The theme for our July 2016 issue is organizational/financial/legal structures for self-managing enterprises. We are happy to include this description of the experimental prototyping by the folks at the August Corporation.
As a Benefit Corporation, focused on purpose over profit, and intent on building a humane and dignified workplace, we have designed the following conditions for distributing equity to all members:
At August, we offer an opportunity to earn equity for all members. With our capital structure, we intend to prioritize: absolute fairness even over absolute equality; dynamism even over rigidity; long-term wealth-creation even over short-term gains; and maintenance of purpose even over long-term wealth-creation.
August has two kinds of equity, breaking ownership for the company into two equal halves: Preferred Shares and Common Shares. Preferred Shares each carry two board votes. Common Shares each carry one board vote. Each share carries an equal right to dividends. There are 1,560,000 shares issued, and all Founders’ equity (780,000 shares) is issued out of the Preferred Share pool.
Can Founders’ shares in the company increase? Yes. Any increases in equity for Founders will be issued out of the Common Share pool. All increases are detailed below (see “Change Management”).
The Founders of August are Mike Arauz, Clay Parker Jones, Mark Raheja, Erica Seldin, and Alix Zacharias.
Vesting works differently at August. All shares are subject to an expiring right of repurchase – August may buy back a shrinking portion of granted shares at par value, with the remainder priced at the median of Book Value and 7x EBITDA. The portion August may buy back at par shrinks over a four-year period, 6.25% per quarter.
For all members, equity is distributed according to each member’s Contribution to the business and Risk associated with joining the business. Each factor is weighted in order to build a sustainable, fair system that incentivizes us to grow our business quickly to achieve our purpose.
The final output is a relative number or fraction that determines the sum of shares an individual receives from the business.
Contribution ÷ Risk
Contribution is determined by assessing the member’s Relationship with the business and their Capacity for our work. Larger numbers here indicate more contribution. In general, the intent is to reward individuals that are able to help August pursue its purpose more quickly than others.
Contribution = Relationship × Capacity
Relationship can be one of two types: either Founder (8 points), Partner (6) or a Member (4)
Capacity is assessed by a representative committee across five-point scale:
1 – 0.8 points
2 – 1 points
3 – 2 points
4 – 3 points
5 – 4 points
6 – 5 points
Risk is determined as a multiple of Time and FinancialRisk factors. Larger numbers here indicate less risk. In general, this awards more equity to people who helped August get off the ground during the first several months, and less equity to those that join later.
Risk =Time Risk × Financial Risk
Time Risk is determined by when a person joins August, according to a pre-set schedule. Joining earlier is riskier, because August’s business prospects are uncertain. It progresses using a Fibonacci scale up to a ceiling, set at the one-year anniversary of our founding – when we should be a stable business.
Financial Risk is determined by totalling the equity investments made by members, along with any unpaid business expenses: < $5,000 risked (1 point); < $10,000 (2); > $10,000 (4)
Any changes in Equity are driven by changes in Relationship or Capacity. Each of these changes have pre-set share grants associated with the change in question.
Promotion from 1 to 2: 250 shares
Promotion from 2 to 3: 2,000 shares
Promotion from 3 to 4: 4,000 shares
Promotion from 4 to 5: 6,000 shares
Promotion from 5 to 6: 10,000 shares
We intend to someday welcome Non-Founder Partners into our business, either from the outside or from within.
Promotion from Member to Partner: 20,000 shares
We intend to keep ownership with the people working at August. We also want to be sure that folks that leave August are able to do well financially as a result of all their hard work. So whenever possible, August reserves the right to and has the intention to buy back shares owned by departing members.
How are the shares valued? For these purposes, the value of the company will be set as the median of book value (as assigned by a third party) and 7x EBITDA for the trailing 12 months.
What if August can’t afford to buy all the shares back? If the leaving member is a Founder, any unpurchased remainder will convert to Common Stock. In all cases, this remainder can be purchased by the company at any time – with a fresh valuation according to the established rubric.
Why did you all do this?
We do not intend to sell August to a third party. We also don’t have dreams of taking it public. We also believe that all members can be trusted to operate with good judgment and always put the purpose first. With that in mind, we want to prepare as best we can for many possible futures, and to use our capital structure as a tool that pushes us to scale.
Mostly, shares in the business will be used to determine profit distributions. Even though the State of New York sees us as a Benefit Corporation, according to the IRS we’re C-Corp – meaning profits will be distributed according to the number of shares owned by each individual. Our structure will push us toward an equity split that is ~50-50 Founder-Member, meaning that once all shares have been distributed, around 50% of the profits will go to non-Founder member-owners of the business.