Our company ZenDev Holding is a group entity that does two things.
- We deliver software development and marketing services
- We create our own tech product companies (early funding from the profits made through our consulting services)
We played with the idea of a profit share model primarily because we were using up a lot of our profits to reinvest into our own products.
We, the founders, felt that if we’re already using up our money to take “bets” on our products, should we be successful, then everybody in the company should be celebrating the success with us.
It’s also so that if we do exceptionally well on the consulting side of the business, then why not pay out a part of those profits to the people that did a great job that year?
Our philosophy was then simple: for every “penny” my co-founder and I take out of the company, a penny should be given back to the people that helped us build the company(s).
For that reason, we introduced a “50% profit share model”.
Here is what we learned from this process.
Learning #1: It’s a dividend share, not a profit share
We quickly realized we got our terminology wrong. We’re not doing a 50% profit share, we’re doing a 50% dividend share.
A 50% profit share would imply that we would be forced to take every penny out of the company every year and divide it between the founders and the coworkers.
That is not what we’re doing as it’s impossible to run a company like that, but what we are doing, is, as mentioned above, we evaluate when it’s feasible to take “money off the table,” and whenever we do so, we split it 50/50 between the founders and the coworkers.
*50/50 profit split between founders and the coworkers
Learning #2: We announced it too early
We announced just before 2022 that our first payouts would be in 2023, with the philosophy that whatever we make in 2022 will be the basis for what we decide to pay out in 2023.
That leaves a long time for speculation and questioning.
Admittedly, we did announce early as it was a part of the marketing strategy to communicate what we stand for, what our philosophy is, and to attract the right people to the company with it.
With that said, it was a bit too early. It was almost 16 months from the first time that we announced it in the company to the first payout, which in hindsight is far too long.
Today, I feel like maybe six months ahead of the first payout would have been a good time spectrum.
Learning #3: Trying to divide individual payouts based on performance is a nightmare
We had an idea that we didn’t want to pay out a dividend equally to all coworkers but rather a bit more to people that “deserved” it more.
Our initial idea was to have two groups.
- Gold - 20% of the best performers share 50% of the coworker pot
- Silver - 80% the share the remaining 50% of the coworker pot
*The initial idea that we did not implement
After some actual thinking of how to implement this, some problems quickly arose.
- It’s a bit unfair on “the borders”. The person(s) that are in the top 30% performers, but no in the top 20% will get a significantly smaller amount of dividend.
- What happens when things change over time, and someone that once was a gold member all of a sudden falls out to become a silver member? How will that affect that person and the company?
- How will we actually, in a fair way, evaluate who the top 20% of performers are?
I then had a friend send me an article about how Nathan Barry had implemented something similar in his company Converter kit.
They chose to evaluate people on five levels and do a yearly profit share based on the evaluation.
*Nathan Barry's way of profit share implementation
The baseline of the shares was then multiplied by the level achieved. So if the baseline profit share is $1000, that means that someone that, for example, scored “1” would get 1 x 1000 ($1000), while someone that scored a “4” would get 4 x 1000 ($4000).
When I read this initially, I felt it was better than our Gold/Silver variant as it was more evenly distributed, and felt more flexible.
With that said, the primary problem still remains: In a subjective world, how would we objectively compare top performers across multiple departments (developers, designers, HR, marketing etc)? Also, if we constantly need to be doing it, how much of our company resources would go to evaluating the almost 100 people in our company over and over again?
After months of pondering on this, I found an acceptance that such a thing would create more trouble than anything else, and we decided that our profit share was going to be a loyalty program.
Our solution: The loyalty format
In the end, we simply decided that we would pay out people based on how long they had been with the company. We created five groups that each got a different size of the pie.
Group 1 — The 20% of people that had been with us the shortest time in the company got 6.67% of the profit share
Group 2 — The next 20% of people shared 13,33 % of the profits
Group 3 — The next 20% of people got 20% of the profits
Group 4 — The next 20% of people shared 26,67% of the profits
Group 5 — The 20% of people that had been with us the longest time in the company got 33,33 % of the profits
*Share of the "cake" per group
This means that if our baseline payout is $500, Everyone in Group 1 would get 1 x 500 ($500), and everyone in Group 5 would get 5 x 500 ($2500).
As with anything, there are quite a few edge cases here, like people arriving at the company on the same day etc, but I’ll spare you all the tedious details.
The first payout
In April 2023, we called for a meeting to discuss the “profit share”, but that same morning we actually did the first payout. We felt that it was good to surprise everybody with some money finally in the bank, rather than just talking about how we will move forward.
It was a great moment. The energy was electric, people were talking about what they would spend their money on, some serious, some for laughs. We also informed everyone that moving forward, this will probably be something that’s divided in payouts over 2-3 occasions during the year, as we never want to affect our cash flow too much.
The model we’ve created is something that we’re still really happy with, but we feel that the true benefit will be seen once some of our own products become really successful and potentially get sold.
With that said, even today, with profits primarily being paid out from surplus made from consulting, it’s greatly appreciated by our team as we get to reap what we’ve sown.
We haven’t necessarily seen that this model has done much as far as making recruitment easier, most people will still primarily be interested in the salary due to its secure nature, and see the dividend share as a nice bonus.
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