Breaking Down Our SaaS Start-up's Operating Agreement

An operating agreement is a key document used by LLC companies to govern internal operations. It basically lays out for the business owners how financial and functional decisions within the business will be made.

This past month Dave, Dimitris, and myself got together in Boston hash out the details of the operating agreement that we’ll use going forward. This post serves to break down the key decisions that we made in layman’s terms, so future employees understand how Outseta will operate moving forward. Our hope is that other start-ups can also benefit from seeing where we ended up, and maybe borrow some ideas as they consider their own operating agreement.

Here are the key details of Outseta’s operating agreement.

Who works at Outseta? How will decisions be made?

There are two different classifications for people working at Outseta—employees and members.

Employees

1. Anyone working at Outseta that is not a contractor is an employee. Well, duh.
2. All employees that have been with the company for more than 1 year will participate in our profit sharing program.

Members

Members are employees who have an ownership stake in the company and are eligible to vote on the following decisions. A 66% majority is needed for an item voted on by members to be approved.

1. Dissolving or selling the company
2. Amending our operating agreement
3. Issuing more membership units (think of these like stock options)
4. Removing “managers” (more on this momentarily)

Every 4 years members will vote for “managers” who will serve a 4 year term. Dave, Dimitris, and myself are Outseta’s existing managers.

1. All other management decisions (but not those listed above) related to the business will be made by the managers.
2. If there are 2 managers, decisions need to be unanimous to be approved. If there are 3 managers, there needs to be a majority vote for decisions to be approved.

Delivering financial rewards

When Outseta makes money, we think our employees should make money. Aside from salary there are two other ways to line your pockets when the business does well; profit sharing and membership units.

Profit sharing program

1. 50% of the Outseta’s profits will be distributed to employees who have been with the company for more than 1 year.
2. The extent to which you participate in the profit sharing program will be based on how many years you’ve worked at Outseta. The longer you work at Outseta, the larger your portion of the profit pie.

Membership units

1. Because Outseta is a LLC we offer “membership units” as opposed to traditional stock options or equity grants. This essentially represents an ownership stake in the business—if Outseta is sold, acquired, or in some other way liquidated all members working at Outseta will receive a payout based on the number of membership units that they hold (just as you would with traditional stock options). Initially membership units will be granted at the managers' discretion, but we’ll look to formalize a more scripted means of issuing units to ensure fairness going forward.
2. If a member leaves the company they do not retain any ownership or equity in the business. Instead, we offer a buy back program where Outseta will buy back membership units from departing members. Members who have left will receive a payout based on the number of membership units they held and how much the company is worth. The valuation of the company will be calculated as two times last year’s revenues. For example, if last year’s revenues were $5mm and a member had membership units that represented a 1% stake in the business, our buy back program would pay them ($10mm X 1%) = $100,000. We will periodically review this formula to make sure it’s fair. The buyback will happen over the course of a few years based on the financial reserves of the business.

In short, we think that the profit sharing program incentivizes all sorts of good behaviors amongst employees - it encourages commitment to the company and financial discipline, while also giving all employees who have been with Outseta for more than a year the opportunity to participate in the financial successes on the business. And if members do wish to leave Outseta to pursue other opportunities, it also allows them cash out their membership units at a fair rate.

Why do we exist? How do we behave?

It’s unusual to see information around durable items like company purpose and values in an operating agreement. We thought it would be useful to include this information in ours because we hope to leverage our operating agreement as an asset that can help prospective hires understand the opportunity at Outseta, how the business will be run, and how decisions will be made. 

Why do we exist?

1. To help small companies simplify the technology choices they have to make to run their businesses.
2. To create a profitable company we are proud of and is enjoyable to work for.

How do we behave?

1. We look to invest in, develop, and fill open roles with employees/members first.
2. We optimize for the best people possible by embracing remote versus co-located work.
3. We value flexibility, but we honor our commitments to each other.
4. We think long term over short term and care more about the journey than the destination.
5. We embrace self management, encouraging autonomy and empowering our people to make decisions openly and transparently without managerial oversight.
6. We earn influence by consistently demonstrating great work and decision making.

What do you think? We’d love any and all feedback on the agreement we’ve come up with. You can also view the full version (the actual legal document) of the operating agreement here.

-Dave, Dimitris, and Geoff