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This Tech Startup Uses a Simple Formula to Decide How Much Stock to Give Employees

leungchopan/Shutterstock.com

Forget about having employees sign a non-disclosure agreement: the Full Monty of disclosure is actually what works best, according to Buffer, a social-sharing app and site.

When Buffer disclosed every staff member’s salary in December, it spawned a discussion about transparency—and a few imitators. This time, it’s divulging how much stock each of its staffers own, seeking to shine a light into the murky world of stock options and equity grants. 

"I hope this is a start towards demystifying equity—at least when it comes to Buffer,” CEO Joel Gascoigne writes in a blog post about the privately held company’s  new “Open Equity” formula, which he touts as free of legalese, jargon, and half-explained numbers. Written in (relatively) plain English, the formula outlines how the company determined what stake in the social sharing app and site to give each staffer and executive.

Stock and options are crucial for the tech and startup world’s ability to attract and retain talented engineers and executives. They are expected from Silicon Valley and New York tech firms, yet often not clearly explained. Wayne Guay, an accounting professor from Wharton University who studies executive pay, said Buffer’s approach is rare for its simplicity, and he said it could be “on the forefront of something that’s going to gain traction” at other startups and smaller companies.

"It’s a very simple compensation structure, just a few things and multiply it out,” Guay said, pointing out that it could simplify the process of negotiating pay and options with new staff.

After Buffer disclosed its staffers’ salaries and its salary formula, Gascoigne said the number of job applicants more than doubled, and so did their quality. (Since then, Buffer has increased engineer pay in San Francisco by $18,000 a year to keep pay levels competitive.) The equity formula has already gained positive attention on social media.

Salary and equity transparency works well in companies with a culture built on trust and candid sharing and conversations.

Buffer set aside 20% of the company to give out as stock options—17% for staff and 3% to key advisors, Gascoigne said in his blog post. How much each person receives will depend on four factors, and none of them rely on an individual’s ability to negotiate.

"We’ve been working on finalizing it in the last week,” Gascoigne told Quartz in an email. But he said they started work on the equation months earlier, about the time Buffer disclosed everyone’s salaries.  The new formula looks like this:

ROLE x CHOICE / RISK LAYER + SENIORITY

ROLE: The person’s job, whether that’s product manager or “happiness hero,” a customer-care position. Engineers and product managers get the biggest boost for their roles, and executive officers get none.

CHOICE: Each person can choose whether they want to earn $10,000 more in salary or acquire an extra 30% of their expected equity stake in Buffer, which they make after their two-month trial “boot camp” ends. So far, nine chose more money, and seven, including Gascoigne and his co-founder and COO Leo Widrich, chose more options.

RISK LAYER: The formula rewards those who took a bigger leap of faith, Gascoigne explained: “When you join a startup, there’s a big risk difference between starting as the 5th person versus starting as the 50th.” Buffer measures how much “risk” an employee took by the company’s size based on number of staff when the the person was hired. Anyone hired after Buffer gets to 31 workers will receive a much smaller sliver of stock. Buffer currently has 22 workers.

SENIORITY: Seniority is measured by whether the person manages a team—or has no team but demonstrates outstanding leadership.

Buffer’s stock options vest over four years, Gascoigne said, with the initial 25% available after one year on the job. “Then the rest is accumulated monthly from there,” he told Quartz.

Buffer’s two co-founders said they relied in part on Joel Spolsky’s perspective, honed at Fog Creek Software, which uses a salary ladder, and also  the Wealthfront equity calculator  which automates workers investment accounts.

The approach is interesting but, notes Guay, it leaves out “performance pay,” the options or bonuses used by many public companies to provide incentives to executives who hit targets set by the board of directors.  Buffer has given cash bonuses at year end, but Gascoigne told Quartz: “We’re still trying to hone those down and figure out the best thing” and develop a formula.

So, while Guay thinks Buffer’s transparency is “a good thing” for a smaller company, he suggests it would not work as well at a large company with thousands of workers.

And as with Buffer’s salary release, Gascoigne disclosed the actual percentages of the company owned by each employee, in contrast with other companies, which may list the stock holdings of the executive team, but often bury it in a sea of information about shareholder votes. Here’s a look at the five Buffer staffers with the highest equity stakes:

Options_chartbuilder

(Image via leungchopan/Shutterstock.com)

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