Max Guernsey, I...'s profileMax Guernsey, IIIBlogLists Tools Help

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    May 09

    ScrumLLC

    Here is a very simple model I think would work quite nicely. If you're planning on starting an agile project, or developing a product, with Scrum think about taking the following steps:

    Form a subsidiary LLC (XYZ Scrum Team, LLC)

    1. This company should have an unusually short life-span, like 13 months.
    2. Capitalize XYZ Scrum Team, LLC mostly through a loan which stipulates that members cannot take distributions until that loan is repaid.
    3. Form an agreement with XYZ Scrum Team, LLC wherein all code written by that company is the sole property of the parent entity.
    4. Hire the the team members for XYZ Scrum Team, LLC and give them some interest. ("Working Members")
    5. Assign a "fair price" to each backlog item.
    6. Give the working members of XYZ Scrum Team, LLC control of the company.
    7. Allow XYZ Scrum Team, LLC to choose which backlog items it will be developed from a subset of the backlog items.
    8. For each item that is completed on time, pay the scrum team company the "fair price" determined above. Likewise: bill it for any expenses such as rent, power, and equipment.

    This incentivizes the working members of XYZ Scrum Team, LLC to do the most efficient thing

    ...in two ways:

    1. Reward: If XYZ Scrum Team, LLC is profitable and repays its initial loan, they can start taking distributions or cash out of the company.
    2. Punishment: XYZ Scrum Team, LLC still has a negative cash flow by the time it runs out of money then they no longer have a job.

    It also gives them a big picture perspective and enforces team accountability. They choose whether or not to make distributions (most of which go back to the parent entity), they choose which backlog items to deliver, and they deal with the consequences. If you get a good set of smart working members, they may be the first to recommend terminating the project or otherwise moving on to something more profitable.

    There are business advantages, too

    It separates the parent and child companies' interests nicely, and protects them from each other. If the parent company goes bankrupt, the child company can continue to function (assuming it can find another source of cash-flow, which should not be too difficult for a highly-functional Scrum team).

    Similarly, the parent company is not directly linked to those employees and, therefore, the risks associated with them are encapsulated within XYZ Scrum Team, LLC company. The worst case scenario is really that you write off the loan used to capitalize the company in the first place - which is a lot less risk than you might take otherwise.

    Most importantly: it brings the principle of cohesion into your corporate structure. Just as the cost of a virtual method call has dropped significantly in recent years, so has the cost of a subsidiary. Qualifying LLC's (to the best of my understanding) are taxed as partnerships and, hence, do not suffer the same C-taxation impediments that a corporation would (non-humans cannot own shares in S-corps).

    The result is better entity-structure

    Your "equity company" (the parent company) takes risk and reaps rewards based primarily on it's ability to assess, purchase, and market value whereas your Scrum team company takes risk and profits as a result of its ability to deliver quickly with quality.