Why and how we share profit

Hugh Francis
Jul 9, 2018 · 7 min read

Update — in 2018 we doubled our profit share pool to $50,996!

Last year, Sanctuary Computer shared $26,309 amongst our five team members!

It was our first year of profit sharing, and I was really proud that we were able to make it happen. When I first started the studio, and off the back of 10 months as a freelancer, I was buzzing with excitement after seeing my own micro-decisions & business creativity play out — it was energizing!

The inverse is true of a salary position — regardless of whether you do an “OK” job, or a brilliant job, you’re still paid the same amount, and you’ve gotta hope someone notices (or leverage another job offer) just to increase your rate of pay.

Without any incentive to solve problems creatively, you’re more likely to get bored, and wait out the clock to go home and work on that side project that actually might mean something.

1. Why we Share Profit

In an agency style business, our accumulated assets are a bunch of desks & monitors in a room. We’re not building inventory, or paying subscribers, and most of the IP we build ends up owned by our clients.

It’s kinda rare that businesses like ours are actually sold — so equity in a business like ours can feel more like a token of appreciation than anything.

Profit Share is more valuable than Equity (for Agencies)

The real value we are building, however, on a day to day basis, is a collective ability to generate profit on an ever-growing scale. Every line of code we write, and every convention our team shares builds more efficiency & capacity to create profit.

Every high quality project we release, and every new market that we innovate in makes us more and more sought after across the board: our income and economics are becoming more of a stable machine each day we work together.

We call this mindshare, and it’s our most valuable asset.

Team Mindshare by Breadth (Time @ Sanctu) and Depth (Seniority) of Experience

Through this mindshare, we can quickly train new developers to think as we do, and easily introduce new and sharper tools to our team to continue evolving and moving faster and better. These innovations lead to stronger outputs, a better reputation and ultimately increasingly reliable income across the board.

For that reason — we don’t offer equity at Sanctuary Computer. Instead, we offer something more real: a generous, vesting share in our bottom line — the direct product of that mindshare we’re working so hard to create.

Profit Share value (Green) vs “Agency Equity” value (Pink)

2. How we Share Profit

Founder Participation by Design

It’s important to note that this plan was designed with my equal participation as a key design choice.

By using this mechanism as the (only) way I can draw from company profit, it forces a platform that is egalitarian, transparent and generous for everyone involved. That’s important, and rare in the USA.

Vesting Profit Share Units (PSU)

The effect someone has had on our collective mindshare is more or less proportional to the time they’ve been at the company.

For that reason, at Sanctuary Computer, every permanent employee earns a single Profit Share Unit (or PSU) per month, backdated from the day they started (capped at 48, or 4 years). Our distributions happen in December, so to not leave anyone out, we count these units in months (rather than a traditional yearly vesting schedule).

Normalized by Studio Effectivity

In order to best judge whether we should be using our profits to reinvest in the business, we filter our profit share pool through a scale based on an algorithmic metric we’ve developed, called Studio Effectivity.

Put simply, it’s a number between 0 & 1, based on how much money we brought into the company that year, divided by the cost to do the work (COGS).

We use our Profit & Loss statement (which we open source each year) as the source for these numbers. Our goal is to achieve a studio effectivity quotient as close to 1.0 as possible.

Anything under 0.3 is considered poor performance, and in that case, the majority of profit is used as a reinvestment.

A studio effectivity of 1.0 is achievable if around 75% of the year is billable, with an allowance for one non-billable person (producer) for every 3 developers.

Payroll Buffer & Studio Allowances (Plus Tax!)

Of course — we can’t simply distribute our entire bank account at the end of the year, or we wouldn’t make payroll on New Years Day.

As such, our profit share pool is allotted after we’ve put aside money for making a couple months of payroll in the new year, and ideally pre-paid 2–3 months of studio rent upfront (the actual grace period is based on contracts signed ahead of time).

Profit Overflows & Reinvestment

For a particularly great year, we’ll earmark some cash for reinvestment (through that same algorithm).

Reinvestment can mean a new hire, some nice office upgrades, or a few weeks put aside to work on an internal project.

The same is true of year that results in a low studio effectivity. As we’ll be multiplying our profit share pool with a low effectivity quotient, only a small portion will be distributed, leaving us with some spare change to spend on the business, and hopefully solve the problems that led to low effectivity in the first place.

Money set aside for the following year

What’s the highest possible Profit Share?

In the case that studio is achieving an effectivity of 0.9–1.0, and a person has been at Sanctuary Computer for 4 years (they’ve vested 48 PSU), they will receive $43,200 — $48,000 in profit.

The maximum possible profit share per person is $48,000 USD.

Profit is distributed in December

The most logical time to distribute large wads of profit is right before the end of the financial year — you’re vastly lowering your tax hit in the new year, and giving everyone some holiday spending money!

Salary Cap & Pay Scale

In order to provide a generous profit share program, we need to make some trade-offs. At Sanctuary — that tradeoff is instituting a Salary Cap across the company, that is generally considered slightly lower than market value for a senior developer.

By placing an upper tier on how much a resource may be paid, we are able to dramatically lower the overall risk of our business, and create a pay scale based on seniority & experience that can still compete with the venture backed companies.

Without Profit Share, the business takes on more risk, and the team member take on less (with less reward).

PS — It’s not for everyone

Of course, our profit share scheme requires a heavy helping of faith. There’s a variety of things that might go wrong during a year; negatively effecting profit margins.

With only a single year of Profit Share under our belt, we don’t exactly have a long track record of consistently doing better and better, so while profit share (and it’s effect on our payscale) plays a big role in our conversations when bringing a new person onto the team, it can often make for a harder sell.

A better balance

If you’re someone who simply wants a steady, predictable salary, then Sanctuary Computer mostly likely isn’t a great fit for you.

However — if you’re a creative person who enjoys seeing the effect of micro decisions & small technical wins play out in your bottom line, and love working with others to create real success, that’s a different story!

A position with our team means a serious share in the year to year growth that we build, with all of the niceties (healthcare, reliable income, 401k & other benefits) of a salary role.

We designed our company as a haven for the entrepreneurial creatives we all are and I’m surprised more companies like ours don’t exist.

Got questions? Leave a comment or tweet at me (@_hhff) and I’ll add a response here.

Biz

Let’s keep chatting!

Wanna talk more?

Please reach out at hugh@sanctuary.computer / isabel@sanctuary.computer — we’re friendly and open and would love to chat in greater detail on some of the specifics here.

Ultimately, we believe that large, full service agencies are becoming less appealing to clients out there, and instead, we’re hoping to encourage a world where nimble, specialist companies work together to carefully create intimate & unique work for clients, at realistic prices.

So get in touch! We’re always down for a margarita @ forgtmenot!

Sanctuary Computer Inc

The Safest Place on Earth.

Hugh Francis

Written by

The internet. @_hhff on twitter

Sanctuary Computer Inc

The Safest Place on Earth.

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