Employees can still benefit from a sale or liquidity event without offering equity or options. Here’s how we do it.
A few years ago at one of our semi-annual Basecamp company meetups, the topic of options/equity came up. Since we don’t offer equity or options, people wanted to know how they could benefit on the upside if we ever sold the company.
So David and I started thinking about it. We consulted some other business owners, Jeff Bezos (who owns a small piece of our company), and 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. The complexity was both psychological (social company dynamics + anxiety of variable value) and economic (options/equity doesn’t really mesh well with an LLC corporate structure). And since we have no intention of selling Basecamp or going public — the two scenarios where options/equity really make sense — equity just didn’t seem like the right fit.
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.
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 shouldn’t be a day-to-day thing, or create daily habits — like the ritual of checking stock prices.
- 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.
- It should reward loyalty. The longer you’ve been here the more you would participate in the upside.
- 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.
- We didn’t want to discriminate by position. Every employee, no matter the position, participates in the same way.
There were other considerations as well, but those were the key things we kept in mind as we developed the program.
Here’s what we came up with in the event of a sale or IPO:
- At least 5% of the ultimate sale price (or, in the case of an IPO, the fair market value of the capital stock) would be set aside for an employee bonus pool.
- Each current employee will be credited with one unit for every full year they’ve worked at Basecamp, starting after the first full year. The maximum amount of units one person could earn would be five units. So if you worked at Basecamp for two years you’d get two units. Three-and-a-half years, three units. Four years, four units. Five years, five units. Seven years, five units. Etc.
- 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.
We’re pretty happy with how this turned out. We think it’s a simple, clear, and fair system. And it’s a great alternative to the organizational complexity of option grants, acceleration, strike prices, conversion into shares, private markets vs. public markets, dilution by outside parties, partial vesting, etc.
One other thing: We treat this entire idea purely as a bonus in the unlikely event of a future sale/IPO. We don’t even discuss it with new hires. It’s not part of the overall compensation package (we don’t pay a smaller salary and try to make it up for it with this program). I wouldn’t be surprised if many employees have forgotten about it or don’t even know about it at all.
Since we implemented the program about 5 years ago or so, we’ve sorta kinda used it once. Back in July 2012 we sold Sortfolio, a web designer directory we launched a few years prior. The selling price was $480,000. But rather than distributing just 5% of that sale, we ended up giving 100% of the proceeds to our employees.
We haven’t sold any businesses since then, so we haven’t had to revisit the plan.