[apinstein]

We came to this conclusion as well; we decided to do bonuses based on Y/Y revenue growth rather than equity. The bonuses are not capped.

This allows us to:

1) Justly reward our employees to the upside (with cash, delivered semi-anually) if things go according to plan

2) Automatically controls costs if we don't perform as a team

3) Achieve upside fairness across early vs late employees since we can adjust the bonus % as we hire each new person

4) Eliminates oddities due to variations in company valuations where swaths of employees end up underwater due to bad luck of timing

Downsides:

1) the tax treatment of bonuses as income rather than capital gains is nominally worse; but given the complications with options, it probably works out better for all but HUGE equity gains

2) this plan might not work well for a company that will be pre-revenue for many years, but that should be a pretty far outlier case.

All-in-all this allows us to offer the opportunity for employees to earn above-market comp without having hope they get lucky with company growth, market timing, and their timing of joining the company.

It's been 3 years now and so far, so good!

[lukego]

Cool :-).

I worked at a very successful company that used a similar model: flat 50% of profits paid to employees as bonus. This worked fantastically well in the short term. Now, 10 years later, the company is still very successful but the upside has all shifted to the owners due to departures, renegotiations, and new hires not getting the same terms. So at 3 years it looked very pro-employee but at 10 years it looks very pro-owner.

Would have been really "interesting" if there had been a liquidity event...

[trevelyan]

The owners stuck around. Why didn't the employees? Serious question... were people fired for having too remunerative packages? Or did people just move on mostly?

[lukego]

Many people just moved on over time for non-monetary reasons.

[apinstein]

I do agree it can be hard to make it fair once a company is big enough or growth slows dramatically, but that's a problem to deal with 3-5 years from now :)

[orky56]

As an investor and/or equity holder, wouldn't you rather see a startup reinvest their profits into their business? Retained earnings are not meant to be paid out as dividends if they can significantly increase shareholder value. This is even more true for startups where you are seeking a "hockey stick growth" model. Especially when you consider what is more important at a given time: profit, revenue, users, market share, uniques, etc. I would argue that it's important for a startup to be transparent around all these issues and help investors understand where you are at. It's unfortunate that startups can only rely on financing rounds to get updated valuations of their business. Coming up with internal valuations based on arbitrary multiples that are not validated by investors could be a slippery slope and thus are not worth considering.

[apinstein]

Our bonus plan is based on revenue growth, not profits. Most of your counter-arguments are based on critiques of redirecting profits, which in our case is not what's going on. That said, you are right that generally companies shouldn't pay dividends if they have something better to do with the cash.

However, I'd make the argument that paying above market for top talent is about the best thing a startup can do to increase its likelihood for continued success.

So why did we choose revenue growth instead of profits as the basis for the bonus plan? Profits are easily gamed and frankly rare in startups and would not make for an appropriate metric to base bonuses on for an early-stage company.

I am not sure I follow your points about metrics, transparency, valuations, etc. Those seem like concerns unrelated to the structure for giving employees exposure to our financial upside.

Our #1 metric is revenue growth. That's what we want our team focused on. Not vanity metrics, not profits even. That's a management concern. Our bonus plans cover multi-year terms, and they motivate one to do the right thing in the long-term vs short term. There are no issues with gaming the bonus program; moving $1 of revenue forward/backwards by a few months has no effect. Making an extra $1 now at the expense of $2 next year is not rewarded. "Top management" still has to approve overall direction and operational processes, so it's not like anyone even has the opportunity to game revenue numbers at the expense of operating margin. Besides that, we hire good people and if you can't trust

I will say that for some types of models (eg Twitter) this wouldn't work as it's a free-as-in-beer product until they can start doing advertising. But models like that are quite rare. Though even in those cases there is probably a single vanity metric that is theoretically the main driver of future revenue growth which could be used.

[pyrrhotech]

this is awesome, I commend you sir