I’ve spoken several times, most recently at SXSW, Silicon Valley comes to Lisbon, and our Portland Future of Work event, about the unique process we pioneered at Second Life to allocate bonuses by entrusting every employee with an equal amount of money to give out to everyone else in whatever manner they thought best rewarded contributions. The process happened quarterly, gave each person an equal amount to distribute regardless of role or level, and used a special auditing system to allow anonymous giving while limiting the risk of bad behavior as the company grew larger. This was an effective approach which was accurate in identifying high performers at all levels in the company, and also (as you might imagine) an empowering and well-liked part of our culture.
In building Coffee & Power, we were emboldened by the experience at Second Life and wanted to extend this model to the distributed team working on C&P worldwide, including giving out stock options in the company. The Worklist.net service has allowed C&P to be built by a global group of part-time contributors with a wide variety of experience levels and contribution. We felt that these team members deserved stock options as much as did our smaller core team in San Francisco, and so we designed a system very similar to the one we used for cash bonuses at Linden Lab. We think our approach is at least ‘good enough to criticize’ as a model for the increasingly decentralized startups out there. Here is what we are doing:
Each quarter, allocate fully-vested stock options to all contributors to C&P, using two simple rules:
- First, allocate 50% of these shares to all team members and contributors as a function of their total earnings (regular salaries, contracts, and payments made for jobs bid on worklist.net). Inotherwards every dollar of earnings, whether as a FT employee or casual remote contributor, is worth the same number of stock options. Everyone above a minimal earning threshold (chosen simply to keep paperwork and number of options holders reasonably manageable) is eligible.
- Second, entrust this same set of people to each give out an equal number of the remaining stock options to each other, in whatever manner they see fit. This process is quick (everyone gets two days to allocate their shares, no talking to others) and anonymous – your peers do not find out what you gave them.
By comparison, the typical process of allocating employee stock involves estimating up-front a FT employee’s likely contribution to the company (gleaned from their resume and the interview process), and putting a fixed number of stock options into their offer letter which vest over their first few years of employment. This process seems less than ideal: Part-time, contract, or smaller contributors to a project are left out in the stock allocation process, though they may have greatly helped the company succeed. The process of guessing at value contribution up-front is often inaccurate, time consuming, and fractious. People who later step up and make huge unexpected contribution are usually not recognized. And unless you are fortunate enough to be among the first few employees (given the natural and well-documented irrational human optimism about the founding team’s ability to quickly build something great), you are likely to be under-compensated by this process.
By comparison, our approach seems both better in general and supportive of decentralized teams: Giving out fully vested options quarterly as measured by your past performance in the collective assessment of your peers creates an environment in which you actually need to do great ongoing work to receive large amounts of equity. Everyone is accountable to everyone, not just to management, creating a higher amount of internal communication and transparency, which is broadly recognized to improve results. Managers are able to spend more time on planning and decision making and less time on offer letters and performance reviews. And, perhaps most importantly, this creates a model is which a highly distributed team with different levels of FT/PT contributions can be given equity in the company.
It is important to note, and perhaps less obvious until you experience it, that the greatest benefit to such an approach is not in the accuracy of individual stock option allocations, but in the tremendous positive impact on the culture when a management team is willing to entrust the entire company to evaluate performance and ultimately shape the fate of the firm through the distribution of stock options.
I’d love to see other companies try something similar, and hear about their experience! I’d also be happy to lend a hand to anyone with questions about implementing the process.