System #15+: Dilutive Time Based Equity (continued)

In my first foray into explaining this system, we isolated a few items that needed remediation. In this article, I'd like to propose a few solutions to those.

What's Considered Net Profit?

As mentioned before, all sorts of bookkeeping gymnastics can be done to lower the Net Profit of a company and potentially screw investors out of dividends that their investments are expecting.

To that end, maybe one way is to have two classifications of tokens, those that are calculated on Revenue, and those that are calculated on Profits. Investors would take their portion before Expenses (adding to expenses as would interest). However, the issue with this is that to stabilize costs (since you could make $2mil in revenue but ultimately have a negative Net Income) instead of doing a percentage of Revenue, you'd change it back to a percentage of investment...which sounds a lot like interest. Making it interest removes the beautiful bet you're making in the company. You don't really care whether they are profitable or not, you just care that you get paid back.

So then maybe, instead of having one classification go before Expenses and the other after, they could both go after Expenses but one could have priority. The problem with this is that you end up with the same need to stabilize and add limits to their dividend potential so there can be enough to windfall to others.

In the end, I believe the thing that makes all of this work, is to also pay your employees with dividends, it would be best if they were monthly, or bi-weekly if possible so that they feel like an actual salary. Then, since everyone is getting paid off the same stack of money, if you screwed over your investors (by not having dividends), you'd screw yourself and everyone else over by not having your salary-like dividends.

Of course, you could have people in your organization that would prefer a salary instead of splitting the profits, and that could still be negotiated...just like you could still have investors that want to be paid with interest instead.

What if I have too large of a dividend?

Too large of a dividend could slow down company growth. I believe the best way to handle this would be transparency and to allow each token to vote for the percentage of dividends to pay out that quarter to a previously agreed on cap. This is doable in a small to medium company if everyone is invested in the company, but might need more restrictions for a larger company, especially one that is publicly traded.

I believe, however, that helping people understand and navigate financial decisions leads to a more educated, capable, and empowered workforce. To start out, the dividends should be made enough to provide livable salaries for each person paid dividends from their token ownership.

Lower dividends give more cash back to the company to fuel growth, higher dividends give more cash back to the token holders to fuel lifestyle, since no single person will hold the majority of the tokens, this can be navigated each quarter. It should, as one would expect, also have emergency protocols to protect the company should the world or company experience an unforeseen circumstance.

Hiring Bad Employees

This is a constant worry for companies. Hiring the right people is a skill, and an art and can make a significant impact on your company's productivity and culture. However, more importantly, not letting go of bad employees swiftly can actually have a much larger impact.

I love something like Greyston Bakeries Open Hiring policy where they just have a signup sheet. When they need someone, they call the first person on the list. They train you, and surround you with the necessary services to thrive. This policy allows people who usually face barriers to employment a chance to prove themselves.

New hires enter an apprenticeship program lasting six to ten months, during which their performance is closely monitored. Apprentices are evaluated on criteria such as punctuality, job performance, teamwork, and availability. If any of those criteria suffer consistently, they are terminated from the program.

Hiring is not necessarily the issue, firing is. But that leads us to the next item...

Creating Too Many Obstacles to Accrual

If the goal is to make every person that builds the company an owner of the company, people could game the system and make it difficult for certain groups to get ownership. By putting up barriers to token accrual, you could still get the company built without needing to distribute authority, or dividends.

To that end, I think every company needs to implement probationary periods. A period where employees do not accrue tokens until they are vetted by their teams. This could be a month in some cases, or 6 - 10 months in Greystons case, but I think it depends on the company. Each token owner becomes a part owner of the company and with that, gains certain voting privileges. You need to make sure the people you hire abide by the organizing reason for the company, you need to make sure that the people you hire abide by the companies values...not those fake values, but the real ones (ie. why doesn't any companies values include making money?).

Potentially Difficult for Investors to Understand

Like every new system, this new methodology takes some getting used to. However, just like every successful system before it, after some integration time, and some streamlining, it becomes mainstream. One of the hardest parts of this system is understanding the implications of the purchase of 1, 10, or 40 tokens. To be able to visualize this, and make it make sense is a lot more difficult than to calculate 6% returns on an investment. To that end, I've built out a visualizer for Dilutive Time Based Equity calculations. As this gains traction, I can add many new features. But for now, given yearly financial projections, projected hires, and their hire dates, one can get a sense of the dynamics of the system.

How do you handle fairness?

Different jobs move a company forward differently. Currently our society seems to appreciate the merits of bureaucrats, and salespeople, but never has a company been built by bureaucrats or salespeople. They owe their jobs to engineers, tinkerers, builders, creators, and visionaries. They owe their jobs to people who have the ability to bring ideas into reality. Those people, and their ilk, move companies forward, they build the machines that we all use. And just like there are factory workers, and the designers of the factories, or machines in the factory, some people's jobs require less training, less knowledge, and different skills. To that end, "fairness" can be attained by tweaking the token accrual formulas. As you can see with the DTBE Visualizer, the accrual rates determine the final equity distribution.

For instance, if you make 2 tokens for my every 1, if nothing else changes you will always gravitate to owning 2x more of the company than me (~66% to my ~33%). Therefore, it is very important that accrual formulas be understood and agreed upon by a company. However, as long as people gain ANY tokens, it is already far superior to most people's current jobs.

I would recommend that you not have more than 3 tiers of accrual, 2 would be preferred. For lack of a better term, I'd name them Creators and Users. A receptionist, for instance would be a User (they utilize the infrastructure that was set up for them) a programmer on the other hand would be considered a Creator. This 2 tiered approach keeps companies from creating an oligarchy within their companies but recognizes when people's roles increase in responsibility and impact.

Conclusion

We've been hearing a lot about fairness in the marketplace lately, as we always have. Some people want more regulations, and stronger unions, others want less regulations and stronger companies. Unfortunately, regardless of what we do, we will never have fairness, and equity, as long as employees do not own the fruit of their labor. As long as some citizens sell their production to others, those citizens will get left behind. With DTBE, we can change that. Each company can start rewarding a person's commitment to building the company without needing to worry about having made a bad choice by granting them a chunk of equity. Since DTBE starts small, and gets diluted by everyone else building equity, the risk to the company becomes smaller the larger the company is. However, for each employee, the larger the company, the more each token can be worth.

Unfortunately, regardless of what we do, we will never have fairness, and equity, as long as employees do not own the fruit of their labor.

While the power does superficially rest in workers hands to choose which company they will work for; if workers were able to collectively only work for companies they believed in, companies would handily fall at their mercy...life, unfortunately is not that simple. And since we're collectively stuck in a prisoners dilemma, the person that betrays first gets the "rewards" to our collective detriment. To remediate that we have wanted to rely on regulations like minimum wage, or collective actions like unions, but with DTBE, you don't need either of those.

All you need is a constitution that rewards each employee with the fruit of their labor. Once workers start amassing that safety net, this single change turns the market in their favor. They now have the ability to say no to bad jobs, and yes to others. They get to wait for opportunities with other companies that won't require them to sell their souls because they continuously collect dividends from the tokens they've accumulated. They get to wait for other companies; companies that could also engage in Dilutive Time Based Equity in a self reinforcing cycle.

It's time we take back our collective power. Share this idea, or if you own a company, adopt it. Curious how? Reach out!