30 May

Profit sharing for bootstrapped startups

In the world of high-growth startups ConvertKit is an anomaly. We didn’t raise funding. We have no desire to sell. In fact, we don’t even have an exit strategy.

When asked recently when I’d consider selling ConvertKit I gave the same answer I always do: Not for at least ten years. A friend who had heard me say that before said, “Wait, that’s what you said last year. So shouldn’t it be nine years now?”

Nope. It’s not a clock that’s counting down. It’s a perpetual long-term focus. We’re just getting started on our mission and taking calls from potential acquirers and private equity firms is just a distraction.

So how do you go about rewarding the team in a company that you never plan to sell?

Why stock options aren’t the best for us

Stock options are the most common method, but it’s strange to compensate a team member with stock and immediately follow it up by saying, “Oh yeah, but we’re not going to sell.”

Options without an exit event just don’t have the same value as when you can expect to flip this startup and be on to the next one within five years.

And even when that is the goal it often doesn’t work out well. Out of all the companies I’ve held equity in, ConvertKit is the only one that has made me any money… Other than this $0.68 check I received last summer!

Instead, profit sharing!

Instead of equity and stock we focus on profit sharing. It’s easier to understand and has a much more tangible benefit in the short-term. Let’s break down how we do it at ConvertKit.

Profit sharing round 1

In 2016 we had a big push to get profitable and build up our cash on hand. During that time we went from losing money to a 51% profit margin in just 5 months! You can read about that here.

Once we did that I wanted to reward the team through a profit sharing bonus. But we were so new that I didn’t know what system to use. Should salary be a factor? Performance? Time with the company?

For the first run at it we took a pool of $110,000 and divided it up between the team purely based on time with the company. We had 20 team members at the time and only two people had been with us for more than a year!

I wrote everyone’s start date into a spreadsheet, calculated the # of days from then to the date we planned to pay out profit sharing. In Google Sheets it’s a simple equation:

=DATEDIF(B2,”8/1/2017″,”D”)

B2 is the cell that has the team members start date and D is telling it the format (days) to return.

Then I divided $110,000 by the total number of days to get a dollar per day. This resulted in totals starting as low as $1,188 for team members who had been with us for 45 days, up to $16,419 for our longest tenured team members.

This is simple and worked well since there was such a range in time with the company, but it’s too basic and not sustainable since it didn’t reward performance.

The payout

Since no one on the team knew that this was coming I wanted to surprise everyone at the retreat. So we got cards for every team member and wrote a personalized message to each person from each director.

Then a simple card is included that spells out the details of what will be deposited into their bank account.

Everyone sitting in a circle opening their cards at once makes for a special moment for us all to share in the success of the company.

Round 2 — Designing a system

Our first round of profit sharing was a decent foundation, but for our next team retreat (we host them every six months) we needed a better system.

We knew that time with the company was going to be a factor, but it wasn’t the most important factor. Instead we wanted each team members individual performance to be the biggest driver.

After a lot of deliberation we came up with a simple system.

  • 25% of each bonus is based on time with the company.
  • 75% is based on performance on a 0-4 scale.

The immediate question is, what’s the scale and how do I get the highest score? It breaks down like this:

  • 0 — Terrible performance. Actually, they should have been fired already.
  • 1 — We have a high standard and they aren’t meeting it. This is painful to hear, but we will work with them to create a plan to get them back on track.
  • 2 — They are meeting our high standards for this position. A 2 means you are doing great work. This is the most common score.
  • 3 — They have done extraordinary work and leveled up their own skills as well as delivered an important project. Out of 30+ team members there are typically four or five that score a 3.
  • 4 — They have not only leveled up themselves, but also driven the company forward in a substantial way. The bar is set very high to receive this score. We haven’t yet awarded a 4.

That’s the scale. The most important thing is that every three months every team member knows where they stand and has time to improve their performance before the bi-annual profit sharing.

The formula is then the total pool (say $100,000) divided into two buckets: time with the company ($25,000) and performance ($75,000). Then all the total days with the company and performance scores are divided from their respective buckets to get a value for each day and performance point.

Here is a sample spreadsheet (with random performance scores and names):

We expect everyone on the team to start making meaningful contributions immediately. Because of that we don’t require waiting any period until you are able to participate. That said it wouldn’t be fair to get the full value of performance points if you just joined for a portion of the 6-month period. So the last step is to multiply each number by the percentage of the period each person worked. For most that is 100%, but for anyone new that will be a smaller percentage.

Round 3 — The final tweaks

This system worked really well. The performance score setup took a little getting used to and a lot of conversations around what actually qualified as a 2 vs a 3, but we figured it out.

The only problem is that we were still up in the air as to what the final pool would be. Our first time it was $110,000 because that was what felt right. The second time it was $200,000, because… well it also felt right.

We wanted a better system so the team could really predict what their profit sharing would be. That meant committing to a fixed percentage of profit to be distributed to the team. Now we divide our profit into a few buckets: taxes, savings, and profit for distribution.

Profit for distribution is then divided between three groups:

52% — Team profit sharing
8% — Leadership bonuses
40% — Owner distributions

With the set 52% of profit for distribution going to the team each member can see how their daily decisions affect their own profit sharing checks.

Salary is not a factor

One key difference between our system and most other profit sharing systems I’ve seen is that we don’t account for salary. Our theory is that salary is a reflection of your market value and not exactly your value to the company. A higher market value such as an engineer versus a customer support team member is already reflected in salary, so we don’t need to account for it again in profit sharing.

Spend like it’s your money

A year ago someone on the team suggested going to Costa Rica instead of Oceanside, California for our winter team retreat. We thought it was a great idea and started to price it out.

The estimate for Oceanside came back at $40,000. Costa Rica was closer to $60,000. We asked the team and everyone said, “The beaches in California are great. Let’s save $20,000.”

Another time someone accidentally left an extra server running, which cost about $2,000 for the month. Once it was discovered and shut off the message from the team was clear, “It’s not a big deal in the grand scheme of things, but please be careful. It’s our money.”

Leadership bonuses

As part of this we have 8% allocated for bonuses for leadership. This is based on quarterly goals each leader sets and the percentage they hit during that period. They also receive their share of the team profit sharing.

So if a leader set 10 goals for themselves and their team each quarter they would receive their share of the total based on goals completed. So with 4 leaders they would each have a pool of 2% of the profit for distribution. Then if they complete 7/10 goals in the first quarter and 8/10 in the second quarter they would receive 75% (15/20) of the pool they are eligible for.

This is a simple system that is decently effective. It rewards smart goal setting and peer pressure from other leaders ensuring that you don’t set unambitious goals you are guaranteed to hit.

Round 4 — An established system

Now that we are gearing up for our fourth round of profit sharing I don’t think we will make any additional tweaks. We are happy with the numbers and system from last time and are excited for it to be a more normal part of our culture.

In the first three rounds we distributed $513,817 of profit to the team. Since we are focused on continuing to scale our revenue and profit while keeping our team small we expect these numbers to keep growing significantly as we get closer to our long-term goal of $100,000,000 ARR with a team of only 50 people.

 

***

 

There’s something special about being able to hand meaningful amounts of money to the team in a single cheque. Each time we do it is a highlight of my year. Give it a try for your company and let me know what you think!

 

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24 Responses to “Profit sharing for bootstrapped startups”

  1. This is really good! Congrats on all the success Convertkit has been having :)


  2. Vitalii says:

    You rock!


  3. Eric says:

    Hey Nathan, I really admire what you’re doing with ConvertKit, I wish more companies had this kind of mentality and approach to the business


  4. Super interesting to see how other companies handle this, thanks for sharing.

    Do you give the option to have profit sharing bonuses put in an employee’s 401k?


    • Nathan Barry says:

      We don’t have something set up in the program for this, but I can’t think of anything preventing them from doing it. We match up to 4% of salary to the 401k.


  5. Incredibly insightful. Thanks, as always, for sharing! Love what you guys are doing. You are a great example.


  6. Mike says:

    Great info – thanks! Curious if your leadership team uses any methods or tools in particular for setting and tracking their goals for this?


  7. Thanks for sharing Nathan👍

    When I had a day job as a developer I always found it strange that earnings were capped by salary.

    This sounds similar to the co-op model (I love co-ops!). Also seems like an way to increase alignment between a company and its employees. Have you noticed any changes in team member behavior since this change?


  8. I’m working on creating one now – thanks for sharing – super helpful!


  9. I dealt with this for a long time at Paleo Plan and I think this is a far better system than what I’d come up with. I really appreciate you going into all the details, and specifically the detailed explanation of the previous rounds. As an owner with employees, it was useful to see the detailed thoughts behind decisions, and the positive response from the team to be more effective and efficient.

    As always, you’re a wonderful writing explaining your thoughtfulness in a succinct way. Both of which are impressive feats.


  10. Really great to hear how you guys have built out this profit sharing Nathan! Will be cool to continuously hear what you learn as you guys continue to grow. Excited to watch.


  11. I’ve been thinking a lot about this. Thanks for giving me something to steal.


  12. Thanks for sharing this generous article!!!!


  13. Peter says:

    Thanks for Sharing Nathan. What is Owner distributions though?


    • Nathan Barry says:

      That is the 40% of our total profit that is paid out to the company owners (mostly me).


  14. How did you decide how much goes into savings and how much into profit sharing?


    • Nathan Barry says:

      We save enough to pay our taxes and maintain 3 months of expenses in the bank. Everything beyond that goes into the profit for distribution (40% to owners, 52% to the team, and 8% as leadership bonuses).


  15. Thanks for sharing Nathan!

    I don’t have a team right now but it’s always good to see the behind-the-scenes of how a company (that I love) operates.

    You’re a great example of building an empowering work culture.


  16. Nicola says:

    Very interesting, I just have a concern. You mention that your reward system is based on an individual performance basis. What about team achievement? Does your individual score reflect also how good a person is as team member, working in a team and supporting colleagues?


    • Nathan Barry says:

      The total size of the pool is determined by the success of the company. So that rewards the entire team.


  17. This came in handy just when I’m about starting my new company


  18. Great article Nathan. I really like your approach to bonuses. To me, the real key to these plans is getting employees to feel like their decisions impact the business in a meaningful way. Having the team rationalize discretionary spending has been really helpful for us too.

    I recently wrote a culture and policy series for my company and covered our bonus plan. We left performance out of the equation but otherwise there are a lot of other similarities :)
    https://labs.karmaninteractive.com/karman-culture-and-policy-pt4-bonuses-456df41ec3ee

    Thanks for sharing your approach.


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