When startups grow into unicorns, the distribution of employee earnings follows a common pattern: the founders make more money than they could spend in infinite lifetimes, a handful of early folks achieve financial independence, and everyone else gets a nice bonus, but nothing life changing. This definitely happened at Groupon — and by the time it was happening, it was too late to fix. I thought about a large equity grant to significantly redistribute employee ownership — good luck getting any board excited about that one. I even tried giving some of my own equity to a few dozen high-impact employees, but the tax impact made it a foolish form of compensation.
In the statistically unlikely chance that Detour is extraordinarily successful, I’d like to maximize the number of employees that achieve financial independence, and minimize the number of newly-minted dynasties. To do this, we invented a new kind of equity program that we are calling Progressive Equity (“progressive” as in progressive tax).
Here’s how it works. First, your company has to set an amount of money that you think equals financial independence. Giving our specific number seems gauche, and since I keep things polite on this blog, let’s use a fake currency and value: financial independence = 50 megadonks.
Now say your company becomes super successful — say you exit at 1,000 megadonks.
Let’s say you’re the founder and you own about 50% — in a normal company, you’d get 500 megadonks. But under the Progressive Equity program, everything above the financial independence threshold gets “taxed” at 50% — you keep half, and the other half is redistributed back to employees, pro rata. So in our example, you’d get the first 50 megadonks outright and half of the other 450, for a total of 275 megadonks, and the other 225 would be redistributed to employees. So if you had 225 employees, on average each would get a megadonk. The cool thing about this is that employee percent ownership increases as the value of the company increases — natural incentive alignment.
It’s a simple idea, but as far as we know, no one has done it. We spent a lot of time with lawyers on the paperwork, which I’m posting for anyone to use. I’m sharing in hopes that you will use and improve upon it.
Equity distribution is a big hairball, and this system doesn’t fix everything, but it’s a step forward. Most importantly, I haven’t met an employee who doesn’t love it. If you have questions, ask me on Hacker News — I’ll keep an updated FAQ at the bottom of this post. Let me know if you give it a try!
Progressive Equity Program FAQ
What are the actual mechanics of how it works?
The employee equity pool is divided into two equal pieces — a normal RSU pool and a “Progressive” RSU pool. Employee grants are equal portions from each pool. The value of an employee’s Progressive RSUs cap out at 50% of the financial independence number — so they basically stop appreciating while the other 50% of normal RSUs continue to appreciate, creating the same effect of a 50% tax.
There’s a third “Kicker Pool” for the redistribution that starts at nothing and is fed as employees cross over the financial independence number.
Does the program apply to investors?
No — it’s designed so investors remain unaffected, but you’re welcome to try and get them to opt-in.
How does the redistribution actually happen?
It’s a one-time event triggered by a large secondary, sale, or IPO. After that event, the whole progressive equity thing goes away and you go back to a more typical equity grant process.
Can employees opt out?
No. But for what it’s worth, in our experience, no one wants to. The financial independence number is high enough that only awful people that you shouldn’t hire anyway would be concerned about being taxed above it. And the vast majority of employees will only benefit from it — most likely, it will only reduce the worth of the founders.
What if an employee leaves before the redistribution happens?Then they don’t participate in the redistribution / kicker pool.
Originally published at blog.detour.com on April 7, 2015.