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Share More to Have More Why Lab.Coop is an employee-owned, holacracy-governed company

Founding Circumstances

After pulling the trigger on closing Brickflow, our previous venture with Tamás Kökény, we decided to stick together. "We stood there and knew where we messed up, and there was a team with whom we liked to work. What’s next?" - as I’ve stated in our recent Forbes interview. It was spring of 2015 and we had to reset our professional life.

Since we had just crashed a company, we had no money to be invested and decided not to raise external funding for the kick-off. This meant two things: we needed a business model which could generate cash in a short time (weeks), but moreover we needed to find a venture with a very low barrier to entry. Since the core team of Brickflow was going to stick together, we had all the know-how of an end-to-end digital product agency targeting software startups. This also meant that the first team members would have to take almost the same risk as the founders.

Based on our previous experience, we aimed to bridge the motivation and commitment gap between owners and employees as the sense of ownership and risk-taking wasn’t satisfying before. A desperate need appeared to create an environment which attracts and supports growth mindset, entrepreneurial, and full-stack minded people.

Market Circumstances
The war for talent: anyone who works in the IT sector knows pretty well that it is close to impossible to be well staffed. The number of open positions in the IT industry in Hungary alone is estimated to be over 20,000, but Europe-wide it is over a million. We are short of IT professionals. On the local talent market, beside the huge multinational employers with strong local presence like GE, IBM, Siemens, EPAM, Erricson, etc. there are successful venture-capital-backed startups like Prezi, LogMeIn and Ustream. A brand-new and underfunded company has no chance to compete with the above players in terms of salary, nice offices or free food. On the other hand, we were confident there would be no way we could starve in such a seller’s market. Again, what’s next?
The Secret Sauce*

*Or at least, as a secret as shared sauce can be.

We had a gut feeling about possible solutions, but unlike with Brickflow, we started with an in-depth validation process. First, we interviewed about 50 IT professionals, founders and CEOs, then I dived into the alternative models of ownership and management.

What can we provide that other companies can not? Ownership! Both in its sense of stock and influence. Why? So we could build a fast-growing business between the above discussed founding and market conditions. Tamás and I believed that by sharing more with our team, we could both be and own more.

There are numerous different models that companies use to distribute profit and/or ownership among employees.

  • Profit sharing: the company decides to distribute a portion of the profit among the employees. In this case, the employees do not get a stake in the company, but are motivated to keep the company profitable. Patagonia is an example of a pioneer of this model.
    This means no influence on high level decisions, it is solely a financial incentive.
  • Employee Stock Option Pool (ESOP): establishing a minority ESOP is a market standard, both at private and public corporations. This includes early stage startups, from Brickflow to Prezi, Matáv, and even Facebook and Microsoft. The employees do not directly get a part of the profit, but gain the right over time (vesting) to purchase shares at a discounted price rather than at the stock or the acquisition-share price.
    Employees do not significantly influence high level decisions, but can make a good exit.
  • Partnership: some companies, like law and consulting firms, rely heavily on the top senior workforce due to their business model. Companies like BCG or the Big Four, with their up or out culture, offer a buy-in for their most valuable employees. This is how someone becomes a partner.
    This setting gives both financial benefits and influence for the Partners.
  • Majority employee owned corporation: some give shares to their employees. Not options, but real common stock. In some cases, it is only the 49%, while in others all the shares of the company have been distributed among the employee shareholders. We have learned a lot from Chroma’s co-founder Paul Millman in this regard. Chroma has more than 200 owners and over 25 years of experience with the employee-owned model.
    This is one possible form of liquid ownership, as the number of stocks a person owns will depend on the added value. In such a setting, the employees have real power over the company and they also take part in the risks of ownership.
  • Cooperative: one person, one share, one vote. Total equality. Sounds communistic? Well, there are thousands of companies just killing it in a capitalist competition. Chèque Déjeuner and others in the top 300 have thousands of owners selling your lunch tickets.
  • Platform cooperativism: AirBnb, Uber and other sharing-economy companies have been heavily criticized for not rewarding enough of the real value creators: apartment and car owners. Platform cooperatives that involve the community in the ownership could successfully challenge these recent market players.
After careful consideration we decided to go with the majority-employee-owned corporation model. Imagine that the corporation distributes a certain number of common stocks each month, sold to the employees at nominal price and weighted by their seniority (as an approximation of their added value). In this model, team growth leads to the fast dilution of the original team. Today, I own about 15% of Lab.Coop and it is diluting. Diluting in terms of %, but not in terms of value. Lab.Coop is a majority-employee-owned corporation. The compensation or salary formula, inspired by Buffer and others, does not only focus on salary, but includes common and preferred stocks too. The details behind our share distribution will be discussed in a later in-depth post.
Self-Management for Evolutionary Purpose

We aimed to build a company with strong autonomy for our partners by distributing the power and making decisions with consent (no, we are not a democracy!), but without the unnecessary bureaucracy and Taylorian management. Why? To scale freedom, which we all love at small, early stage companies.

There are various models of self-management which have been pretty well described in Reinventing Organizations by Frederic Laloux, in Management 3.0 by Jurgen Appelo and in many other works. (**See a full reading list at the end of the post.) I do not aim to dive into these concepts and practices, but if the below visuals inspire you, please go ahead and read these books. Like Zappos, we chose Holacracy to support our transformation towards a Teal organization. Adam Banko facilitated this from day one. Holacracy provides an operating system-like sets of rules to kick-off which facilitated experimentation. The power of the CEO is placed into a decision making process, based on the Holacracy Constitution. For our team, it brought the same mindset change as switching from waterfall to agile software development so we could work on our governance in small iterations. By defining these policies together, we were consciously improving the way we worked. Because of that, we now have our own apps on the operating system in the form of a public governance document.

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Looking Back
We started by experimenting with a model to scale the team and freedom. Our aim was to find a financially sustainable, fair, scalable and long-run-motivating approach. Maybe--especially in Hungary due to our history with socialist cooperatives--we might sound out of touch. Our ownership and management system were not a brand-new invention, but a combination of existing practices. In just 10 months we tripled the team (to about 20 shareholders), became profitable, and launched an IT school (GreenFox Academy) alongside the product agency. Even if all of the above was not perfect in practice yet, even if we had a lot to work on, we felt unstoppable. It was good, albeit early, proof that our hypothesis regarding co-ownership and self-management were right. Lab.Coop is scaling.
Annex: Our reading list while doing our initial research for this venture