As equity, there is also the notion that if
circumstances dictate that you move on you will still be rewarded for your
hard work 'later'.

The 'units for time served' system effectively simplifies to this if you allow
the employees to 'keep' units after they leave the company.

Its disingenuous to say 'we have no intention of selling or going public'
since I can assure you that you also have 'no intention of doing this for the
rest of our lives'.

And no, I cannot read Jason's thoughts, but I can reason to this statement
logically. Jason (and other co-owners) of the company have interests outside
of 37signals. Working there may be the awesomest thing in the world now, but
at some point when the realization comes that you're time on the planet is
finite, it occurs to one that perhaps they should take some time to do some of
these other things. The notion that if you had enough savings you could live
off the returns from that capital, and do the things you love, and not worry
about specific deadlines, becomes more and more appealing. At some point the
owners reach the 'tipping' point where they would rather work 'free form'
where the cash flow for basic lifestyle was disassociated from the work
product they're doing (the word 'retired' really doesn't cut it, more like
'base expenses covered before work income is considered') If the combination
of owners wanting to change their lifestyle, and some entity is willing to
offer you enough money for 37signals to make that change possible cross, the
environment is ripe for a sale. The only other statistically probable 'exit'
for LLCs is for the founder to die unexpectedly. The outlier case is the
founder runs the company until senility and degeneration results in them dying
leaving behind what was once a thriving business/practice/partnership and is
now simply an obligation to file a tax return once a year.

By that reasoning I know that the principals of 37signals are going to either
'sell the company' or 'go public' at some point in the future, regardless of
their protestations to the contrary. And when that happens, you've carved out
5% of the sales price / market value for the employees who have stuck with you
to that point and are currently there. Which is admirable.

But Jason's point number 3:

 _It should reward current employees. This was about who was at the company at
the time of a sale/IPO, not people who worked here years ago._

Does not sound like the system would provide anything for the folks who were
instrumental in you getting there but for one reason or another had left the
company. This system might leave them with a bad taste.

A variation on this system would be to reserve a larger chunk (say 25%) of the
transaction price or fair market value (FMV), and accumulate your units on a
monthly basis (so 1 unit per non-owner employee / month) which fill the whole
pool over the lifetime of the company ( prior to sale / IPO ). Allowing
employees to retain their unit-shares even after people leave, so basically
the employee-month units slowly grow over time (while the value of the company
grows over time) and the payout is proportionate to the time of service, and
is retained for employees who have left, and requires only that you compute
the integral number of months any employee has worked. (no admin overhead).
Finally, it gives a better signal of recognition to your employees that you
value them with a more meaningful percentage than 5%.

A sample worked problem where each employee-month-unit (EMU) accumuates 1 per
non-owner employee per month.

3 founders, $500K seed round

+1 year 5 employees (2 non-owners) (24 EMU accumulate if sold each EMU worth
slightly more than 1% of the company)

+2 year 15 employees (12 non-owners) (+144 EMU, 168 total, at sale each EMU
worth .14% of the company, 2 yr vet worth 3.6%)

+3 year 20 employees (17 non-owners) (+ 204 EMU, 372 total, each unit worth
.07% of the sale price)

People who stick around get a bigger payout, leaving isn't a penalty (you may
not have a choice), and everyone gets rewarded the same.

Unfortunately given that some employees are going to have a much bigger impact
on the success and 'value' of the company than others, I doubt they would go
for that scheme either. That doing compensation is hard isn't really a very
surprising result I guess.

~~~
tptacek
Some context your analysis is missing:

37signals is older than any YC company. In its current incarnation, I believe
it's older than Facebook. It is clearly not on the same trajectory as the
typical company we talk about on HN. It is not a flavor-of-the-month, or even
of-the-year, for Fried and DHH.

 _and_

Supply and demand probably does give them an edge on employee comp, but from
friends I know who've worked there, they're making market wages. People aren't
taking jobs there on the promise of hockey-stick upside. It's a pretty amazing
work environment. You should see the offices. Place is nuts.

 _You_ don't have to take them up on their comp plan, but it's naive to write
comments as if there was something wrong with it. Most YC companies would be
very poorly served indeed by the comp plan 37signals laid out here; those
companies are all on VC shoot-the-moon trajectories, and a stake in a
liquidity event is a big chunk of the reason you'd work at any of them. In
37signals case, you have to start by defining what a liquidity event even
looks like.

~~~
ChuckMcM
It was not my intent to criticize their overall compensation plan. Jason put
this blog post up as their response to the employee request for equity
participation. My analysis was to look at how his solution responded to that
request. I works well in some ways, not as well in others.

As I mentioned the desire on his part and that of the other owners to respond
to that request was admirable. And certainly for non S-Corp type businesses it
can be very difficult to respond to this sort of request in any way.

My comment on compensation was targeted to exactly this:

"People aren't taking jobs there on the promise of hockey-stick upside. It's a
pretty amazing work environment. You should see the offices. Place is nuts."

Compensation is such a rich confluence of things, from wages to benefits to
corporate culture to 'lifestyle perks' to profit sharing. My mother-in-law ran
a CPA practice for 30 years and did various things over those years as forms
of compensation. So its a rich, complicated, highly nuanced, and rarely
replicatable space where companies have to operate. I get that.

~~~
tptacek
The word "disingenuous" means something unflattering. Also, compensation may
indeed be a rich tapestry, but options only matter if you're going to sell, go
public, or buy them back. For companies without a defined trajectory towards
liquidity, they're actually deceptive.

~~~
ChuckMcM
Ahh, got it. Perhaps naive would have been a better word, although I recognize
that in some circles that can be a larger insult. And for the record, I think
that their plan for this 5% is much less deceptive than options in an S-Corp
can be.

The disparity for me is that Jason makes this claim, "And since we have no
intention of selling 37signals or going public – the two scenarios where
options/equity really make sense – the complexity became too hard to justify."

My claim is that _that statement_ is disingenuous because it posits the
following argument; The company will never be sold, thus options or equity
would never be liquidated, so providing equity or options doesn't make sense.
The implicit claim on which this argument rests is that they will _never_ sell
the company, and that claim is neither supported by a structural contingency
on the company, nor supported by a statistical comparison with the ways in
which LLCs are dissolved (granted medical practices and law practices seem to
dominate in this area, and can skew the results). In my opinion, it
deceptively leaves that impression rather than being 'up front' about what are
the real constraints.

I would completely believe him if he said instead "The Articles of
Organization for the LLC specify exactly how any proceeds from the sale or
dissolution of this company are to be distributed, and we are loathe to change
them. Thus we don't really have an option here." (no pun intended)

And again, I think its _really impressive_ that they came up with a way to
share 5% of the proceeds when the company is sold. I merely suggested some
ways they could make it 'look more' like what other people get in terms of
equity and options by both allowing people to keep accumulated time after
leaving the company and by having those 'units' represent a similarly sized
chunk of the company.

------
grellas
Mature LLCs do have tricky issues when it comes to option grants for
employees. Among other things:

1\. LLCs are partnership-like entities governed by an operating agreement and
every owner (member) has to sign and agree to the terms of such agreement,
meaning also that every owner (employee) gets to see in intimate detail who
owns what within the company, who has what management authority, who has
invested what, and the like. Bad for the company.

2\. LLCs have no counterpart to ISO-like grants, meaning that everyone who
exercises options can (normally) effectively do so only at the time of a
liquidity event because he would otherwise have to pay an immediate tax on the
"spread" (difference between exercise price and fair value of equity interest
acquired) as of the date of exercise and would thereafter hold an illiquid
investment for what could be many years. Bad for the employee.

3\. Apart from the limitations of LLCs themselves, it becomes difficult to
administer an option plan when the value of a company is already high because
it costs too much for employees to buy into it. For example, if a company is
already worth $10M, the exercise price of options needed to buy .001% of it
would be $10K. How many employees want to part with real dollars for the hope
of a speculative return way down the road, especially if the company itself
says it has no plans to move toward a liquidity event any time soon?

Hence, the alternative plan adopted here makes sense. It does _not_ represent
any form of true equity interest but is an employee bonus plan. This means you
lose the benefits if you leave employment. It also means you get, at best,
employee compensation that is subject to tax at ordinary income tax rates as
well as to all employment taxes (though no tax is due until the bonus is
paid). It also means that the interest is not transferable. It is basically a
special reward granted to those who stick it out over the years until the
company gets to a liquidity event. It is not perfect but, given the problems
noted above, it is actually a pretty good solution to the problem of how to
afford special incentives to key employees whom you want to add value to a
growing but mature company operating in LLC form.

~~~
tptacek
Since we're on the subject: aren't there restrictions for LLCs about
principles/members taking W2 wages? I know there's a way around this, but I'm
curious about what the best practice is for issuing equity to employees at
LLCs.

~~~
grellas
The members in an LLC can take W-2 compensation just as owners of any other
entity can be employed by that entity and take salary, etc. There are no
special restrictions on this, at least that I am aware of.

If early-stage LLCs want to adopt equity incentives, they can mimic what a
corporation does with a little custom drafting to the operating agreement.
Instead of defining ownership in terms of percentage ownership as set forth in
a schedule (the typical LLC pattern), LLC owners who want to issue equity to
employees can define the ownership in terms of "units" of ownership. They
define a number of authorized units in an operating agreement (e.g., 10M
units) and then reserve a grouping of them for an equity incentive pool. These
can then be used to support unit option grants (like stock options, albeit
always NQO and never ISO) or restricted unit grants (akin to restricted stock
grants in a corporation). If this is all done in the early stage, the units
can be priced at nominal pricing so as to avoid adverse tax consequences to
the employees. There is still the problem of option holders being taxed on the
spread on the date of exercise (as with NQO options in a corporation) but,
otherwise, such grants may be made very much as they would be in a corporation
(made subject to vesting, etc.).

The key to an effective plan is to do this early in the LLC's existence and,
if done in that way, this is pretty comparable to what happens with a
corporation (except for the absence of ISO-like options). As long as this is
all done right, there are no special restrictions on issuing equity incentives
to employees in an LLC.

LLCs are state-specific and it might be that there are special restrictions in
Illinois or other states that don't exist in California where I practice. But
the above sums up the essence of how it is done here.

~~~
abalashov
I do not pretend for a moment to be the attorney here, but it is my
understanding that members of LLC, unless that LLC has made an 8832 election,
are mandatorily considered self-employed and must make quarterly SEP payments,
and that they cannot be employed as W-2 because, as a creature of state
statute, the LLC is not held at the federal level (for tax purposes) to be a
distinct entity apart from its members.

~~~
alnayyir
This is false in at least the commonly understood case, you can elect to be
treated like an S-Corp under an LLC and receive a salary and keep your SEP-IRA
among other things.

The obligation to be 1099 is the default case for single-proprietor LLCs but
can be overcome as I described above. It is not necessarily the case for
multiple-member LLCs.

FYI:

I am not a lawyer, but I have done all this before.

~~~
abalashov
_you can elect to be treated like an S-Corp_

Right, that's what an 8832 election I referred to in the original comment is.

------
patio11
This plan conjures an image of accountant given a copy of the PHP manual and
the instruction to write a login form. He may do it the right way... but I'd
be a wee bit scared.

Prior to implementing something like this at your own company, I'd ring your
friendly neighborhood tax accountant and make sure you didn't just create a
taxable event for all employees. Much like writing a login form, I think there
are a lot of very subtle infelicities in implementations which have very
serious consequences.

~~~
dhh
We had the plan vetted by lawyers and accountants. It's a taxable event should
it trigger, but by then you have money to pay the taxes. It's not taxable at
its implementation.

~~~
dcurtis
The bonus would, however, be taxed as income and not as capital gains. That's
kind of a bummer.

~~~
gojomo
Indeed. In a large exit, this could more-than-halve what employees net, moving
the proceeds from a 15-20% long-term capital-gains rate up to a 35-40%
regular-income rate.

~~~
billforsternz
How is 60-65% less than half of 80-85% ?

~~~
gojomo
Yes, I mispoke, and should have said 'more-than-double what they pay in
taxes', rather than talking about the net.

In a max-tax scenario (high-tax state like California, expiration of the Bush
tax cuts in 2013), the bulk of a large exit would be taxed at about 53% if
ordinary income, but only about 33% if long-term capital gains treatment can
be obtained. So they'd be netting about 30% less due to the 'bonus' approach
rather than equity.

(I'm counting medicare tax, which no longer phases out any income, but not
social security, which isn't collected on income over ~$107K.)

------
tptacek
The classic alternative to options/equity is a partner track. That's how huge
law firms and the big 4 accounting firms do it. There are multiple levels in
the partnerships, and the upper levels are often pretty spectacular.

Partner tracks address some of the concerns Fried brings up here. For
instance, they reward current employees and don't create a class of former
employees with a painful claim on forward revenues. They're simpler than
options (you're gunning to "make partner"; you don't need an Excel spreadsheet
to figure out what a win is).

They also have downsides; for instance, the biggest partner tracks are also
all up-or-out systems where competent employees who are assets to the team but
not ambitious enough to make partner are incented to leave.

So the question I have is, why didn't 37signals do that? It's a proven model.
I ask because I'm sure there's a reason, and I'd love to hear it.

~~~
jaredmck
Isn't this fairly onerous to administer? At my previous company, a private
consulting firm, there are some shareholders who are kept around largely
because there is not liquidity available and if you've been around for 25
years, even if much of this was during a period of demographically-driven
economic growth, it's hard to get rid of you as a partner (since you have to
be bought out) no matter how little value you provide. I'm interested to hear
why 37signals didn't go with this model and if they'd ever consider going with
an S or C-corp over the LLC.

~~~
tptacek
I don't know; I've never administered one. But: the scheme I described also
accounts for most small consultancies.

------
Murkin
To clarify: * Employees working now will get nothing if they leave. * The
amount you get is not tied to performance. * Chances of this happening are
slim. * In many cases employees get new stock-option/bonuses at M&A anyway (to
keep them on board).

Sounds like the only good thing from this is: You have something to tell loyal
employees asking you why you won't share with them some of the proceeds they
created you by hard work.

~~~
ry0ohki
That's the main reason I like traditional options/equity, it makes me feel
like I own part of the company (no matter how delusional or small of a share
that may be), so sure I get paid for 40 hours of work, but if I work 60 hours
and don't get overtime, it's not terrible because I'm helping the company I
own part of.

37sigs has implemented essentially a non-performance based bonus (which is
also what they call it), which kind of defeats the point of equity/options at
all in my opinion. An interesting question would be, if 37sigs does take any
more investment in the future, and this pool stays the same, it does seem to
have the advantage of not being diluted?

~~~
fragsworth
The employees want the sale price of the company to be higher so their portion
of the 5% pool will be higher. As far as incentives go, it's not much
different from equity/options.

~~~
bhickey
There are the tax implications. This scheme will be ordinary income and
subject to FICA and income tax rather than being taxed as capital gains. By
being clever they're screwing their employees out of a lot of money. Employees
also can't make an 83(b) election on a bonus.

------
smackfu
It's like anti-profit sharing. The employees own part of the company, but only
for acquisitions and not for profits.

~~~
tptacek
This is like an anti-comment. No part of it makes sense.

The employees _do not_ own part of the company. They're promised a bonus in
the (unlikely) instance of a major liquidity event.

Granting them that bonus in no way injures any other element of their comp.
This is so much the case that Fried says most of his employees have probably
forgotten they even have this bonus. That's not what you say when you're using
a comp scheme as leverage with your employees.

You have no idea what 37signals people make, how profit sharing and incentive
comp work, or why people choose to work there. But you feel just fine snarking
about them because they don't fit into the "first engineering hire gets 5%"
shoot-the-moon mold we normally talk about on HN.

~~~
smackfu
Dude. You totally misunderstood my comment. An actual ownership stake means
you share in both profits and acquisitions. A typical employee profit sharing
means the employees shares in profits but not in an acquisition unless they
also get stock options. In the scheme described, the employees share in
acquisitions but not profit. So it is the anti-profit sharing. Anti- not
meaning bad. Anti- meaning opposite. Maybe not the deepest thing in the world,
but geez, you took it a bit too seriously.

~~~
tptacek
Options or restricted shares --- or even the common stock of publicly traded
companies --- do not automatically entitle the owners to a share of the
profits. Profit sharing and equity are orthogonal issues.

------
drusenko
You're giving away 5% of the pre-tax value, but that only translates to 2.5%
net for those at the receiving end here.

One key distinction with options is that they can be more tax advantageous if
the employee exercises and holds their stock for more than one year,
triggering long term capital gains (LT cap gains may or may not exist in the
future, though).

------
Jach
I don't know... What are some realistic numbers here? Suppose a mere $10m
acquisition, 5% is a mere $500k. Suppose 10 employees, 5 are maxed out, the
other 5 have 4,3,2,1,0 units respectively. The payout range then is $14k to
$71k. Working there for 5+ years, taking home only $71k, which is definitely
nice, while the boss gets at least a few million... I think employees should
be made as happy as possible at acquisition time. I'm not sure this scheme
would accomplish that, but I don't know what realistic numbers would be nor
what competitive options/equity figures would look like.

~~~
metachris
Could be interesting to also apply this scheme to the company's yearly
earnings! That way everybody would get something out of it, and it wouldn't
focus the company so much on an acquisition/IPO.

------
fourk
They're trading the 'unfair' uneven distribution of equity based on position
for one in which people are compensated equally regardless of position. This
twist on the distribution seems like a great way to attract people to fill
those positions that generally come with a less-than-average equity
expectation. However, I'd be willing to guess that there is a negative
correlation between ease of filling a position with a high-quality hire and
the average expected equity amount for that position.

It seems to be a disincentive for those with higher-than-average equity
expectation in that it implies that their contribution to the company is
valued at the same amount proportionally as the lowest-contributing employee
of the company, salary notwithstanding. If you are looking to hire a new CEO
and inform him/her that, in the case of an IPO or acquisition, the new
secretary hired last week will get the same cut of the bonus pool as the
prospective CEO, they might be less inclined to work for you vs a company
that, all else being equal, might offer them a proportionally higher payout.

Edit: Response to reply by jarin:

1) Right, I meant to encompass salary with 'all else being equal' in the last
sentence.

2) The fact that something is currently unlikely doesn't mean that it won't
ever become more likely. I think ChuckMcM's reply addresses this pretty well:
<http://news.ycombinator.com/item?id=2888740>

~~~
jarin
You have to consider two things though:

1) They pay good salaries.

2) They are not seeking an exit strategy, and this is merely a "just in case"
scenario.

I would guess that most technical and executive hires come to the company with
full knowledge that an IPO or sale is against their core values.

------
dkokelley
Personally, I would be more interested in a profit-sharing system. I
understand that actual equity is difficult to do in some situations, but the
1-5 units system could be adapted to offer profit sharing. When the company
makes a profit, the portion designated as a distribution gets divided into the
total units as employee bonuses. I'm not sure how these units are handled once
an employee leaves, but as a guarantee against missing out on a windfall
profit or exit I could see this system being useful.

------
adamtmca
This just seems like the owners are being menschen in trying to ensure
everyone gets a taste if they ever IPO.

Given that this "isn't [used as] an incentive to work at 37signals" I don't
see how it's an _alternative_ to options which exist entirely to incentivize
employees & management.

------
Timothee
I really like the simplicity and overall fairness of the plan.

The only thing I wouldn't like (and it could very well be that way for
technical reasons[1]) is the part where only current employees get a part of
it. I understand the idea behind that but if someone were to do fantastic work
for them for over 5 years and leave 6 months before Jason Fried and DHH change
their mind about selling, that employee might feel stiffed.

Instead, I could see a system where you earn units while you work there and
lose them for the time you don't work with them, at the same or different
rate. Say you earn 1 unit per year worked but lose 2+ per year non-worked.

But, you know what? It's their company, they do it however they want to :) and
considering they have no obligations to put that in place, it's hard to argue.

[1] e.g. maybe it's a pain to pay somebody anything once they're not on the
payroll…

------
pchristensen
I think this is a really smart, fair program that every startup should read,
especially since most companies (even those that want to) don't get sold/IPO
at a huge price that makes tiny options worthwhile.

------
staunch
They say: _"I wouldn't be surprised if many employees have forgotten about it
or don"t even know about it at all."_

Which means it's not by any means _"An alternative to employee options/equity
grants"_.

------
mbyrne
This seems more like an attempt at rationalizing "equity" (in the social
sense) rather than motivating performance, which is fine. I would love to hear
what the document is that guarantees execution of their promise at a sale. And
why not put 5% of shares into a trust for employees per the allocation stated
so they don't face the significantly higher tax rate of ordinary income?
Thanks for sharing your idea.

------
nhangen
I don't know...

I like that you're trying to address the problem, but I think this points to
another problem, which is the core issue of whether you actually care about
your employees' success as much as you do about the company.

On a grand level, no, of course not, but at the micro level, you should.

You want people to stay, even though they're considering moving on to form
something of their own. You want them to feel like they are 37 lifers.

Obviously, you want some to graduate and move on to bigger things too. These
types are also valuable.

All in all, it doesn't feel to me like you care about your employees,
especially when one founder is busy in LA and/or racing around in expensive
cars, and the other is writing posts like this.

If I were an employee and presented with a plan like this, I wouldn't feel the
need to invest in anything more than a paycheck, and while that's great for
many companies, that doesn't seem right for one, like 37 Signals, that once
was cutting edge.

I want something I can sink my teeth into, and feel like I'm going somewhere.
I have a feeling many other HN'ers feel the same. This won't attract people
like that, or get them to stay, but maybe those aren't the type of people you
want?

------
JoeAltmaier
I don't understand how this is any kind of incentive at all. They've declared
they have absolutely no intention of ever making good on it (will never sell
out or go public). They don't even tell new employees about it.

Other than making themselves feel like good benevolent managers, this utterly
fails as an incentive. What's the point?

~~~
techiferous
It's not meant to be an incentive.

~~~
JoeAltmaier
The very title is "An alternative to employee options/equity grants", which
are certainly meant to be incentives!

The thing that makes these completely worthless is, should the company ever
actually have an equity event they are void, as the new owner may do whatever
they please which probably won't include honoring "these spreadsheet scribbles
we put together with no legal weight whatsoever"

~~~
techiferous
In the comments on the original blog post, Jason Fried says:

"Because we’re making the point that this payout should not be expected. You
should not be banking on this. It’s not an incentive to work at 37signals.
It’s purely a bonus."

~~~
JoeAltmaier
A bonus is an incentive. And this one is defined as 1) never going to be paid,
and 2) not legally binding in any case.

The whole idea is doubletalk; that's my point. Its a non-incentive incentive.
Its a non-paying insurance policy.

~~~
techiferous
An incentive is a device to motivate employees. This is not what they are
trying to do. They did not start with the problem, "How can we motivate our
employees?"

Incentive to work better is not the only motivation that an employer may have
to share money with an employee. Generosity is another motivation, for
example.

Only Jason knows his true motivations, but if he says it's not an incentive,
there is nothing inconsistent or logically wrong with that.

~~~
JoeAltmaier
Ok, then if he's so generous, why not quit screwing around and just share
equity? Then, if a loyal employee leaves after 5 years they own something of
what they built. If they get bought out the loyal employees would have some
legal leverage to profit by the buyout.

Instead they have a promise of a bonus they're never going to get (by his own
declaration), and have to start wondering what he's playing around at. Its the
opposite of generosity - "its all mine, but maybe some indefinite share might
go to you if somebody else later feels like it, but I'm going to try hard so
that never happens"

This non-bonus bonus plan seems to be lazy, ineffective and insincere.

------
zach
I can vouch for the agreeableness of this system. I received a bonus from a
similar pool when the company I was working at was sold. It came across to me
and everyone else who received it as a genuine and thoughtful act.

That may have been ameliorated by the fact that there was no expectation
ordinary employees would get anything -- we just found out about this bonus at
the same time we got our "Welcome to [Acquiring Company]" letters. The
founders also had a very generous profit-sharing-equivalent project bonus plan
as well, but as has been mentioned, this is in an industry where bonuses are
more prevalent than equity.

------
alain94040
It seems broken. While the guiding principles are interesting, there's a
reason why stock-option plans have evolved to where they are today: all cases
have been tried, and they are well understood.

One example of problem in Jason's plan: if you go IPO, you immediately owe 5%
payments on the full valuation of your company, to your employees. Where is
this money coming from? The money raised during the IPO? Fine, but how many
shares did you float?

~~~
tptacek
"Broken". They're a 30-odd person web app company in Chicago. They aren't
going public. They're throwing off cash at a rate that allows them to buy
supercars. They're not selling. Why would they? What the fuck good would
"options" do any of their employees? Options don't mean anything unless you go
public or sell the company.

Believe it or not, _most companies_ don't sell or go public. PwC and E&Y seem
to incent employees just fine.

------
TheSkeptic
"We treat this entire idea purely as a bonus in the unlikely even of a future
sale/IPO."

At far too many companies, equity is seen by the employer and employee as a
form of cash-equivalent compensation, even though it isn't unless that equity
has an income stream attached to it (as would be the case in, say, a grant of
restricted stock in a company that pays dividends). So it's somewhat
refreshing to see a high-profile tech company eschewing this.

The problem here is that 37signals' "plan" lacks all substance. The company
doesn't intend to go public or seek acquisition, and its "bonus pool" is
potentially limited to just 5% of any acquisition price.

As such, this "plan" doesn't promote retention the way equity does, and for
all intents and purposes, it doesn't promote much of anything as the savvy
employee will never expect it to bear any fruit.

Put differently, this "plan" feels sort of like an equity version of a poorly-
made Louis V. knock-off. While, to its credit, 37signals' isn't pitching this
as a justification for a less-than-market salary, there's a strong argument to
be made that offering an equity substitute like this is _worse_ than not
offering equity at all.

The better approach for a company like 37signals? Make sure salaries are
highly-competitive, offer an attractive benefits package and, if you want
employees to feel like they have a direct "stake" in the company's success,
implement a profit sharing plan. The benefit of this approach is that you
attract the type of employee who wants to work at a company like yours without
creating any confusion on trying to pretend that you're offering something
that you're not willing to offer.

------
daimyoyo
"And since we have no intention of selling 37signals or going public"

It seems to me to be unfair to create incentives like this without intending
on ever paying them out. I'm glad that they are creating this now instead of
if and or when they are acquired, but I still think equity grants are a more
fair way of handling incentives.

~~~
jasonfried
This is one of the reasons we don't formally discuss or disclose this plan
when hiring people. It's not pitched as an incentive to work at 37signals.
It's a bonus, purely a bonus, if/when something very unlikely happens. We do
not factor this in to the overall compensation package when making people
offers or giving people raises.

~~~
smackfu
Do you think this detailed plan is even worthwhile then, rather than just a
stated commitment to pay out at least 5% of the sales price to employees?

~~~
jasonfried
It's not terribly detailed. It's a few paragraphs long with a couple of pages
of standard legal boilerplate. Employees don't have to sign anything or sign
up for anything. It's better for everyone that it's in writing.

------
dugmartin
I always thought something like this would be the more fair:

    
    
        Employee X share = (Max(0, Business Days Worked Before Sale - Business Days After Leaving Employment) / (Business Days Open Before Sale * Total Number of Employees)) * Total Employee Equity Percentage * Total Equity Amount

------
binh_nguyen
We have this at my company at well. However, I treat it as a piece of paper,
no more no less because the owner of my company has no intention to sale at
all.

------
NHQ
Doesn't that miss the point of giving your employees incentive to work "above
and beyond", to the benefit of the company and all? It's a good thing they
don't tell the employees, cuz what would an employee want with worthless "BIG
IF" points?

------
sanj
Why max at 5?

~~~
jasonfried
So one or two employees that have been with the company for significantly
longer than everyone else don't substantially dilute the pool.

~~~
Timothee
That would make for odd office dynamics where the more senior employees are
driven to quit by the less senior ones…

------
borism
Wow, gives employees all the impression of co-ownership but none of the real
co-ownership.

Much like the Skype-SilverLake plan.

37signals sure has some good lawyers!

