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.
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?
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.
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.
Equity encourages employees to build long-term value even if they plan on leaving the company, and act favorably to the company after leaving. A buyout lottery for current employees hurts morale and encourages people to hang on to the job for the sake of hanging on (and royally screws them tax wise).
Mainly this is an argument against ever using an LLC for a long-lived business. LLCs should be reserved for personal shell companies and companies that will be wound down at a fixed time. If this had been an S corp or C corp, they could have simply adapted an off the shelf stock option agreement.
Salary comes from the proceeds created by the employees' work. If the employees don't feel they're receiving enough of the proceeds, they can search for other employment. It's not like the high-value employees at 37signals would have much trouble getting hired elsewhere.
In software circles much of the salary comes from profits from the capital assets the employees create. This is why more mature software companies are able to pay much more than new software companies.
If you compare to an industry like fast food where the goods created by labour are not capital in nature you'll see mature operations and new operations paying roughly the same. It doesn't matter whether you work at Bob's Burgers or Mc Donald's you're making min wage.
First: what "capital assets" are you referring to?
Second: never mind, what's your point? If most of the value in the company comes from employees and not the execution of the owners, the company pays more salary. If they don't, the employees leave. So, in what way is this responsive?
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.