Context

This is the fallback plan we executed in 2023, as Stock options are not implemented. This is kept as simple as possible.

Why

Same as Why

Characteristics

1. Payment schedule

• Amounts are calculated every 12 months at the end of the fiscal year, which is also the calendar year for us, so at the end of December.
• The bonuses are added to January’s pay. So the amounts are transferred around the end of January / early February.

2. Base Amount

• A % of the net profit is allocated to the profit sharing. It forms the “Base Amount”.
• The % allocated is between 8% and 15% during “growth mode”. This is based on the strategic use of the cash for the given semester/year. Effectively, the more likely we might need the cash to invest in future revenue, the lower the % will be.
• If we ever reach a point where we have so much $ we don’t know how to spend it. It could make sense to go as high as 50%, like ConverKit and Gumroad. However, today, we have so many different areas we can invest in to grow revenue. The long-term target is to be able to make this bonus hit 10–20% of annual comps. At this level, profit sharing becomes a real perk.

3. Formula

• The distribution between people is a factor of:

  • Base salary. Why? To be proportional. This would match the recommended approach in https://www.indexventures.com/rewardingtalent/option-grants-at-seed for stock options.

  • Tenure. Why? In our line of business, the length of the tenure is important, as product iteration cycles are in the order of ~1-2 years.

  • Ratio. It’s used to modulate the base salary to match the presence throughout the year.

  • The exact formula used so far was:

    =   3/4 * (50% tenure + 50% base salary) * ratio
      + 1/4 * tenure * base salary * ratio
    

• Tenure.

  • This is the time from the start date to the 31st of the year of the profit sharing.
  • There is a cap at 7 years. Why? It assumes that the knowledge acquired 7 years ago brings little value now.

• Ratio.

  • The initial value is 1.0.
  • People who were on a ‣ during the previous year are only eligible to 50% of what they would receive without.
  • The amount is less advantageous for non-full-time employees. The decreasing factor applied is: In this spirit, we apply the following function (exp(3x-3)) to determine the stock option package based on the FTE ratio.. It’s for the same reason as why Non-full-time employees: we are in a winner-takes-it-all market.

4. Pool

• The distribution of the Base Amount is structured as a pool. We start by adding everyone, and then use exclusion rules:
• Exclusion rules:
  • People join the pool after a 5-month cliff. The cliff is aimed to keep it fairer for the contribution made in that time frame and help in case of mis-hires. Conceptually, we want a 1-year cliff, and since profit sharing is done once a year, this should be an OK-ish approximation.
  • Commissioned roles are not included in the pool, e.g., sales. They already get a % of the revenue.
  • People working strictly less than 0.5 FTE (full-time equivalent) are not included in the pool. It’s unlikely to differentiate the business without more time involvement; we can’t move as fast as the competitors.
  • People on general leave (not paternity leave).
  • People who are not employed on the 31st of December are not included in the pool. But sometimes exceptions are made.

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