Owning equity in a for-profit venture is a powerful motivator – particularly in the early stages. It’s also one of the most contentious, negotiated parts of building a high-growth venture. This comes from our organizational conventions of control and scarcity – we need to control and amass resources to control and weild power and get things done.
In taking a peer-produced approach to building Shldlss, the for-profit offshoot of the Social Venture Commons, I found we needed a new model to fairly attribute the economic value to those who actually created it. After many conversations, including on this post, here’s where I’m at with what has now become our “Kudos Model” for economic value distribution.
- Phase: Set the phase of value creation ending with a valuation event or economic value distribution
For shdlss this is the founding phase extending through to Series A investment. At this point we should have a reasonable grip on the value of what’s been created and what others think it’s worth.
- Proportion: Set the estimated proportion of enterprise value that will be newly created during this phase.
For founding phase this would be 100%. Over time, the new value created will likely be proportionately less each time – though not always. A basic benchmark for where to set the proportion might be what a comparable venture might issue in option pool.
- Appointment: Appoint key people to allocate Kudos.
For shdlss we will go probably go to 4-6 people who have been and are committed to being involved for the whole phase. This appointment is happening essentially half-way through the phase and will be done shortly.These are people who are closely involved in the project for the entire phase and will have a reasonable sense of the relative value of contributions made during the phase.
- Allocation: Have a KudoFest at the end of the phase.
All appointed people will gather to review the stream of all contributions made during the phase. We will use the twitter and VenTwit streams as the core history. Each appointed person will then be able to allocate 100 Kudos to those who made meaningful contributions. They must allocate all Kudos and cannot allocate any to themselves. The 100 limit means the smallest contribution they can recognize (1 Kudo) represents 1% of the value they have to distribute. After each person does their allocations, we will aggregate the allocations and have an initial allocation. The group will then review and discuss and can make any changes provided their is unanimous consent.
- Distribution: Distribute financial value rights according to Kudos allocation.
During the founding phase, this could be in common or preferred shares, in subsequent phases this could be through options or other forms of financial value sharing.
This will no doubt evolve as we work our way through the process. As the lead founder, I’ve been asked why I would do it and even told that I’m crazy for trying it. With where I’m at now, I can only see us all as having a much more to gain. Without the spirit of this in play we wouldn’t be where we are at – and that’s what it’s all about – getting it done – together.