I think its a creative solution in response to the employee ask, but it doesn't seem to actually resolve the issue does it?

One of the reasons that equity grants work is that people are incented to grow the company as the bigger/more valuable the company becomes they participate in that valuation growth. As equity, there is also the notion that if circumstances dictate that you move on you will still be rewarded for your hard work 'later'.

The 'units for time served' system effectively simplifies to this if you allow the employees to 'keep' units after they leave the company.

Its disingenuous to say 'we have no intention of selling or going public' since I can assure you that you also have 'no intention of doing this for the rest of our lives'.

And no, I cannot read Jason's thoughts, but I can reason to this statement logically. Jason (and other co-owners) of the company have interests outside of 37signals. Working there may be the awesomest thing in the world now, but at some point when the realization comes that you're time on the planet is finite, it occurs to one that perhaps they should take some time to do some of these other things. The notion that if you had enough savings you could live off the returns from that capital, and do the things you love, and not worry about specific deadlines, becomes more and more appealing. At some point the owners reach the 'tipping' point where they would rather work 'free form' where the cash flow for basic lifestyle was disassociated from the work product they're doing (the word 'retired' really doesn't cut it, more like 'base expenses covered before work income is considered') If the combination of owners wanting to change their lifestyle, and some entity is willing to offer you enough money for 37signals to make that change possible cross, the environment is ripe for a sale. The only other statistically probable 'exit' for LLCs is for the founder to die unexpectedly. The outlier case is the founder runs the company until senility and degeneration results in them dying leaving behind what was once a thriving business/practice/partnership and is now simply an obligation to file a tax return once a year.

By that reasoning I know that the principals of 37signals are going to either 'sell the company' or 'go public' at some point in the future, regardless of their protestations to the contrary. And when that happens, you've carved out 5% of the sales price / market value for the employees who have stuck with you to that point and are currently there. Which is admirable.

But Jason's point number 3:

It should reward current employees. This was about who was at the company at the time of a sale/IPO, not people who worked here years ago.

Does not sound like the system would provide anything for the folks who were instrumental in you getting there but for one reason or another had left the company. This system might leave them with a bad taste.

A variation on this system would be to reserve a larger chunk (say 25%) of the transaction price or fair market value (FMV), and accumulate your units on a monthly basis (so 1 unit per non-owner employee / month) which fill the whole pool over the lifetime of the company ( prior to sale / IPO ). Allowing employees to retain their unit-shares even after people leave, so basically the employee-month units slowly grow over time (while the value of the company grows over time) and the payout is proportionate to the time of service, and is retained for employees who have left, and requires only that you compute the integral number of months any employee has worked. (no admin overhead). Finally, it gives a better signal of recognition to your employees that you value them with a more meaningful percentage than 5%.

A sample worked problem where each employee-month-unit (EMU) accumuates 1 per non-owner employee per month.

3 founders, $500K seed round

+1 year 5 employees (2 non-owners) (24 EMU accumulate if sold each EMU worth slightly more than 1% of the company)

+2 year 15 employees (12 non-owners) (+144 EMU, 168 total, at sale each EMU worth .14% of the company, 2 yr vet worth 3.6%)

+3 year 20 employees (17 non-owners) (+ 204 EMU, 372 total, each unit worth .07% of the sale price)

People who stick around get a bigger payout, leaving isn't a penalty (you may not have a choice), and everyone gets rewarded the same.

Unfortunately given that some employees are going to have a much bigger impact on the success and 'value' of the company than others, I doubt they would go for that scheme either. That doing compensation is hard isn't really a very surprising result I guess.