OK, so you have spent the last few months
locked up in the garage with your friend and you have hacked out something you
feel has real value. In order to hit the
market window, you need to accelerate the deployment of some new features and also
need some cash to pay for the ballooning hosting cost (because of all the new
users of course!). In summary, you need some
money and more hands on deck. The
revenue model is not all figures out yet, so no cash-flow to speak of. You realize that you’ll have to give up some
of our company to get the resources you need so you consider your options… You can sell some of it to investors and/or give
share options to developers prepared to sacrifice salary for a future
payday (surely they cannot get shares and get paid a full salary?).
Negotiations ensue… Everybody is pushing to
get a bigger share. There is an
especially big disconnect between the external investor and the developers on who deserves
the better deal. The external investor believes he is due a big share because he is forking out real money and developers are
just heads that should be paid. The
developers maintain that their effort will make or break the venture so they
should be handed a big incentive to make it succeed.
The above example might be an over
simplification, but the issue I want to raise is the age old one of whether the
money or the kilojoules are more important to a new venture. In the spirit of openness is there not perhaps
a way to transparently allow all parties to invest in the company in a
open and, dear I say it, fair manner?
Can we not create an “open source” business funding model which everyone
can understand, requires minimal “consultant” overhead and free people up to
rather focus on making the whole thing a success?
I have been playing around with a few ideas
for fun and I am quite interested to hear your opinions.
Bear with me for a minute and let’s use an
analogy to illustrate the point. Let’s
say a company is like a machine printing money for its owners. In the beginning the owners had to spend
money(resources) to get the machine built.
They paid a designer to draw up plans and a mechanic to put it together.
When the machine was completed, they hired an operator to maintain the machine and
they started to, well, print money. The fact that it was a particularly
talented designer who designed a particularly efficient machine, which makes
them particularly rich, does not escape the owners, but they are quick to
attribute this to the fact that they know how to choose a good designer, and that
they did agree on the design cost upfront. The designer, however, now says that
he should receive additional compensation for his contribution to their success.
Guess what happens…
Lets take it a bit further. Lets say the owners initially had enough
money to pay the mechanic and the operator, but not the designer. They can get another investor on board(becoming
a new co-owner) to provide the money in exchange for a share stake in the
business; or they can offer that same stake to the designer if he would be
prepared to do the design for free. It
should make no difference whether the new co-owner is an outsider or the
designer. The investment is the same,
the ownership stake should be the same. Right?
Now back to real life. Can we not cut through all this noise by
making a $1 employee salary sacrifice worth the same stake in the organization
as a $1 external investment? Any resource an organization needs should be
valued the same. Whether it is $1 cash,
$1 development time or $1 management time. At any point in time the owners of
an organization should be able to say, “Right, we need $50k to pay for an expansion
to the data center. 5k shares will be issued for this investment.” Now an
external investor can go for it, or half a dozen guys can offer to forfeit
their salary for next month. Your stake
in the organization is proportional to the sacrifice or the investment
you make.
This makes it public knowledge that the
company currently values its shares at $10.
It is up to you to decide whether this is a good offer or not. Would be great fun to design an intranet app
to show the current investment price!
The price might also be determined by reverse-auction so everyone gets a
fair chance to invest and the company gets the best deal they can.
I am interested to hear your thoughts on
this. As an investor, would you invest
in a company like this? As an employee
would you work for a company like this?
Some further thoughts
- It can obviously only be for issuing new shares since insider trading laws will prevent the exchange of already issued shares in this manner
- Nobody can ever complain that they are not sharing in the company’s success in the proportion that they are contributing. Everyone provides a service, having a value on the open market. The extent to which you share in the upside is equivalent to the extent you were prepared to risk the downside.
- Some people are more risk averse than others. This allows every employee to decide the level of exposure they want
- A company could mandate a minimum sacrifice from every employee to make sure everyone is hungry to succeed.
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