Introducing Open Equity: Buffer’s Equity Formula and Full Individual Breakdown

Ever since we established the Buffer values that are at the heart of our company culture, we’ve been continuously on the lookout for new ways to live those values every day – particularly our important value of defaulting to transparency.

Last year, Buffer shared all of our salaries and the formulas behind them. We regularly share what we’re reading, how we’re working to improve ourselves – even the mistakes we make. Without this ongoing commitment, our value of transparency is little more than a word written on a piece of paper.

That’s why today we take one more step toward turning Buffer into a completely “open company” by sharing our equity structure and individual breakdown, too.

What is Open Equity?

I’ve always wanted to demystify equity. Although the concept is deeply ingrained in startup culture, it’s often a cloudy topic. Many tech companies give you options, but explaining them is so complicated that employees still struggle to know what it all means. And with Buffer being a fully distributed team, many of our team members are far outside the Silicon Valley tech world and haven’t had experience with it before.

Leo and I had no idea how to approach equity at first. We ended up doing quite a bit of research, talking with people we trust who had great guidance for us. In the end, we set aside 20% of Buffer to give out as stock options to our team and advisors.

Right now, there are 11,256,468 Buffer shares issued and available. We issue them to team members through our “Open Equity”– a simple formula to calculate equity (actually, “options” – but more on that in a minute) that is open to the whole team. Here’s how it works.

The formula

equity-formula

Here’s a breakdown of each element in the formula and how we calculate it.

Type of role:
Each key role at Buffer carries with it a base percentage of equity. (Note: Operations and Executive Officer roles have 0 only because the roles are currently filled by Leo and I, who get zero options. We have founder equity as displayed in the table below.)
equity-role

Choice:
When you finish your 2-month “Buffer Bootcamp” period and come on full-time at Buffer, you have a choice to make: $10,000 additional salary or ~30% more equity.
equity-choice

Risk Layer:
When you join a startup, there’s a big risk difference between starting as the 5th person versus starting as the 50th. For Buffer, we use the company’s size to determine a relative “risk layer to reflect this risk.
equity risk layer

Seniority:
Right now, we have two levels of seniority: lead and senior. A lead-level team member has or will have a team to manage, while senior-level team members have shown exemplary leadership but may not have a team to manage. We are not at the size to have additional levels such as VPs just yet. In the future we will add these here.
equity-seniority

Breakdown by individual

Those are the components of the formula. Here’s how that formula breaks down in percentage equity for each member of the Buffer team today (this is an abbreviated version; you can see lots more at our open salary and equity spreadsheet).

current equity

The reason we use percentage in most areas is that this makes the concept slightly easier to grasp – it seems to be easier to understand that you hold 10% of a company’s value than that you have 1,125,646 options in a company. (An additional 500,279 options belong to a small group of Buffer advisors and former team members who retain options from partial vesting.)

Example acquisition scenarios

In general, choosing more equity means taking more risk. But a small change in equity can mean a big change in monetary outcome. So we also share with each team member a few examples of exit scenarios for Buffer. For example, let’s look at someone with options for 0.5% of Buffer:

  • Buffer sells for $30M. They make $150,000.
  • Buffer sells for $60M. They make $300,000.
  • Buffer sells for $600M. They make $3,000,000.

Keep in mind, these figures would have to be deducted by the amount the employee pays for the options (for example $0.02/share if they are an early employee at Buffer) and any taxes that apply. So in the $150,000 example, effectively with those deductions it would become $148,874.35.

The way the number $0.02/share or $0.17/share is determined is through an outside firm valuing Buffer through a process called a 409a valuation. They come up with the price/share which can then be used to issue options for all Buffer employees. Every company has to do a new 409a valuation once a year.

Our vision for Buffer is to keep going for a long time, so we might not exit. However, there may still be opportunities for team members to sell their options along the way.

Important note: Options vs. Equity

What a team member actually gets when joining Buffer is a number of options in Buffer, not actual equity. An option, as defined by Wikipedia, means the following:

“an option is a contract which gives the buyer (the owner) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date.”

Say Buffer has 100 shares. When you join Buffer, you get 10% in options as part of your compensation package. This means you get 10 options, each with the right to buy 1 of the 100 shares, at a fixed price. Let’s say that price is $1. So if you want to get your 10 Buffer shares, you will pay $10 and then you will hold 10% in the company. Now, let’s say Buffer sells the company to Google for $1,000. Since you have 10 options, you can pay $10 for your 10 shares, and since Buffer just sold, you will get $100. Effectively, you will make a $90 profit – pretty sweet!

The older Buffer gets, the more valuable the company (hopefully!) becomes. So the fixed price to pay for the options also go up. As an example, when Buffer started, the first few people could pay $0.02/share. The next batch, after Buffer became more valuable, had to pay $0.17/share. So the difference between option price and the worth of the actual share went down slightly – it should always be so that it’s still very worthwhile to have these options.

Thoughts about the future of Open Equity at Buffer

I hope this is a start towards demystifying equity – at least when it comes to Buffer.

Special thanks to goes to:
Joel Spolsky: Joel’s guidance with his concept of layers that he described here has been immensely useful for us to get our formula together.

Wealthfront’s equity calculator: The Wealthfront equity calculator has also been a fantastic guide for us, as we tried to come up with equity options in our formula that were fair and would scale.

Our formula for equity – like much of what we do at Buffer – is still a work in progress. We’ll likely have to make some changes and there’s no guarantee that it will scale as we grow, but it feels good to finally make this element of Buffer open.

I’d love your thoughts, ideas and feedback on our formula and how we can improve it further. Ask me any questions at all in the comments below, or simply tell me what you think.

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  • http://quentinpaquot.wordpress.com Quentin Paquot

    Another great post, thanks Joel! The Buffer story is inspiring a entire generation of web-entrepreneurs!

  • http://www.postplanner.com/ Scott Ayres

    The open-ness is interesting but do you think you put some of these people (yourself included) possibly at risk of robberies, bank fraud, identity theft and etc by exposing salaries? Plus I wonder how being open about salaries might effect a persons ability to be hired by another company should they leave Buffer, since the salary they made at Buffer is open to everyone. If person A is making say $50k at Buffer it would be hard to “demand” a higher salary at a different company for an equal job.. Just some thoughts.

    • http://marketingbeforefunding.com/ Mike Abasov

      I would expect people who leave Buffer after successfully working there to be able to find more senior jobs, so negotiating more senior salaries shouldn’t be a problem.

    • http://joel.is/ Joel Gascoigne

      Great questions Scott!

      I can’t think of a reason why public salaries would put people at risk. I can understand it in theory. In practice I think it’s not something that comes up. Having salaries public has been much less of a big deal than we might have anticipated. In addition, there are many public sector jobs where salaries are made public.

      In terms of being hired by another company, we are aiming to always pay above the market average so that hopefully reduces some of the concern. At the same time, I could see how it might be hard to demand a higher salary if the new employer knows your salary. What’s unique about Buffer, though, is that we really have a focus around getting the most out of Buffer while you’re here. We have regular 1:1 sessions for team leads with team members (I do several a week) and encourage people to work on themselves through blogging, speaking opportunities, etc. This generally means that people finish in a much better position than they started, no matter how long or short their time at Buffer.

      • Alec Matias

        How do you think Buffer’s current salaries compares to market rates? 20% below average? 5%? How much above average would you think you’d like to go?

        As our company begins a trend towards open and transparent salaries, I had the same thought: if you’re paying above average, then the employee has to compare the quality of their day-to-day work to make a decision, not a straight up numbers comparison. To me that seems like a “flawless” idea, but there has to be a perspective I’m not considering.

  • http://workado.com/ Justin McGill

    Great stuff – I am curious how you handle things when employees leave? I know vesting is involved, but do you get lawyers and everything involved everytime? What happens to their options?

    • http://joel.is/ Joel Gascoigne

      Hey Justin! Great question. We involve our lawyers to wrap things up there, and generally we are on the generous side (e.g. if someone is vested 11 months we will most likely push it to 12 months so they don’t get zero shares). We have 4 years vesting and a 1 year cliff, so if someone leaves after 6 months they don’t get shares. If they’ve been with us 1 year they get 25% right away and then it accumulates monthly from there.

  • http://www.thewebsitemanagers.com Thea Woods

    I always wondered about how equity/options worked for employees, so thanks for this great explanation! Although – to be honest — I’m still a tad bit confused. But that has nothing to do with YOUR explanation… Perhaps I need to invest in a course in “Equity/Stock/Shares for Dummies” or something… But again, thanks :)

    • Courtney Seiter

      Equity is really, really complicated! I would definitely read “Equity/Stock/Shares for Dummies” :)

  • http://unbounce.com Tia K

    Cool to see this all laid out so concisely, Joel. We just had a company-wide sit down with our COO last week and he went over the whole explanation of stock options with us. For some people without a business background (and even some who have) it can be hard to ‘visualize’ the potential benefits of being offered stock options. This should clear up the basic process for anyone searching.

    • http://joel.is/ Joel Gascoigne

      Very cool Tia, I think that’s such an important conversation to have! Kudos to you guys.

  • Alec Matias

    So happy you shared this, I’ve been waiting for this one! Thank you.

    • http://joel.is/ Joel Gascoigne

      Thanks Alec!

  • Williamson

    This is an interesting concept. Has Buffer considered the possibility of going public? I feel that, with your given klout in the industry now, you can only go up and offer more opportunity for the company and exit strategies for early investors.

    • http://joel.is/ Joel Gascoigne

      Wow, that’s amazing to hear, thanks for chiming in with this comment. We’re certainly committed to the long-term, so perhaps one day we might be lucky enough to have something interesting for the public markets.

  • http://www.danieltay.me/ Daniel Tay

    This is really amazing. A whole new level of transparency. Thanks for this, Joel!

    • http://joel.is/ Joel Gascoigne

      Thanks for the support Daniel!

  • https://rythie.com Richard Cunningham

    How long is the vesting period?
    Also, what happens if you take the Equity choice for a couple of years and then change your mind? do you lose the options associated with the Equity choice?

    • http://joel.is/ Joel Gascoigne

      Hey Richard! Great questions.

      We have a 4 year vesting period, with 1 year cliff.

      The salary/equity choice is a one time thing. We have some additional options planned for loyalty and promotions, so that’s the key way to get more options down the line.

  • http://www.regiondo.de/ opnde

    Hi Joel,

    your transparency – both internal as well as external – is fantastic. Thanks for sharing! Just two questions which came up:
    Do you have any bad leaver clauses?
    How do investor react to your construct? Esp. how would you deal with liquidation preferences etc.?

  • Patrick Randolph

    Hey Joel, I was curious if you guys grant dilution protection?

  • http://SeanMMadden.com/ Sean M. Madden

    Awesome post, Joel. Thank you for sharing this, including the spreadsheet. As I’ve just written to Courtney in response to her April Content Marketing Report, you guys are an incredible day-to-day inspiration and are hugely impacting the way we’re doing things here at CreativeThunder.co. Great gratitude.

  • http://socialfresh.com/blog Jason Keath

    When do you issue more shares? Does anyone ever get devalued to make room for more shares for new employees?