The definition of startups is getting broader, and as founder-friendly VCs are getting born, it might be time to think beyond equity.
Equity is loved and hated. For most startups, it is a substantial part of the compensation package and it’s usually the main vehicle to provide upside to employees and the founding team.
With about 90% of startups failing, it can also be one of the most worthless / riskiest forms of compensation, so not everyone is open to it. Cash is still preferrable to many, leading to a team that is not sufficiently incentivized by the success of the overall company.
Even more so, many companies and their way of doing business are incompatible with issuing equity.
- There is no exit in sight, so the equity can’t be sold (or at least not easily)
- The company is cautious when it comes to funding and growth, so equity isn’t worth a lot
- The founders prefer to own all/most equity in their own business
- It’s not possible or difficult due to the company structure (e.g. remote company in the US)
Not only that, but giving equity in a successful business is also not a reward for loyalty or important work - it’s a reward for risk takers and people who can afford it. This creates an imbalance in the team, where impact is often disconnected from upside – companies are rewarding wealthier and more secure employees, not their most important ones.
Profit Sharing
More companies are therefore looking into profit sharing as a way to reward loyalty and growth. Some of my favourite companies, such as Basecamp and Buffer, recently announced their Profit sharing programs.
Happy to share that to end 2018, Buffer is doing a profit share with our team of $394,997. We're also committing to doing charitable contributions matching 20% of this amount, so $78,999.
— Joel Gascoigne (@joelgascoigne) December 17, 2018
Thread with details around our methodology for profit share and charitable contributions 👇
Profit sharing is an amazing way to reward employees:
- It creates a liquidity event every year vs. possibly once every 10 years.
- It rewards productive work and loyalty vs. risk taking and luck
- It isn’t coupled with ownership
But what if there is an exit? Profit sharing can also include that, e.g. in form of a percentage of the company that is distributed amongst all employees based on loyalty. Loyalty gets rewarded, employees are happy, founders are happy (because they get to keep a larger part of their own company!)
Addendum in 2026
The trend of increasingly alternative ways of creating upsides for employees has continued over the years. In a world where big cash exits have gotten rarer, and companies have started surviving longer and pushing for profitability sooner, the development of this has continued.
Profit sharing remains at the core of many compensation strategies. In fact, it’s what we use at MentorCruise as well.
However, I’ve also heard of teams that leverage the legal framework of equity to then pay out dividends or issue stock buybacks every few years. They’re also interesting compensation frameworks, all with their own pros and cons.