This post describes our take on profit sharing in our company.

TLDR; We distribute 10% of the company profits to the team. The way it's distributed can be tricky. We tried to make it as fair and objective as possible. It's a kind of an ESOP (employee stock ownership), but not really. Disclaimer: there is no profit yet, and there still won't be for a while.

Challenges of profit-sharing:

  • Fairness. It's impossible to make it entirely fair and objective for everyone. As I see it, it's rather about making it as close to fair as possible. That's what we have tried.
  • Legislature ecosystem and tax problems. There are issues specific to companies in Slovakia, which are not present in the US. But I won't talk about those in this post.
  • People mindset. The stuff mentioned above, combined with our region's geopolitical history, people here don't have as much interest in ESOP as in the US, for example.

We tried to come up with something that would deal with those challenges and work fine with how we want to run this business. I'm sure it's not perfect, there are weak parts, but it's the best thing we came up with so far. It's the v1.

Rather than talking about it, I'll share the whole thing. Here's the full text:

Profit Sharing Spec v1.0

This page explains our profit sharing deal.

What is this for you

It is a financial bonus given from our company profits to you. It's a reward for your efforts in the past. It's also a motivation.

This bonus is not:

  • It's not a part of your salary. Your salary should be set without counting on this bonus.
  • It's not something you should count with or expect. It may never happen.

Key principles

  • It's safe and sustainable for the company. Bonuses are paid out from existing profits (it's basically a dividend). So it will not put the company in danger or debt.
  • It's not focused on company exit. So it's nothing like "reduce your salary and when or if we sell the company in future, you will get your return".
  • It's trying to be fair and objective (although nothing's perfect).

It will work only if:

  • Our team consists of great people only.
  • We are all honest and can trust each other.
  • We are precise and fair with time tracking.

Rules

Overview:

  • 10% of the company profit is given to the team
  • Your reward is based on how many hours you worked combined with your hourly rate. The calculation is explained in detail below.
  • Payout is once per year, after the company profit is calculated. It's usually after the calendar year ends.

Requirements for getting in:

  • Working full-time.
  • 18 months of full-time work (there are exceptions like maternity leave, which count as a pause).
  • A month counts only if you work 120+ hours during that month.
  • If you would work less than 120 hours during a month, that month would not count in.
  • If you switch to part-time or leave the company, the counter (for 18 month) resets to zero. So if you would switch back, you start over from zero.

How is your bonus calculated?

Definitions

  • Profit is the company profit. Revenues minus costs for one year.
  • Shared profit is the money that goes into the profit-sharing scheme. Now it's 10% of company profit.
  • Stake is your (%) proportion of the shared profit.
  • Stakeholder is a person who participates in the profit-sharing scheme.
  • Bonus is your (€) portion of the shared profit.

Calculations

The shared profit is split into three parts:

Performance part

  • 60% of the shared profit.
  • Split proportionally by money invoiced during the last 3 years.
  • Calculation = (shared profit) * 60% * (total € you invoiced for last 3 years) / (total € invoiced by everybody together for last 3 years)
  • What this represents: It's the value you brought (invoiced) to the company over the last 3 years.

Retention part

  • 30% of the shared profit.
  • Split proportionally by money invoiced during all years.
  • Calculation = (shared profit) * 30% * (total € you invoiced for all years) / (total € invoiced by everybody together for all years)
  • What this represents: It's your lifetime value you brought (invoiced) to the company.

Socialist part

  • 10% of the shared profit.
  • Split proportionally by hours invoiced during the last 1 year.
  • Calculation = (shared profit) * 10% * (hours you worked last year) / (total hours everybody worked last year)
  • What this represents: It's the time you spent working with us for the last 1 year.
  • Why do we have this package? For the team spirit, and to ensure that the little guy gets something too. This part does not take into account the added value of each person. Hence the name "socialist".

Example table with calculations:

FAQ

What if you leave the company?

You stop receiving the bonus.

Your stake stays in place. The stake of others does not change.

The portion of the future profit will not be spread between other stakeholders. There is a number of reasons for this:

  • It could result in bad blood. People could happen to be motivated to do stuff like: "let's fire XY, because his stake is very high. Then it would go to us."
  • You may come back. This is further specified below.

If you leave in the middle of the year, please rather do not count on the bonus.

What if you leave and come back?

You need to work 12 full-time months to become a stakeholder again. The same rules apply as when you were getting in for the first time.

What if we let you go?

You stop receiving the bonus. This whole scenario is a bit tricky. Your contract will be terminated, and things get complicated.

If your leave happens in the middle of the year, please rather do not count on the bonus.

What if we sell the company?

This is also called "company exit".

First of all, I don't plan or expect to sell the company in the foreseeable future. I'm rather trying to build something that would last.

Company exit is a complicated and very hypothetical scenario. I would rather not create any rules or set expectations for it. To make things simple, please do not count on any bonus in case of company exit.

When to expect the bonus?

After we turn profitable.

  1. First, we need to start making money (that's called making a "revenue").
  2. Then we need to be making more money than we are spending.
  3. Then we need to make enough profit to return the investment. The longer we develop without profit, the higher the investment (loss) is going to be.
  4. Then we start making a profit.

These terms are subject to change.

So that's the version 1.0 of our profit-sharing specification.

What do you think about this? If you are an executive, got a startup or participate in some ESOP or have any feedback, I'd be happy to hear it.

And if you are structuring your ESOP and dealing with the legal and tax problems here in Slovakia, I'd point you to Tomas at Highgate.

PS: I want to thank everyone who helped me put this together, especially Martin and Michaela.