Imagine it’s January 1998 and you’re being offered a job as a junior software engineer at a new online bookseller named Amazon.com. Part of your compensation is a cash-based salary and the other part of your compensation is stock options. Your stock option agreement will grant you the right to purchase 10,000 shares of Amazon.com stock at an exercise price of $3 per share, vesting over four years.
Should you take the job?
In hindsight, the answer seems obvious. If those options had been exercised, the stock would be worth $35 million today. But the decision isn’t always so simple.
What if you had previously worked at a company that gave out generous stock options, only for the stock to go to zero? You might choose a company that gives more weight to cash-based compensation (i.e. higher salary and bonuses) for your next opportunity.
Let’s think through a different hypothetical scenario. What if you had started working at Amazon.com in 1998, and in 1999 Jeff Bezos had decided to retire, and over the course of the next couple of years, the company changed direction and decided to focus more on short-term growth, operating at a profit and paying dividends for the purpose of attracting a certain type of institutional investor. In this alternate reality, Amazon.com overpays for an acquisition of Barnes & Noble, and eventually gets taken over by a private equity firm at $9 per share. The $60,000 you net from the acquisition helps you make a dent in your student loans, but it’s a small consolation prize compared to what you thought you were signing up for. You would have been disappointed. You were in it for the long-term, not for the company to focus on harvesting short-term profits.
When a founder or CEO states their intentions about how they intend to grow and operate the company, it’s surprising when the company changes course1.
Mailchimp
The Atlanta tech scene was buzzing this week with news of Intuit’s $12 billion acquisition of Mailchimp. Mailchimp is well-known in the Atlanta area for being a great tech company and perhaps unconventionally, never took venture capital. They’ve been bootstrapped the entire time, funding their own growth.
The founders of Mailchimp, Ben Chestnut and Dan Kurzius, stand to net around $5 billion apiece as a result of the deal. Mailchimp’s 1,200 employees are set to receive $500 million in bonuses and retention stock as part of the deal.
Business Insider reports2 that some current and former employers feel betrayed by the new direction:
The founders told anyone who would listen they would own Mailchimp until they died and bragged about turning down multiple offers.
"It was part of the company lore that they would never sell," said a former Mailchimp employee, who like others interviewed for this story were granted anonymity because they were unauthorized to discuss sensitive internal matters. "Employees were indoctrinated with this narrative."
Look, the point I’m trying to make is not “Mailchimp employees weren’t taken care of.” You can’t make everyone happy, and from what I gather reading various reports online and speaking with people in my network, Mailchimp employees have been well-compensated over the years through a generous profit-sharing plan. And they are getting to participate in the upside of the Intuit deal, even if it’s not directly via equity.
I’m curious if it may have been possible for Mailchimp to balance “we’re never planning to sell” with “but if we do, you’ll get be taken care of as if you were an owner.”
Bootstrapped ownership
I worked for Fog Creek Software from 2011 until 2014. Most people these days haven’t heard of Fog Creek, but perhaps you’ve heard of Stack Overflow or Trello, who both spun out of Fog Creek.
Throughout the 2000s, Fog Creek was famous for being a bootstrapped software company that took care of its developers. Part of the reason I was attracted to Fog Creek was because they were a tech company that eschewed venture capital, choosing instead to distribute profits directly to employees. I had heard horror stories when it came to stock options, so I was excited about the prospect of Fog Creek’s profit-sharing plan3.
But! Fog Creek used to grant stock4 in the company. Not stock options, actual stock. The thinking was along the lines of “we’re not planning on selling the company, but if we do, we want you to be able to participate in the company’s success.” Thus, if the company were to be purchased, all shareholders—which included employees who had received stock grants—would get a payout, not just the founders.
The problem with giving away stock was that there were tax implications associated with the grant. So employees had to pay taxes on an illiquid asset that couldn’t be sold. This was a rather expensive way for employees to be able to participate in the potential upside of Fog Creek ever being sold, especially when the plan was that that the company would never be sold. That said, when Stack Overflow spun off from Fog Creek in 2010, Fog Creek shareholders received shares in the new venture.
About the time I joined, Fog Creek stopped granting stock and switched to an instrument called “bonus units”. I’m not able to track down the documentation that formally describes how they worked5, but essentially, instead of stock, we received a grant of bonus units that, when added all together, represented a certain percentage of the company and vested over time. Unlike stock, bonus units expired when you left the company, so you couldn’t take them with you. However, if the company was ever sold (which, again, the company wasn’t planning to do), you’d get to participate in the upside of the sale based on your bonus units.
While I didn’t originally join Fog Creek with the intention of ever working for a venture-backed company, I greatly appreciated that my time at Fog Creek directly translated into ownership in Trello when the new company spun off. Those of us working for Fog Creek at the time gave up a significant portion of potential profit-sharing while the company paid the salaries of software developers working on a product (Trello) that wasn’t making any money. I’ll confess I didn’t fully appreciate it at the time, but Fog Creek’s founders were incredibly thoughtful and generous in anticipating this possibility and building it into their compensation plan from the beginning.
The upside of ownership
I wonder if we’ll see another Mailchimp in Atlanta, a company that distributes profits without giving the opportunity for equity. Profit-sharing helps employees participate in the cash generated by a company for a single year, but equity gives employees the opportunity to participate in how the broader market values the future cash flows of the company6.
There will continue to be bootstrapped companies, even in tech. And there will continue to be workers who prefer the surety of cash-based bonuses over riskier stock options. For those bootstrap companies whose founders are promising to never sell, perhaps some of them will consider giving employees a concrete way to participate in the possible sale of the company, just in case the founders change their mind.
Jeff Bezos’ original 1997 letter to shareholders is worth a read in its entirety. A few gems:
“When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.”
“We will balance our focus on growth with emphasis on long-term profitability and capital management. At this stage, we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model.”
“We will continue to focus on hiring and retaining versatile and talented employees, and continue to weight their compensation to stock options rather than cash. We know our success will be largely affected by our ability to attract and retain a motivated employee base, each of whom must think like, and therefore must actually be, an owner.”
I’m sure I would have been equally excited about the profit-sharing plan at Mailchimp, had I been given the opportunity.
See the benefits section in this archived job listing.
I know the bonus units were tracked in Carta for a while, so this is probably something Carta could help with if founders were interested in offering them.
As in, if you use fundamental analysis, i.e. net present value of discounted future cash flows, to value the company.