How hard could it be to come up with a million-dollar idea? Sometimes not hard at all:
Two years ago, Noah Weiss, a young programmer who spent the summer working here at Fog Creek Software, came to me with a business idea. Noah, who was still in college, had noticed that a lot of smaller tech-related blogs were running classified ads for job listings. He suggested that we do the same thing on my company’s blog, Joel on Software. The site is read by thousands of programmers a month — the ones who are so good at programming they have spare time at work to read the self-absorbed drivel I publish there.Building an online classified ad system would be easy, Noah argued. (As any programmer would tell you: “It’s one table!”) And Fog Creek already had systems in place for charging credit cards, printing receipts, and accepting purchase orders, so the whole project wouldn’t take much work.
At first, I resisted. I had never run ads of any sort on the site and liked the idea of keeping it commercial-free.
But Noah kept arguing. “These 37signals guys are getting 50 ads a month,” he said, referring to a well-known software company in Chicago. “At $250 each, that’s — “
Wait, I interrupted. They charge $250 for each ad? I had imagined that the going price to run a job listing would be, oh, I don’t know, $4?
That’s right, Noah said. They charge $250 per ad. “Besides,” he went on, “a job listing is not really an ad — it’s providing a community service.”
By then I had almost stopped listening. Little gears were turning in my head: $250 times 50 ads times 12 months — that revenue would allow me to hire another programmer! So we added classified ads to the site. Noah wrote the first draft of the code in about two weeks, and I spent another two weeks polishing and debugging it. The total time to build the job listing service was roughly a month.
Instead of charging the going rate of $250, we decided to charge $350. Why not? I figured we could establish ourselves as having the premium product simply by charging a premium. In the absence of additional information, consumers often use prices to judge products, and I wanted our site to be the Lexus of job listings. A few months later, 37signals raised its price to $300.
By the time you read this, that little four-week project will have made Fog Creek Software $1 million — nearly all of it profit.
The real question though is, Thanks or No Thanks?
That raised a question: How do you properly compensate an employee for a smash-hit, million-dollar idea? On the one hand, you could argue that you don’t have to — a software business is basically an idea factory. We were already paying Noah for his ideas. That was the nature of his employment agreement with us. Why pay twice?But I felt we needed to do something else to express our gratitude. Should we buy Noah an Xbox 360? Pay him a cash bonus? Maybe present him with a certificate of merit, nicely laser-printed on heavyweight bond paper? Or a T-shirt that said “I Invented a Million-Dollar Business and All I Got Was This Lousy T-shirt”? We were stumped.
And what about everybody else at Fog Creek? Those people were doing their jobs, too. Simply because one programmer’s idea translated visibly and directly into a lot of money didn’t mean that the other team members weren’t adding just as much value to the business, albeit in a less direct way. At around the same time Noah came up with the classified ads idea, most of my employees were hard at work developing FogBugz 6.0, a smash hit that just about doubled our monthly sales.
Noah’s case was only the most dramatic example of a question that has long intrigued me: How do you pay employees based on performance when performance is so hard to quantify? The very idea that you can rate knowledge workers on their productivity is highly suspect and always problematic. If you mess up, the consequences are very real.
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Throughout my career, I have observed that companies with formal systems that tie cash bonuses to performance end up with far more than half of their staff sulking and unhappy.
You don’t want to replace intrinsic motivation with extrinsic, and you don’t want everyone thinking, Why didn’t I get as much?
His solution:
So, back to Noah, the guy with the million-dollar idea. Though we don’t believe in performance bonuses, we still wanted to recognize his contribution. We decided to give Noah 10,000 shares of stock — conditional on him coming back to work for us full time when he graduated. Because Fog Creek is private and our stock is hard to value, we could say “it’s only fair that you share in the wealth” without assigning an actual dollar amount to it. It wasn’t the perfect solution, but everybody thought it made sense.Noah seemed pleased, and we hoped the stock would entice him to come back to Fog Creek to take a full-time job. Which…he didn’t. Google made him a better offer.