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37Signals' alternative option  

Not all companies that you'd think of as tech startups needs to distribute shares or options to their employees:

The complexity was both psychological (company dynamics) and economic (options/equity doesn’t really mesh well with an LLC corporate structure). 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.

It's easy to come up with elaborate alternate schemes to avoid giving equity to employees, so it's good to see that 37Signals came up with a relatively straightforward scheme:

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 37signals, starting after the first full year. The maximum amount of units one person could earn would be five units. > - So if you worked at 37signals 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.

The only point I'll add is that if you decide that your business is not one which grants equity to employees (which is absolutely fine), you should be consistent. I know of at least one fairly high-profile business which takes the "we don't give employees shares/options" but then do give them out in secret to some key employees. That's just wrong.

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