How to share profit based on both effort and skill?

Suppose the following:

1. You have a very small startup (a few people) with almost no startup capital
2. You have a client or two and are making some money, but not enough to afford real salaries
3. Each member of your team performs a variety of tasks (development, testing, documentation, management, client relations), with highly varying amounts of effort (varying over time, and per teammate - I might work 20 hours this week but 5 the next, while my colleague might put in 10 hours one month, and then none the next)

Now given points 1 and 2 above, you decide that profit sharing as a form of payment seems reasonable for the time being. Because the amount of effort each team member puts into the project varies so much, you decide as a team to share the profit depending on the hours worked - the effort. A nice, simple formula.

Although this seemed fair at first, you soon discover a serious (and, in retrospect, obvious) problem:

• Although you're no-where near as good a programmer as your super-duper developer buddy, you each get rewarded the same for an hour's worth of work. In practice, this means that your super-duper developer colleague is (heavily) punished for being more efficient.

Your team quickly decides that you need a system that reflects both the effort put in and the teammate's individual skill levels. Being a huge proponent of transparency in the workplace, you come up with the following table, which is reviewed and updated as a team on a regular basis (eg: quarterly):

Dev Docs Management

You | 7 | 16 | 20

Super developer | 20 | 5 | --

Tech writer | -- | 20 | --

 

Each number in the table is used as a multiplier to help calculate what share of the profit each teammate will get. Eg: If you work 2 hours of development and one of documentation, then you get 30 'profit points'. If your developer worked a single hour of development, and your tech writer didn't work this week, then they get 20 and 0 'profit points' respectively. That week, you would get 60% of the profits, and your developer would take 40%. Note that the hours are recorded usually once/week and 'roughly'.

The questions: Is this a reasonable, fair approach to splitting profit share under these circumstances? Is there a name for this sort of completely transparent table for how much everyone is 'worth'? Is there a much easier way to do this I'm missing?

You are adding a lot of overhead and friction under the guise of "transparency". Work in a startup is so fluid and rapid, that having this kind of timecard management is an overkill. Hell, even at a $15billion company this was veto'd as an overkill and the quantum of unit was changed from hours to days.

Secondly, you're adding a lot of bean counting by having people count hours. If someone works for 45 minutes but puts in an hour, what do you think is going to happen to the dynamics? Do you want them to worry about "what about that 15 minutes?". Do you want others to catch and punish such 15 minute violations?

It's a small startup. You should be able to value each person's worth right upfront and split the equity that way. To accommodate any errors in that judgment, you would introduce a vesting schedule.

On top of the above, you can have a bonus pool of options to award people who have gone above and beyond the initial expectations, more than the others. I'm skipping the salary section since you said cashflow won't permit it. But note that in the US the startup owners are liable for minimum wages i.e. even though you won't sue yourself, you (or other partners) can sue the remaining partners for minimum wage violation.

In terms of measuring the performance, I'd recommend moving from "hours worked" to "milestones accomplished". Set milestones that are needed for your startup, assign importance, distribute per skillset, track on weekly basis.

Don't over-complicate matters!

This seems problematic because those multipliers are going to change over time...

There are a few tools at your disposal:

• salary/bonuses
• profits/equity share

You can pay at a different rate to different people and also allocate money based on "left over profit".

You should consider those methods rather than a complex formula of hours and rates and the like.