Test Double becomes 100% employee-owned with ESOP plan

We’re excited to announce that Test Double is now a company that is 100% owned by our employees.

Justin Searls and I have always been employees and owners, so in a sense this has always been true -- but the difference effective today is the company’s adoption of an ESOP plan.

There is plenty of information to read about ESOPs elsewhere, but the short of it is that all of our employees will be allocated shares on an annual basis. These shares will vest over time, and at the point where an employee exits the company, a payout (or tax-deferred rollover) can be completed based upon the number of shares, an external valuation of the company, and the amount of vesting completed.

Why sell?

Being founders of a small business that has grown beyond our expectations is really hard to describe.

In many ways, we’ve been more tied to the business and each other over the last 8 years than we have our families or any other aspect of our lives. The thought of selling the business and retreating to an island somewhere to live out our days has been appealing for sure. The reality, though, is that we are still trying to build Test Double into a company that is having a real impact on the industry and is providing roles for Justin and I that are fulfilling, valuable, and balanced with our personal lives. We aren’t going anywhere.

While this transaction will allow us to recoup some of the risk, time, and stress that we’ve put into the business in the form of a payout, we both live frugally enough that we’re not in need of a big payout, and it’s certainly not what drives us.

The real reason that we’re pursuing this is that as we’ve grown (Test Double is now 3x the size that it was at the end of 2016), the business has become more profitable and it’s become evident that our team and not the co-founders are more and more the reason for our success (and subsequent valuation). We’ve struggled for awhile with the feeling that there is a level of inequity in the value derived from the business, so this is a natural way for us to correct that in a fair and equitable way. It’s easy to hide behind statements like “We took the risk, so we get the reward.”

We see founders do this all the time with similar businesses, but at what point have the founders been adequately compensated for their initial risk? Justin and I have been (or will be as a result of this transaction) adequately compensated, and we’re excited to see our team start reaping the benefits of this amazing company.

Sustainability

When looking at options to diversify the ownership of the company, we had to focus not just on the effect that the transaction may have on the employees and the owners, but also on the company itself.

The harsh reality for small businesses is that the vast majority of exits for owners are culture-breaking events. By this, I mean that the purpose, values, or behavior of the company overall will drastically change (likely for the worse) shortly after completion. If we were to pursue a private equity acquisition, our purpose would immediately change from improving the software development industry, to growing our financials as quickly as possible so that the PE firm could make a profitable exit.

Similarly, an acquisition by a bigger consulting company or an acquihire by one of our clients would result in Test Double’s culture being largely consumed by the bigger entity. With an ESOP, we have none of these drawbacks. Our team will continue to be the stewards of our culture and we’ll continue to pursue our mission of improving this broken industry of software development.

Equitable equity

Further, we felt it important that any plan we establish for others to share in the equity of the company be equitable. By that, we mean that allocation should be based on impact to the business, not access to cash. A lot of the other approaches we evaluated put more of a burden on the purchaser (employees) to have access to vast amounts of cash or credit to buy shares or exercise options. If one of our employees came upon $500,000 from their Aunt Edna and felt that they should invest all of that in Test Double, they would have a much higher stake in the outcome of the business than many others. Even worse, if someone is living paycheck to paycheck with bad credit but is a great contributor to our team, they might be completely shut out of any of the wealth generated at Test Double.

In ESOPs, allocations are made based on salary with no cash outlay by the participants. If our salary calculations are aligned with performance, then everyone will get equity aligned around the value they are producing for the business.

What changes does the ESOP bring?

Maybe nothing, maybe everything.  

As mentioned earlier, with the transition to an ESOP, we’re confident that the culture we’ve built up over the years will largely remain. Justin and I will continue to operate in our respective roles and we won’t have a scary new boss or external Board of Directors or anything that we need to report to.

The one big change that we anticipate is the adoption of an ownership mindset among all of our employees. It remains to be seen how much of an impact that change will have on the business, but we’re optimistic this will reinforce a culture that we’ve tried to build at Test Double—employees having all of the data at hand and being empowered to do what they feel is right by themselves, our company and our clients. Ultimately, this will drive stronger performance as individuals and as a company, and we are really excited to see all of our employees reap the benefits.