Equity grant stock options
Noisea publication about the web by Basecamp since So David and I started thinking about it. We consulted some other business owners, Jeff Bezos our sole investorand our accountants and lawyers. We wanted to get a pretty full picture of the implications of an equity program. The more people we talked to, the more complex it started to sound. However, we were determined to come up with another way so everyone could participate in the unlikely event of a sale or IPO. You never know, so we wanted to have a system in place just in case. There were other considerations as well, but those were the key things we kept in mind as we developed the program. I love the simplicity of this. I think it achieves much of the same value ie, rewarding employees too if a sale happens without the craziness of options and equity. That being said, I grant this option works for and attracts a certain type of person. Interesting idea Jason, but I always thought that the idea of offering options and equity was a great motivator to get employees emotionally invested in the company. The complexity is difficult to grasp and administer. Did you guys explore anything related to revenue sharing or was that simply off the table? Lets see if I got this right — a person works for 37signals for 10 years, leaves the company and you sell it the next day? Why cap it at 5 years? Because if you have a couple employees that have been around for a long time, it would massively dilute everyone else. It is really simple and clear. Thanks for the transparency here on your company politics but what are you guys so adamant about selling a company? I know in your options book you quote Ian MacKaye great BTW when he says in effect -if you have a bakery and you love baking, than keep doing what your doing instead of building the business up and selling it. I like the part about most employees probably forgetting about it. You should not be banking on this. You should work at 37signals because you like the work, you like your co-workers, you like the company, you like the customers, you like the environment, and you like what we stand for as a company. There are plenty of tech companies that have a very clear goal of selling. But this depends on how much equity is already distributed to the core people who were around in the earlier days. Your solution is really similar to another one I like: You definitely get more control over limiting things like total payouts and bonus on acquisition with your current plan. I felt appreciated and taken care of and I worked harder to make great things there than anywhere else. When the company was dissolved due to bad management, I felt as twice as betrayed. Mostly because I was lied to on many occasions and I was in an executive position. While my exposure is unique, I think it promotes a certain psychology. This type of incentive gets everyone to feel like a 15 year old girl who loves their boyfriend. When they are in love everything is write in the world and the fairy unicorn rainbows can be seen on every corner; however, if anything goes wrong, we are crushed. Not saying this will ever happen at 37signals, just stating how vulnerable this can make employees. One big downside for employees with grant program is that whatever bonus they get would be taxed as income rather than capital gains. As you said, this would only happen in the unlikely event of a sale or IPO. Do you set aside a certain amount of profits each year to be given back to the team or do you kind of just play it by ear? David, Jeff Bezos, and I do not have any units from the employee pool. We do not dilute the pool. There are equally simple restricted equity programs that provide major tax benefits over this, without providing equity to former employees, and while still being simple. We have a similar scheme at work but have done it the complex way for tax reasons. My point being the complexity is worth it to increase the value to our employees. Pippa F Anonymous Coward is a reference to the Slashdot comment threads or possibly something else. The bonus would only kick in after 1 year. The change was prompted by the employees not me and as I am not part of the bonus pot, being the director, I though it was rather fair. The difference is our bonuses are paid out each quarter. Where as for 37s I guess this is a safety blanket for employees should the unthinkable happen. I missread the word seniority. I read seniority as being someone in a commanding position i. Do you not feel that you would need to reward the higher echelons of your staff more as they have more experience and risk? I am a lowly 2 year producer at my company, but I still thought rank would account for something? I would imagine a person company the units would be worth too much. I like the simplicity but I would possibly add a further layer which would be top level managers get 3 extra points, senior workers get 2 points, normal workers 1 point and interns 0 points? You would only be granted any of these extra points if you had worked for at least 1 year in the company- what do you think? So a customer support staff member with 5 years experience gets the same amount as a senior developer with 8 years stock the company. This seems like an awful lot of planning ahead. Why not wait until a sale or IPO is on the table and work out a way to allow current employees to participate at that time? This is a really thoughtful approach. On the surface, it seems to favor tenure over performance, in terms of who it rewards. Do you think this is a concern? Or, do you have other ways of addressing the performance issue. Can you hear yourselves? Not yet, let us think about it. From them to their employees for free. This is a somewhat amateur scheme that you guys would end equity changing if and when a liquidity event did occur. Another aspect of having shares is receiving a dividend when the company does well. Not sure how common that is. Plus their non-voting shares so you do not have to have board meetings, etc. Well, that is way too complicated and I believe it is sticky. But, at least we did something. This encouraged all people to work together regardless of their role. Under your current scheme they get an equal share of the money. How about a developer working with you for 20 years? If you want to be generous and do right by your employees, then just implement your bonus program as a surprise if you ever sell. I agree with Ian. Why did you guys choose to go with default convention in this case when most of what you guys do is reasoned? Comps are a lazy way to make important decisions. The reason I posted this now was because I recently read a post by Jessica Mah about how her company pays people less salary in the short term in exchange for equity in the long term. I had some spare time this weekend so I wrote it up. What a great post! If I were a 37Signals employee, I would be grateful for this program because I am not expecting it. The management is already doing a fantastic job of creating a company where things that should matter actually matter. And top of all that, you give me some equity?? What a great present! I hope you should feel that way too. So the discussion came up. No equity, in this sense. When it is paid out it sounds like it will be treated as income thus attracting the highest rate of tax. I personally think there are better schemes eg an exit ratchet based on value above a threshold which means that employees are focused on building a very valuable business whether or not you sell it or not. I find this message confusing. Now the message is obscured and I am unclear on what you stand for. Is this stemming out of employee pressure to get an equity stake? Guilt from wanting to retain specific employees? What would be the consequences of making other employees partners or having a bonus scheme based on profits? It was said many times above. A bonus on exit. Cash bonuses are always treated as ordinary income. Did you consider awarding based on the number of quarters? You might get some resentful employees who work 2 years and days only getting 2 years worth of benefit. Great plan, clear and straight forward… Sure enough there is some people who would like more, but hey, this is a bonus a gift, not part of options salary…. How exactly are you planning to implement this? Jason, sorry, I like your products and most of what you guys do at 37signals, but this system is stupid. Option grants are common in tech because they let non-founding employees participate in the upside of a firm on the event of a liquidity event. Cash bonuses would be vastly simpler, they could reward profitability just like option grants, and are used across many other industries finance, retail, etc. Out of curiosity, have you added it to your employment contracts or it more just an unofficial plan you guys have in place? Jason co-founded Basecamp back in He also co-authored REWORKthe New York Times bestselling book on running a "right-sized" business. Can he do anything on his own? Meet the writers of Signal v. Subscribe to our RSS. Some of the considerations included: It needs to be simple to administer. The closer we could get to zero administration, the better. It should be easy to understand and explain. It should grant current employees. It should reward seniority. The plan would be consistent from day one until the last day. Some companies grant lots of options in the early days and then barely trickle them out later. We wanted the same opportunity for all new employees forever. Every employee, no matter the position, participates in the same way. The maximum amount of units one person could earn would be five units. Three-and-a-half years, three units. Stock years, four units. Five years, five units. Seven years, five units. We would divide the total employee bonus pool dollar amount by the total number of units held by all employees. This would determine the unit value. Each person would receive the unit value multiplied by their units. Jason Fried wrote this on Aug 15 There are 68 comments. Tim Jahn on 15 Aug Which is good for you. James Gibson on 15 Aug Do you guys also offer some type of profit sharing program with similar guidelines? Seth on 15 Aug Greg on 15 Aug Anonymous Coward on 15 Aug JF on 15 Aug Tadas on 15 Aug Gary on 15 Aug Chris Gillis on 15 Aug Alex Humphrey on 15 Aug That is a really interesting idea. Especially for an LLP. Ryan Walker on 15 Aug options Theodore Nordsieck on 15 Aug Leeheb on 15 Aug James Heathway on 15 Aug Hi Jason, Thanks for the write up. Does your bonus plan include the founders, you and David, both receiving 5 units? Drew Volpe on 15 Aug Clay S on 15 Aug David Ulevitch on 15 Aug Gary Bury on 15 Aug Michael on 15 Equity Good job to you and everyone else who worked on it. Just Wondering on 15 Aug Are you currently hiring other than the filmmaker position? Ben Kinnaird on 15 Aug Tom K on 15 Aug I leave the company I get nothing. Scott on 15 Aug Is intended as an incentive? A measure of goodwill? Rahul Pathak on 15 Aug Nick on 15 Aug John on 16 Aug I think you guys would find a way to throw some cash his way. David Q Hogan on 16 Aug Anonymous Coward on 16 Aug For private companies in the tech world? Rahul Pathak on 16 Aug Steven on 16 Aug Did you ever explore profits interest? As an LLC you enable employees to profit if or when the company is sold. GeeUWonder on 16 Aug Wow that stock like a really sweet deal to me. Sara on 16 Aug Jimmy Chan on 16 Aug Income, profit, future-plans, company size, etc Very flexible I think. Henri on 16 Aug Sasha on 16 Aug An elegant solution to a complex problem. JF on 16 Aug SweetPea on 16 Aug Judging by the responses here, you may have to come up with a better plan: Ian on 16 Aug Scott on 16 Aug As usual, the actual answer is much simpler: So there you have it. Robert on 16 Aug Abhishek Desai on 17 Aug Joel Spolsky does it this way at FogCreek http: It will really help companies like me to develop a system which is fair and simple. Ian Smith on 17 Aug Not sure what objective this structure achieves. Capping the number of units also seems a little strange. But I absolutely applaud the innovation. Jeremy B on 17 Aug Anonymous Coward on 17 Aug Eric on 18 Aug Other than that, excellent plan! LONG on 19 Aug This plan really well yet. I still do not understand the deep. Trabajos Medio Tiempo on 19 Aug Brann on 21 Aug David on 21 Aug Gordon McLachlan on 21 Aug This discussion is closed. About Jason Fried Jason co-founded Basecamp back in Start with our best hits: Catch up on our latest posts: Basecamp HQ Mural Chocoholic Anonymous Building Basecamp 3:
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