Flowing-organizations

Tl;dr : How to reconcile startups models known to be efficient but not fair and opaque between founders and employees, and cooperative models that have demonstrated fair value shared but efficiency issues in their capacity to scale? Here are flowing organizations, a new employee/founder model based on planned equity inflation over time, that allies transparency, talent attractivity and keeps efficicency in the ability to scale and govern the company.

Employee versus employer : Long story short

The value repartition between capital and work has been a long and hard debate in the society over the past 200 years, since the spread of the capitalist era and the beginning of mass employment. Many attempted to define a fair model between workers (as employees) and owners (as capitalists founders) have been tried. One part arguing that only the workers are providing the value, and that capital owners takes a pluevalue on the worrkfroce to make a profit. The other part argue that capital is essential to create a business activity and that the risk of ensuring that everybody will be paid even if the company model does not work, needs to be rewarded (that can lead at the end losing the whole capital invested). This struggle has defiend a practice model that can be sumed up in three main categories :

• The Corporate model
• the Startup model
• the Cooperatve model.

In this paper, we will present a 4th model that mixes the best of three models. A model where everybody is a shareholder of the company and everyboy is an employee, and all efforts are rewarded based on the early efforts and time you have spent working actively in the company, and all of this transparently as everybody knows what equity they will have over time working in the compnany because it is "in the protocol". We call it the Flowing Organization model.

Corporate, Startup or Cooperative?

We may simplify it here to improve readiness, but we can categorize 3 models of employee/employer relationships that exist mainly today.

The Classic Corporare/SME model

The corporare model is the simplest model where the shares are owned by shareholders, and where managers operate the company assets and money by acquiring means of production and employing workers to do the job. Employees are most of the time not shareholders of the company and are paid at the same amount whatever the results of the company, even some corporations offer bonuses based on company overall performance, or for managers the possibility to buy stock options at reduced price to the conditition to stay a certain mimimum of time in the company. Employees most of the time have no voting rights in the company decision. It his model, corporates often give dividends to shareholders, that is money created that does not go to employees even if they are in majority (almost in full due to their number in cpmparison with shareholders) creating the value

The Startup model

The startup model is a more hybrid model, where founders and investors are in majority the shareholders of the company, but there is in general a pool of shares for early employees. This pool of share is here to attract early employees and interest them to stay and grow the company with all the hard efforts needed, lower pay compared than the market and the risk of no return on these personal investement. This pool of shares can represent from 5 to 15% of the company, depending on how founders and investors decide how important are key employees in the company success. What happens is that founders and early employees can have a huge stock difference, even if the early employees have been hired few months after the company creation, or after the founders begon to work on the project. A founder can have 30/40% of the company where its first employee mays have 0.5% vested over 4 years and contributing at the end almost as much as the founder over a long period of time. Also in this model, late employees often have residual stock or even nothing. Also, contrary to the corporate model, for a long period of time, startup don't give dividends to shareholders and the money is reinvested into growth, then growing the shares value, where the shares can lead to an important amount. On the voring right side, Employees most of the time have no official voting rights in the important company decisions, like acquisition, fundrasing, annd strategy.

The Cooperative model

The cooperative model is a model that is gaining popularity, where all employees are shareholders of the company, with equal voting rights between all employees, comparable revenue models based on salary (oftne there is a maximum difference between earnings), and the equity is shared amongst all employees equitably. With an egalitarist model about value repartition and decision, we may have seen some issues about capacity of Cooperatives to scale their team above 50 members, due to the fact that the last employee has the same right and rewards than the early "founders/employee" of the cooperative, who often gave extra efforts and financial risks to kickstart the business. Also, the higly distributed governance and egalitarian voting model of such cooperative may slow operations and decisions in a fast paced environment, and the weigh of late employees in the decisions are as big as ealry employees who know more about the market and the business.

A new relationship between workers and employers : the end of employment, the beginning of work

In an era of technology and skilled workers who are diving into entrepreneurship, we arrive in a time where this is not the the skilled worker to say what he/she can bring to the company, but to the company to tell the future employee what it can bring to him/her. On the other side, we have more and more less skilled people who are unemployed but who want to be hired by corporations but that companies don't want to hire as they don't have the skillset required. So companies are in need to invest on their worker as it becomes the main asset of the business. And a new model of value repartition between employees and employers is needed can be beneficial for both sides of the hiring line.

From the win-win to value based negociation model : how fair it is?

In the past, most of the negociation theory was based on getting a win-win agreement. As long as everybody wins in a deal, the deal is good. But the problem is that the deal can be win-win but still not fair. In a deal, if one part earns $1 and the other earns $1,000,000 they are both in a winning situation, but they are not making a fair deal. If both parts knew what was earning the other one, the deal would not have probably happened, as the $1 winner would have asked a fairer share of the value created. In comapnies, either corporations or startups, the value created and the share than the employee gets is not transparent. Employees don't know exactly how much value they create to the company, and what they will earn is not depending on this value creation over time. It is based on the market value of their profile and their skills, and to the negociation power the company has with them, and all their competitors for the same job, as the reserve army

In startups, the equity early employees gets is a little more transparent, but still quite opaque about the number of shares every employee gets at a certain time and a certain position, the company valuation at this time etc... Lots of tech entrepreneurs in Silicon Valley and elsewhere argue that the startup model is fair because of its win-win aspect. They claim that if the company is successful and is worth billions, early employee even if they have a 50 to 100 times less shares compared to the founders, they will still be millionaires. And because of that, that is a fair deal, at least better than working for a big corporation that will never make you rich in millions like that in such short period of time. But we have seen that this model is based on win-win more that value-based negocation, and even if employees accept the deal, this is not the fairest in an economical point of view. However, the execution model of startup and their ability to attract the best talents with this model make them the most efficient model for high and concentrated value creation.

In cooperatives, the model is egalitarian and transparent by design as everybody has the same share of the company, and most of the time, higher incomes are limited to a certain amount from the lowest income of the company. Econmically this is the fairest model, but it may lack of incentives for the early workers to continue to share the value over time with new entrants as the late arrivants have the same share and value that the ones doing the work for the last XX years. The human aspect of social interaction and equity as time and energy spent to create the profitable entity is denied. For that reason many cooperatives have developped mechanisms to rewards early employees with extra revenues, and we see lot of cooperatives that have issue to operate as efficiently as startups, go beyond 50 employees or raise capital to grow fast and big.

The perfect model is probably in between. The efficiceny, the ability to scale, the extra reward for early investements from the startup model and a fairer and more transparent model between all workers from the cooperative.

Flowing organizations : rewarding early investments, onboarding skilled talents, remaining operationnal, being open and transaparent

How to reconcile startups models known to be efficient but not fair and opaque between founders and employees and cooperative models that have demontrated fair value shared but efficiency issue in their capacity to scale? Here are flowing organizations, a new employee/founder model based on planned equity inflation over time, that allies transparency, attractivity and keeps efficicency in the ability to scale and govern the company.

Principle : Flowing Organizations

The principles are the following :

• every year, the company create shares that are splitted amongst the all the people working in the organization at that time in a equal part.
• Founders and employees counts for the same, although founders are often working before the majority of employees in the company, so they accumulate shares in the early days of the company
• the dilution/share creation ratio over time is core to the company shareholder agreement and cannot be changed. Like that, workers know exactly what equity they will get depending on the time they join and they spend in the company.
• You need at least 12 months in the company to get your first 12 months of equity (1 year cliff)
• you cannot sell or give your shares, shares are only issued to people who have effectively worked in the company
• If you leave, you keep your shares that will be diluted over the years over time, as you don't create value anymore to the company

Example

You are 3 founders, creating a company with 1000 shares at the start, and an inflation ratio of 1000 shares everyear.

Year 1-2-3 : You work 2 years as the 3 founders to build your MVP. After 3 years, there are 3000 shares created and each founder owns 1000/3000 shares, as 33% of the company.

At year 4 : you launch your product and make some money, you hire someone full time, your 1st employee, who will work most of the time hard as much as you (at this stage) to make the company successful. Like every year, 1000 shares are issued, and are now split between the 4 of you, as 250 shares for each.

• Each founder has now 1250/4000 shares, as 31,66% of the company
• the 1st employee (or the 4th founder :) ) has 250/4000 shares, as 6,66%.

At year 5 : the product is going well, 6 new hires join the company full time. Like every year, 1000 shares are issued, now split in 10 people equally, as 1000 share each.

• Now each founder has in total 1350/5000 shares as 27% of th company
• The 1st employee has in total 350/5000 shares as 7% of the company
• The 6 late employees have in total : 100/5000 shares each as 2% of the company

Let's explore 3 cases of growth and their impact on equity for each founder, early employee, late employee.

Case 1 : The company stagnatesat 10 employees for 5 years

After 5 more years of 10 employees and 1000 shares per yer, we obtain

Now each founder has in total 1850/10000 shares as 18,5% of th company The 1st employee has in total 850/10000 shares as 8,5% of the company The 6 late employees have in total : 600/10000 shares each as 6% of the company

The company did not scale as much as planned but it still working well. All people contributions tend to a more cooperative model where over a long period of time everybody tend to get (almost) their shares accroding to a equal split between employees. It can apear normal that it tends to that number as the work is more split between all the employees and the founders contribution is diluted ovet time in the whole team work.

Case 2 : The company goes back to 3 employees (2 founders and 1 late employee)

Imagime after year 5 the company has diificulties to continue the business, 1 founder leaves the companu, 2 founders stays and year 5 employee stays in the company

At year 6, 1 founder, the 1st employee and 5 out of all the late employees are leaving due to financial issues. From year 6 to year 10, 1000 shares will be issued every year to the team working on the project, split in equal shares of 333 shares per year

So at the end we will have :

• The 2 early founders who stayed who will have a total of 3015/10000 shares as 30,15% each
• The founder who has left in year 5 will keep his shares of 1350 but diluted to the 10000 shares so 1350/10000 as 13,5%
• The 1st employee has in total 350/10000 shares as 3,5% of the company
• The late employee who is still working will have 1666/10000 as 16,6%
• The 6 late employees have in total : 100/10000 shares each as 1% of the company

The 2 staying founders are rewarded for the continuous work they have brought at early and late stage with 30,15% of the company. The leaving founder in year 6 is rewared by its early work ad diluted over time because of his inactivity inside the company, going from 18,5 to 13,5% of the company. The 1st employee who left in year 6, has still some value for its work during the year 4 and year 5 and still owns 3,5% (from the 8,5 %) The late employee who stayed from year 6 to year 10 now has 16,66% of the company, acting like a founder and rewarded so. (from 2% previously) All other late employees who had accumulated 2% of stock now have a residual stock of 1%.

Case 3 : The company scales to 1000 employees

Let's imagine the company goes from 10 to 1000 employees in 5 years due to exponential growth as is :

• Year 5 : 10 employees
• Year 6 : 40 employees
• Year 7 : 100 employees
• Year 8 : 200 employees
• Year 9 : 500 employees
• Year 10 : 1000 employees

At the end :

• Each founder has 1784/1000 shares as 17,84% of the company
• 1st employee in year 4 have 484/10000 as 4,84% of the company
• Employees in year 5 have 171/10000 as 1,71% of the company
• Employees in year 6 have 46/10000 as 0,46% of the company
• Employees in year 7 have 15/10000 as 0,15% of the company
• Employees in year 8 have 5/10000 as 0,05% of the company
• Employees in year 9 have 2/10000 as 0,02% of the company
• Employees in year 10 have 0.50/10000 as 0,005% of the company

If the company is growing fast it had probably a huge valuation and this model enables a fait repartition based on the efforts of each in the past. Il we imagine tha the company worth 1B dollars for 1,000 employees (classic acqui-hire model 1 employee = 1 million)

• the 1st employee will have $48,4M worth of stock
• the 10th employee will have $17,1M worth of stock
• the 40th employee will have $4,6M worth of stock
• the 100th employee will have $1,5M worth of stock
• the 200th employee will have $500,000 worth of stock
• the 500th employee will have $200,000 worth of stock
• the 1000th employee will have $50,000 worth of stock

We can consider than it is a fairer value repartition based on value creation and timing based on risk of the model that comparable startup or cooperative models.

For a more successful startup, the valuation could go lot higher, like for innstance Stripe, currently valued $22,5Bn for 1,000 employees, so you could multiply these numbers above by 22. Or the case of Whatsapp would be even more attractive, bought by Facebook at $19B for 47 employees. Or Uber, valuated at $65B for 16000 employees, Airbnb valuated $20Bn for 4000 employees etc...

The impact of the flowing ratio

The flowing ration (as dilution/share creation ratio) has a lot of impact on the attractiviy model of the flowing organization. Let's explore the 3 different models of dilution.

Linear flowing ratio

This is the example model we took with a flowing ration of 1, where every year a same amount of share, X=1000, is created and the dilution. Let's call it the base model for founders/employee equity repartition over time.

Logarithmic flowing ratio : rewarding early founders

The idea here is that instead of having a flowing ration of 1, we will have a flowing ratio of y where 0<y<1, and this for every year n. Then we have X(n+1)=yX(n) Meaning that if for instance the number of equity created at year 1 is X=1000, with y =0.8, we will have for :

• Year 1 = 1000 shares
• Year 2 = 800 shares
• Year 3 = 640 shares _ year 4 = 512 shares _ etc...

That means that the early founders are more rewarded and less diluted than in the linear model, coming back to a model that looks like "startups". A startup model would be a flowing ratio y =~ 0 where once the equity have been shared by founders, there is not so much for later employees.

Exponential flowing ratio : onboarding late employees more attractively

Contrary to the logarithmic model, the idea here is that instead of having a flowing ration of 1, we will have a flowing ratio of y where y>1, and this for every year n. Then we have X(n+1)=yX(n) Meaning that if for instance the number of equity created at year 1 is X=1000, with y = 1.5, we will have for :

• Year 1 = 1000 shares
• Year 2 = 1500 shares
• Year 3 = 2250 shares
• year 4 = 3375 shares
• etc...

That means that the early founders are less rewarded and more diluted than in the linear model, coming back to a model that looks like more how "cooperative" works. A cooperative model would be a flowing ratio of y= infinite

Vesting

You can apply equity for employees with a vesting, let's say for instance 5 years. Meaning that if the vesting is not finished, employees leaving the company will not get their full shares, only the one they have vested so far, to go back to a stock option model. Based on that, the stock option model is then more attractive for the early years than the late years, but also more attractive if the company is downsizing and the employee get more shares compared to its late arrival.

Raising money

This model is based for a certain type of companies that need to scale but want to involve everybody in the journey more fairly. For a full rocketship company, the classic startup model, based on win-win will is probably the most performant, where investors want founders to get enough equity compared to stay focused and dedicated to the growth of the company, and then do not accept too much founder dilution after raisong capital. With this model, raising money is just apply a down ratio to the company flowing ratio.

For instance, if a company has a flowing ration of 1, with 1000 shares a year, the impact of raising money for 30% of the capital will just dilute that ratio by 0.3. Now the company emits not 1000 shares but 700 shares a years.

This model is also made for companies that never raise money, like most of cooperatives, to give them an opportunity to raise capital.

Expected incentives to adopt such model

• Easier to attract talents, that is the only thing hard to scale
• more involvement from workers to the company missiom
• more loyalty to the company over time, even after leaving
• less nogociation into shareholders agreement (stock,vesting, good leaver/bad leaver etc)

Philosophy

• Value is created by the whole organization (as the people in it), from the assistant to the CEO
• All employees are links of the value chain of the company in a symbiotic manner
• Employees are (late) founders too
• Rewards to the one who works to create the value in the company
• There is more incentive to work in a company where the rewards are shared more equitably
• the feel of appartenance is higher when things are transparent and I have a voice
• There is no good leaver of bad leavers, just leavers.

limitations