I'm looking for a way to structure a new business such that each contributor shares proportionally

[GreatGazoo]

to their input. I'm thinking this is maybe some kind of scoring system where each contribution -- hourly labor, loans and investments, key skills, and one-off tasks/projects -- gets scored and then the total score is divided by an individual's total score to get that person's share of the company, voting and equity. The overall total is going to keep rising which makes each person's share dynamic.

Kind of like crowd sourcing with a paycheck or equity in return for your investment of time, money and passion.

Is there something like this? a model I can look at?

I have been in start-ups and non-profits that get stagnated or where early investors wind up very diluted. I am very interested in a crowd model that encourages and allows people to have a direct daily stake in the success of the company. And where each person's talents and skills can be rewarded fairly.

(btw, is there a better forum or group for this kind of question?)

[SheilaT]

1. The closest thing to that that I know of

would be a baby-sitting co-op. They can be mind-boggling complex.

[KamaAina]

2. Some $iliValley startups are looking into similar schemes.

There are no managers at these firms. Not sure how they're handling compensation, though.

[GreatGazoo]

5. I found some of the 'flat structure' firms, Valve seems to be the most visible

and some of that fits but some Valve veterans say it doesn't scale. I'm thinking more about the compensation and equity side than the organizational structure. I was in a non-profit that used a rotating chair and flat structure. It didn't go well. Herd of cats.

Found this on crowd sweat equity. The guy lays out a very simple version of the idea:

The future of sweat equity is hopefully much brighter. Once equity crowdfunding is legal in the US, major platforms will hopefully feature it as an option. Not only that, but it should be an attractive option.

How do you make it attractive? This can be done by following one simple rule, make sure that the tasks asked of those willing to put in sweat equity are clear-cut. For example, if a startup wanted to offer a small amount of profit sharing for their first year of business in exchange for an explanation video, I think that would be a great trade. On the other hand, a vague amount of effort put in promoting the company via social media for a few weeks might not be a good trade for equity because it is not clear-cut, and such an arrangement could turn into a dispute, disappointment, and confusion.

Here a few more good tasks that would be great to offer equity or profit sharing in exchange:

A bunch of blog posts and an editorial calendar.

Customizing a WordPress theme to do what you need it to

A logo package

A research paper on the market your company is entering

A detailed list of competitors and related websites in a whitepaper

Some heavy duty consulting from an expert

The list goes on!

Really, this ‘clear-cut task’ rule applies to most crowdsourced labor, and crowdfunding platforms can learn from other crowdsourcing platforms like Mechanical Turk that already facilitate work online.

Moreover, the work received for an equity proposition would likely be of great quality because the worker would already be very motivated to see you succeed, and they are likely passionate about what you are doing; they want your company to thrive because it means they benefit. Also, in this world of trading skills for equity, there is room for crowdsourced contests. If your company is popular, you might be able to convince talented folks, logo designers, for example, to compete with others to create something, like a logo, and only the winner will take the equity agreement, etc.

http://www.feex.com/blog/sweat-equity-better-than-crowdfunding/


Flat Structure leads to Cliques at Valve:
http://www.gamesindustry.biz/articles/2013-07-08-valves-flat-structure-leads-to-cliques-say-ex-employee

[Erich Bloodaxe BSN]

3. I wish you luck, but I can't think of any.

The one suggestion I have is that any capital input should always be in the form of a loan. Otherwise having capital in the company becomes a permanent drain on the 'sharing', even though no further investment is made, no further work done. Having money is neither a skill nor a talent, but simply a state of being. Loans should have a return on investment, but not be a way to take control of the company.

[GreatGazoo]

4. Thanks. interesting point about loan vs LT investment

[1939]

7. A lot of companies started this way.

One of the problems that occurred was that the upfront fixed charges each year (i.e interest on the loan) are often too much of a headwind for a startup. Giving capital an equity position in the company avoids the upfront fixed charges because you don't have to pay dividends if you can't afford it or could better use the money to expand the business.

[Erich Bloodaxe BSN]

8. Sure. And a lot of companies wound up stripped away from their starters and in the hands of equity,

too. It's a deal with the devil, and different people make different decisions. But I think in the 'crowdfunding' era, you can probably find a lot of small investors willing to risk small amounts for minimal interest. When the banks are offering 0.something interest, you can probably find lots of people willing to sign up for, say, 5% annual whose loans you could buy out at your own pace.

[panader0]

6. What's the product?

Isn't that the most important part?

[GreatGazoo]

11. can't say it yet. the idea is to get a structure that will let us scale rapidly

because this is something that others have been close to but no one yet has seen this tweak. We are trying to get servicemark or trademark and patent in place before really unveiling it. I always believe that longterm execution is more important to success than the idea but there is an opportunity on this one for the first mover to define the category around themselves, kind of like how GoPro became THE mobile camera. Like the way Xerox became a verb.

[JI7]

9. seems impossible

You will spend more time on trying to make it work than actually running the business.

[GreatGazoo]

13. not if it is only for the start-up / pre proof of concept phase

It could be a way of sharing the risk and potential rewards of a start up with co-workers rather than with hands-off investors.

[lumberjack_jeff]

10. In general, pay is supposed to reflect input.

If that's the case in your business, then divide total payroll by the amount of equity you want to give away. Each dollar of earnings is thus worth x number of shares.

Administratively challenging but mathematically trivial.

[Massacure]

12. Sometimes I've thought about this myself.

This may be a bit crazy, but sometimes I wonder what would happen if a company like Wal-Mart were to just get up and start paying people in company stock instead of cash. Granted the first $7.25 an hour (or whatever the state's minimum wage is) would have to be paid in cash. But it would be interesting if they paid a new cashier $7.25 plus 0.03 share of stock per hour, if they paid a department head $7.25 an hour plus 0.11 to 0.13 shares of stock per hour, if they paid an assistant manager a salary of $23,600 (the minimum salary for an exempt employee) plus 300 shares of stock per year, if they paid a store manager a salary of $23,600 plus 1200 shares of stock per year.

The currently existing stock holders undoubtedly would hate such a move, but I imagine eventually the stocks created out of thin air and given to the employees and the amount of stocks purchased back by the company out of profits would equalize. And eventually it would be the employees who would own the majority of the company.

Such a scheme is high-risk high-reward though. On one hand you have companies like Procter and Gamble where employees who started there out of high school have retired in their late forties or early fifties with a million dollars in their retirement accounts because of their generous profit sharing. On the other hand you could end up working for a place like Enron and end up with nothing because the company went belly up.

[Travis_0004]

15. I would imagine most employees would quickly sell their stocks

If I was a store manager making 23,600 per year, I could not survive. If I was paid in stock, I would turn around and sell the stock the next day, so I could pay rent. Even in well paid positions, I've had the opportunity to buy stock at a discount, and I have always sold it a day or two later, and kept the profit on the discount.

On a personal level, I never invest in a company I work for. I want to be diversified, yet I rely on my employer for 90% of my pay. Imagine you work for Enron. They go belly up. Being unemployed sucks. You have to find a new job, if you can and you may take a pay cut. Imagine loosing all, or even half of your 401k as well if you were heavily invested in your employer.

Also, when a company issues new shares, it dilutes to shares already in existence. If company x is worth 100 dollars, and has 100 shares, each share is worth 1.00 (gross oversimplification).

If I issue 5 shares there are now 105 shares. Assuming the value of the company didn't change each share is now worth about 95 cents. Now in reality the value of the company does change. If I pay you in stock instead of cash, I have more cash on hand. You can sell your stock, but you sell it to another investor, typically not back to the company. Ultimately this would be a way for walmart to build up my cash, but it would also dilute the shares, and piss off a lot of investors, who would then sell the stocks.

I'm not so sure the idea is unfeasible, but I can't imagine a bunch of people who are paid minimum wage to hold on to the stock. They will probably sell them to get by, and encounter fees to sell their stock. Also, their pay becomes volatile as the stock price fluctuates, and I would expect the stock price per share to go down (therefore employee pay goes down), yet at the same time Walmart would save millions in payroll, and the employees would be worse off. That's not to say such a system is impossible, profit sharing does exist in many companies, and a profit sharing system can include stock. Once again, if I was awarded company stock, I would probably sell it the next day.

[Travis_0004]

14. Why not issue stock?

If you are an S corp or LLC you can issue stock.

Its possible, but I'm not so sure I like the idea. How to value stock can be a tricky proposition, and it would be difficult to value a project. As you issue stock to one person, everybody's else's value is diluted. If I was an investor I would want to know the exact rules for issuing future stock, and I'm not so sure how easily you could write those rules in advance.

The exact accounting would be easy. If I own 10 shares, and there are 100 total shares I own 10%. If somebody else is issued 2 shares, I own 10/102 or 9.8% now.

If you are serious about going forward, you should talk to a tax accountant, they can help you out. There are a lot of restrictions on common stock for S corporations, and an S is a flow through entity, so If I own 10%, 10% of all income is mine. (for example, if I owned stock in an S corp, I could demand my share of the profits. If you want to save up for something, tough luck. Pay me my share (I have to report my share on my individual income taxes a year end.) Also, I can sell my share to just about anybody. I wouldn't think an S corp makes sense with your idea.

LLC's allow different classes of interest, and pass through income is not tied to ownership percentage. You can restricted on who you can sell your shares to. Your idea is certainly possible, and at least at a quick glance, an LLC with stock makes the most sense, but I'm not sure how much I like the idea. If somebody is valued, give them a pay raise. If you go around issuing stock for too many things, then its possible to play favorites, or at the very least there are disagreements on what is a fair amount. I would demand that the rules for issuing common stock are laid out beforehand in the operating agreement, but I'm not sure how you think of all situations to write rules for.

How big do you think this will be. Are there going to be 3 share holders? 30? 300?

[1939]

16. An S Corp does not have to give the shareholders all profits

The income of an S Corps is passed through to the shareholders just like a partnership (I believe that an S Corp is allowed a maximum of 25 stockholders. The difference between an S Corp and a partneship is that the S Corp shareholders have no liability beyond their share of the company in bankruptcy while a partnership's general partners can have their private assets sued in bankruptcy.

The whole concept of the S Corp was originally set up to allow start up losses to be passed through to shareholders allowing them big tax deductions. After the lowering of individual tax rates under the 1986 tax law, it became valuable for small corporations to pass through their income to shareholders and have the income taxed once rather than twice as was the case with a C Corp.