The definition of startups is getting broader, and as founder-friendly VCs are getting born, it might be time to think beyond equity.
Equity is loved and hated. For most startups, it is a substantial part of the compensation program and it's a form of compensation that has made many early stage employees rich before.
With about 90% of startups failing, it can also be one of the most worthless / riskiest forms of compensation, so not everyone is open for it.
Even more than that, as the definition of startup is getting broader, there are multiple reasons why a startup might not want to give away equity.
- There is no exit in sight, so the equity can't be sold (or at least not easily)
- The company is cautious when it comes to funding and growth, so equity isn't worth a lot
- The founders prefer to own all/most equity in their own business
- It's not possible or difficult due to the company structure (e.g. remote company in the US)
Not only that, but giving equity in a successful business is also not a reward for loyalty or important work - it's a reward for risk takers and people who can afford it. So employee #3, a student straight out of college, might not see any reward at an exit vs. employee #345 who is living off savings just got another payout.
More and more companies are therefore looking into profit sharing as a way to reward loyalty and growth. Some of my favourite companies, such as Basecamp and Buffer, recently announced their Profit sharing programs.
Profit sharing is an amazing way to reward employees:
- It puts some cash in your hand every year vs. possibly once every 10 years.
- It rewards productive work and loyalty vs. risk taking and luck
- It isn't coupled with ownership
But what if there is an exit? Profit sharing can also include that, e.g. in form of a percentage of the company that is distributed amongst all employees based on loyalty. Loyalty gets rewarded, employees are happy, founders are happy (because they get to keep a larger part of their own company!)
Sharing is caring! And I'm super excited that these new ways of rewarding employee loyalty exist!