Sunday, April 14, 2013

The Barefoot Philosophy Cornerstone #5: Employee Ownership

[This is part 6 of an 8 part series: The Barefoot Philosphy.  It is based on my experiences as the founder of a business—Barefoot Software—which I ran for 12 years.  Please start with the intro.]

It’s time for the final cornerstone.  (Yes, I know that makes five cornerstones.  It’s sort of a pentagon thing.)  Merit-based pay and no salaries gave our employees a sense of financial independence and responsibility.  Financial transparency gave them the knowledge of how to run the company themselves, and no org chart gave them the ability to do so.  Now they just need the motivation to do it.

So give them the company.

I can’t tell you how many times I’ve heard people running a company say that they were frustrated because they couldn’t get their employees to act like this was their company.  I can, however, tell you how many times I’ve heard people running a company suggest that they solve this problem by actually giving their employees an ownership stake in the company: zero.  It’s done, obviously; I started out with cornerstone #1 talking about Jack Stack and SRC, which is an employee-owned company.  But none of the corporations I ever worked for considered it.  Occasionally, stock options were offered, but it’s just not the same thing.  Giving up ownership means giving up control, and giving up equity, and those are two things that most entrepreneurs just don’t cede.

Of course, I’m not most entrepreneurs.

I say, if you want your employees to act like this is their company, make it so this is their company.  Here’s how we did it at Barefoot.

When you first came to work at Barefoot, you were a probationary employee for 90 days.  At the end of that period, you were awarded one share of stock.  Not a stock option; an actual share.  It wasn’t much, but you were now a shareholder.  You had the right (and, again, the responsibility) to vote at the annual shareholder’s meetings, where we elected board members and occasionally approved tweaks to our articles of incorporation.

Of course, there isn’t much you can do with a single share of stock.  We were always privately held, so you couldn’t trade it on the open market.  You could sell it, but only to another shareholder—never to an outsider.  You could sell it back to the company for the current stock price (set by the board),1 although the company could decline to buy it if it was economically infeasible.2  You could vote it, but one vote didn’t carry much weight.

But every year, at the end of the year (before the annual shareholder’s meeting), every current employee received another stock bonus.  This bonus was based on how long you had been with the company, and whether you held multiple roles (e.g., employees got stock, and board members got stock; if you were both, you got double shares), and a few other factors.  This stock distribution was mostly additional stock added to the general pool, so it diluted everyone’s percentage, but then everyone also received more stock, and in practice everyone always came out ahead.

Of course, the majority shareholder was me.  But, every year, I proxied the majority of my stock to the employees.  I split the proxies evenly amongst them, based on their current percentages.  So if you owned 10% of however much stock I didn’t own, you’d get 10% of the proxy.  I kept enough for myself that I was still a significant factor in the votes, but never so much that no one else’s vote mattered.  It would take a pretty serious coalition to go against me, but it was possible.

Also, every year I donated a chunk of my stock back to the company, which it used for part of the new shares it distributed.  I was slowly handing my company over to its employees.  I did it slowly and carefully, because I wanted to make sure I had the system right before I lept into it; the ability to squash any vote in an emergency situation was my safety net.  But, as the company finally ended, I was right on the verge of becoming a minority shareholder in the company I founded.

Is this crazy?  Jack Stack apparently doesn’t think so.

I don’t own 100% of SRC. I own 19%. The rest is owned by the employee stock ownership plan and various employees. I could have had more, but that was plenty for me. Not wanting to be accused of being greedy probably had something to do with it. But more important, I didn’t want to be alone. I was going to be leading the charge up the hill. I wanted to make sure that when I got to the top of the hill and turned around, there was a bunch of people coming with me.3

Netflix has a different approach.  Employees can choose to receive part of their compensation as stock options (not stock).4  Netflix points out that this lets the employees decide how much they want to invest in the company’s future.

But I didn’t want my employees to have to decide that.  I didn’t want them deciding that they didn’t care, or not having the money to invest.  So I just gave them the stock, whether they liked it or not.  I didn’t say to them, “act like this is your company.”  I said, “here: this is your company now.”

Now you see why I never worried about my employees ripping me off, or doing something that would be detrimental to the customers.  They would have been ripping off themselves; it was their customers they were looking out for.  With great power comes great responsibility, as the mantra goes, and I put that to work for my company and my customers.  Which were now my employees’ company and my employees’ customers.  Their reputation was on the line as much as mine was.  It was their money as much as mine that they were playing with when they made financial decisions.  They were not only earning top pay rates, plus a commission-based bonus, but any profit left over after all that was partially theirs too.

Did it work?  Well, I can prove that it did.  Because I had employees who would do some work for free.

In any company, there’s work that needs to get done that it just isn’t practical to pay someone to do.  Typically, the founders of the company do this work themselves.  This is why starting a business is such a time sink: you not only can’t pay anyone else to do it, you can’t really afford to pay yourself to do it either.  So it’s just extra work that somebody has to do after hours.

But, at Barefoot, there were no salaries.  Remember: if you’re working, you’re getting paid.  If that extra work was going to get done, either someone had to get paid, or ... someone had to agree to work for free.

Naturally, I was constantly putting in free work.  But I certainly never expected any of my employees to join me.  And, yet, that’s exactly what happened.

At Barefoot, you were allowed to work for free on company business as often as you liked.  You would still run a timer and track that time; you just attached the timer to a special internal “customer” which guaranteed that that time never hit your payroll.  At first, it was nothing more than a mark of pride: self-forming teams might take it into consideration when trying to decide between two close candidates (go with the person who’s more dedicated to the company), but it was mostly just for bragging rights.  We did eventually start using that time for other things, though: put in enough unpaid time and the company would start covering part of your health benefits; put in even more, and you’d increase the amount of stock you got at the end of the year.  We had to start adding these perks, because there were so many people doing it towards the end there that I was starting to feel guilty about it.  So if you ask me if know that my employees felt like this was truly their company, I can answer without a single doubt or hesitation.  Yeah, they knew it was theirs.

I set out to make my business employee-focussed.  To make it employee-owned was a natural outgrowth of that.  I never questioned whether that was the right thing to do or not.  I never meant to get rich, so I didn’t care about giving up the money.  I never wanted to be in charge, so I didn’t care about giving up the control.  I just wanted to love coming to work every day, and I wanted my employees to love it too.  The fact that it made my company financially stronger—because all the employees were now focussed on making their company run more smoothly and earn more money—was just a bonus, as far as I was concerned.

That’s all five cornerstones.  Next week we tie everything up and put a little bow on it.

Part: << 1 2 3 4 5 6 7 8 >>

1 In fact, technically you had to offer to sell it to the company first.  That is, the corporation retained “right of first refusal.”

2 Technically the company could decline.  In practice, I don’t think that ever actually happened.

3 “Being the Boss”, Inc., Bo Burlingham, October 1989.

4 Netflix Culture: Freedom & Responsibility, slides 103, 110.

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