Thursday, July 15, 2021

How to Do It

In the previous post [1] I proposed a manner in which labor would be rewarded for the value it puts into a business enterprise in the same way as does money investment. An illustration will, hopefully, make the idea clearer. The numbers I use will be somewhat arbitrary, of necessity, but it’s the concept I’m trying to illustrate rather than predict results. The results will vary with the business, as is the case with businesses.

We begin with Person A, who has an idea for a business. She has $10,000.00 to invest, and she does so. She doesn’t seek out a bank loan at this point. She has, by that means, contributed $10,000.00 of value to the company.

Naturally, she also works at her business. Let’s say she puts in 3,600 hours during the first year. Also, during that first year, her new company has generated $10,000.00 in revenue. Person A now has, under our system, $20,000.00 of value she has contributed to her company in the first year. She has, as of yet, no employees to share it with, since her firm doesn’t generate enough money to pay any employees.

Things begin to pick up a little in the second year, and her company generates $50,000.00 in revenue. She has also worked another 3,600 hours. All of the revenue of the second year is attributable to her work, and she has contributed another $50,000.00 of value. Her total is now $70,000.00.

In the third year the business has receipts of $100,000.00. Midway through the year, she has hired Person B, who has put in 1,000 hours of work for the year. Person A has put in another 3,600 hours of work. This year, Person A has put in 78% of the work for the year, and Person B has put in 22%. $78,000.00 of the revenue is attributable to Person A, and $22,000.00 is attributable to Person B. At this point, Person A has put in a total of $148,000.00 of value to the company, and Person B, has put in $22,000. Person A now owns 87% of the company, and Person B owns 13%.

Things really pick up in the fourth year, and the company generates $200,000.00 in revenue. Person A continues her diligent habits and puts in another 3,600 hours of work. Person B puts in 2,000 hours. Person C has been hired in the middle of the year and has put in 1,000 hours of work. Based on their hours, 55% of the revenue is attributable to Person A, 30% to Person B, and 15% to Person C. This amounts to contributions of $110,000.00, $60,000.00, and $30,000, respectively. Person A has now contributed a total of $258,000.00, Person B has contributed $82,000.00, and Person C has contributed $30,000.00. Person A now owns 70% of the company, Person B owns 22%, and Person C owns 8%.

In the fifth year, Person A decides to take out bank loans to finance the business totaling $40,000.00. $20,000.00 of this amount is backed by Person A’s personal guarantee. This is considered an investment of $20,000.00 by Person A. The $20,000.00 not backed by a personal guarantee is not considered her investment, because only the company itself is liable on the loan. Meanwhile, an investor, Person D, who is impressed with the company’s performance, offers to invest $50,000.00 for a share in the business, and that offer is accepted. Person D does not intend to work for the company but will be a passive investor only. At the midpoint of the year, another employee, Person E, is taken on.

The fifth year is a good one, and the company receives $400,000.00 in revenue. Person A has decided to relax her efforts this year and has reduced her hours to 3,000. Both Person B and Person C have put in 2000 hours each. Person D, of course, has put in no hours. Person E has put in 1,000 hours. Person A has done 37.5% of the work, Person B and Person C have each done 25%, and Person E has done 12.5%. Taking the investments into account, Person A has now contributed a total of $428,000.00; Person B has contributed $182,000.00; Person C has contributed $130,000.00; Person D has contributed $50,000.00, and Person E has contributed $50,000.00. Person A now owns 50.9% of the company; Person B owns 21.6%; Person C owns 15.5%, and both Person D and Person E each own 6%.

The foregoing should be a sufficient illustration. At the end of each year, the lifetime contribution of each employee and investor is added up. The employee contribution for each year is calculated by multiplying the total revenue by the percentage of hours for each employee. Investor contributions are added to the total revenue, and that whole sum is used to determine ownership percentages. Shares are then distributed accordingly.

And that’s how the plan would work. In the next installment, I will address any serious objections I encounter or conceptualize.