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Definition: Democratic Company

A company where all employees are equal owners, and the company constitution dictates that:

  • All employees are issued voting shares across their first 12 months.
  • All votes must use the mathematically sound quadratic voting system.
  • All current employees are issued non-voting shares (profit shares) each quarter.
  • A departing employee's voting shares are converted to non-voting profit shares.
  • Profits are shared amongst current and former employees based on total shares.
  • Salaries are capped at 4x an employee's country's median wage.
  • Dividend payouts are capped at an average of 1x the salary cap over 5 years.
  • The company "war chest" is capped at 5x annual expenses.
  • If the company's profits exceed its caps, it must take action to reduce profit.
  • The company cannot sell more than 20% of its shares to raise capital.
  • The company can only invest in other Democratic Companies.
  • The company must not hold or use any unsanctioned financial instruments.
  • Employees cannot work more then 40 hours per week.
  • Only humans can be employees of the company.

Employees are issued voting shares over their first 12 months

Every quarter, employees are issued voting shares until they have accrued their full complement of voting shares. An easier way to think about this is that every employee's vote is weighted Math.min(monthsEmployed / 12, 1).

This allows their influence to ramp up as they become more familiar with the company. It prevents a cohort of new people having an outsized impact on decisions they lack context for. It also allows them to grow familiar with the voting process while the stakes are lower.

Voting must use Quadratic Voting system

Across the world, government elections use to different voting methods, but all of the methods used at scale for democratic government elections are mathematically unsound. Rather than re-explaining all of that, Veritasium made a great video about it. Instead, we will use a system called Quadratic Voting. The high level explanation is that everyone gets a fixed number of points to "spend" on their votes. "Buying" the first vote for an option costs 1 point, allocating 2 votes to 1 option costs 2 points, 3 votes costs 4 points, etc. So if you had 16 options and 16 points to spend, you could vote once for every option, you could place 4 votes on one option, etc.

What gets voted on? Anything that people have not or might not agree on! Being a software guy, I have vague designs for a system that you could think of as "Slack, for voting" — all votes would be open to everyone, but people could subscribe to topics they are interested in. Everyone would have equal capacity to make a case for their proposal. Some decisions would require a company-wide vote. It looks like software already exists for this purpose, but I am yet use it.

Current employees are issued non-voting shares every period

Non-voting shares, AKA profit shares are used to calculate dividend payouts. By issuing an equal number of shares to all employees every period, people are rewarded for tenure, but also all employees are trending towards an equal share. I think it accurately reflects the reality that people can help shape a company, but we're always shaping it together. If someone spends ten years at a company, yes they've had a big impact, but ten years after their departure the company will have been shaped by other people, and their share of dividends will taper off to reflect that. The more people there are in the company, the faster their relative contributions, and thus their payouts, taper off.

Departing employees' voting shares are converted to non-voting shares

This means that people leaving the company still receive a long-tail of decaying dividend payouts, but they don't have a say in the decisions of the company. This prevents things like an absent founder coming back and making terrible decisions because they don't have an up-to-date understanding of the company.

Profits shared amongst current & former employees based on shares

Basically, sum the voting shares and profit shares of each shareholder (current or former employee) to calculate their share of the profits. Explaining it in JavaScript again:

function calculateEmployeeDividendPayout(
  /** The number of voting shares the employee holds */
  votingShares, 
  /** The number of non-voting AKA profit shares the employee holds */
  profitShares,
  /** The total number of shares on issue across all current and former employees */
  totalIssuedShares,
  /** The total number of dollars being paid to employees from company profits */
  totalPayoutDollars
) {
  const employeeShares = votingShares + profitShares;
  const employeeSharePercentage = employeeShares / totalIssuedShares;
  return employeeSharePercentage * totalPayoutDollars;
}

And that's it! Very straightforward maths, the most complicated part is understanding the variables.

Salaries are capped at 4x an employee's country's median wage

This prevents the company from inflating wages to reduce profit. I think everyone should be paid equally for their time, but there may be cases where that is plainly unfair in a way that is obvious to everyone. The cap also prevents employees from becoming excessively wealthy, because we want to be rewarded for our work rather than work for a reward. It prevents the company from becoming a vehicle to exploit its customers to enrich its shareholding-employees. I want to make sure there is never an incentive to sell a crappy product or harm people to maximise profits.

4x a country's median wage is still a bloody great salary! Here in Australia that would be a maximum base salary of $232,864 based on the $58,216 median wage. That is excluding dividend payouts, which are in addition to the base salary.

Dividend payouts capped at an average of 1x the salary cap over 5 years

This means that someone could take home, at most, 6x their salary in dividend payouts provided they have gone without a payout for 5 years. Basically, this provides a pathway-to-reward for reaching true profitability, which is generally a multi-year slog. Employees could choose to reinvest profits into growing the company for a number of years and then be compensated down the track.

However, that means the next year their dividend payout would be capped at 0.2x the salary cap, then 0.4x the following year, etc.

Of course, combining the dividend payout cap and the salary cap means total compensation is capped at 8x the median wage, which again in Australia would be $465,728 on average — enough money to live extremely comfortably without becoming a Bond villain. Or taking 5 years of payout all at once, $1,397,184.

Company "war chest" capped at 5x annual expenses

This is a limit on the cash the company can hold, preventing the company from becoming a vehicle for manipulating governments, etc. This is part of the "don't be a Bond villain" ethos, again. By basing it on expenses rather than revenue or any other metric, it gives the company room to manage its cash flow, especially in cash flow sensitive businesses that might have a high cost of goods sold and low margins.

If the company's profits exceed its caps, it must take action to reduce profit

These actions to reduce profit could be any mix of

  • reducing prices, but not entirely below cost (don't price out competitors!)
  • voluntarily paying more to the company's democratic vendors
  • stopping production, provided doing so does not harm the company's customers
  • investing in other democratic companies

This is part of being a good citizen of the community — if everyone in the company is being paid maximum salary, maximum dividends, and the war chest (savings account) is full, then the company's needs are met. There is no need to make more money, so don't! Again, don't become a Bond villain! There is such a thing as rich enough, and 8x the median wage is certainly enough. If you still don't feel rich enough, find better friends.

This way, if your business is providing a necessary good to humanity, it is forced to provide that good to people that need it at the cheapest viable price once the company's needs are met, rather than maximising returns for investors. This also gives a company plenty of flexibility to exercise strategies like selling at a higher price to a demographic that can afford it to subsidise selling below cost to a demographic that cannot.

The company cannot sell more than 20% of its shares to raise capital

At least 80% of all shares must be held by employees. The company cannot sell voting shares to investors, even if those investors are employees. Strictly no exchanges for voting shares. Why? Because investors are not good for companies, nor communities. Sometimes a company might need to raise some capital, but ultimately these democratic companies are supposed to be good citizens, and a company that needs to raise $500,000,000 to reach profitability probably isn't providing enough value to meet the threshold of good citizenry.

Note that this does not prohibit companies raising money from their employees, only that they cannot be compensated with voting shares. This does mean an employee could invest in the company in exchange for profit shares (however, the profit cap applies).

The company must exclusively invest in other Democratic Companies adhering to The Constitution of Democratic Enterprise

Partly, this is to prevent the company's profits escaping the constitutional limits through proxies and such. The other aspect of it is again the good citizen ethos. By investing in other democratic companies, it helps propagate democratic enterprise. These companies are better for the planet, our society, and the integrity of our democratic governments.

It also creates a positive feedback loop where the success of democratic companies leads to the creation of new democratic companies. By supporting the new system over the old system, we're creating a positive feedback loop that will allow democratic companies to thrive and completely replace feudal companies.

The company must not hold or use any unsanctioned financial instruments

The company can exclusively hold cash, depreciating assets, loans of up to 25% it's revenue, and up to a 20% share in other democratic companies. It cannot purchase loans from another company — strictly no trading debt. It can take loans, preferably but not exclusively, from other democratic companies. Again, this prevents constitutional escape, but it also generally prevents financialization. Part of being a good citizen is providing concrete value, not financial instruments. With few exceptions, financial instruments only enrich the wealthy.

Note that this is a list of financial instruments the company can use, not a list of instruments it cannot use; It is an exhaustive allow-list, not a deny-list. This closes a vector of constitutional escape such as an employee of the company inventing a new financial instrument and selling it from the company to themselves to extract profits.

An employee cannot spend more then 40 hours per week working

Believe it or not, this closes yet another constitutional escape vector. An individual could not work at two democratic companies to collect double the maximum salary. They would have to divide their 40 hours between the companies that employ them and their salary & dividend payout cap at each company would be proportional to their working hour allocation.

Only humans can be employees of the company

This prevents someone creating another company, trust, AI in a trench-coat, etc, and making it an employee to siphon money out of the company.