A dividend is a way for the company to share a portion of its profits with employees and investors without asking them to sell their shares back to the company.

In this market, “people are valuing cash flow and liquidity a lot more,” DoNotPay’s founder and chief executive Joshua Browder said on a video call from San Francisco.

At nine years old, DoNotPay may be geriatric in startup years, but with a team of only seven employees and seven contractors, it punches well above its weight. Its software for helping consumers file disputes and find hidden money is used by “well over” 200,000 subscribers, Browder said. Though DoNotPay has not disclosed its revenue, Browder said it’s profitable and has a sum on the balance sheet greater than the $24 million of capital it’s raised to date.

The company was in a position to spread the wealth, said Browder, who is an angel investor in other software firms. He got the idea from one of his own angels, Sahil Lavingia, whose startup Gumroad issued a dividend last year.

“My job as the founder is to do best by all the shareholders, myself included, I’m a big shareholder,” Browder said. He declined to share details about his own dividend payout.

Dividends versus buybacks

This financial gesture is a novelty among startups because it requires them to have profits to distribute. These fledgling companies often burn through more cash than they generate and channel any profits into growth.

That could change as companies stay private longer, says Josh Seidenfeld, a partner at the Big Law firm Cooley.

Employees make a trade-off when they go to work at a startup: forfeit higher wages to get stock options. The expectation is that when a company sells or goes public, employees will cash in their shares for untold riches.

But in the past few years, employees have had to wait longer for the big payday in this market. The overwhelming abundance of private equity means companies can raise large sums without selling shares to the public. Investors aren’t nipping at their heels to exit, Seidenfeld said. More funds are becoming registered investment advisors to participate in more complex transactions in the private and public markets, such as holding their stock in startups after they start trading.

Even those startups wanting to go public are holding off until interest rates fall and revenue multiples for software companies bounce back to pre-boom time norms.

However, stretching these timelines hurt employees more than investors. That’s why companies make tender offers. They allow employees to sell their shares to existing investors who want to increase their stakes. Other times, a startup will repurchase shares to reduce the number of shares on the market and increase the value of the remaining shares.

The downside of a stock buyback, said Seidenfeld, is that employees lose out on future gains. Plus, in most cases, the majority of proceeds are taxed at ordinary income rates.

Last year, the digital commerce startup Gumroad paid a dividend of $1 million across employees, investors, and thousands of crowdfunding backers. The company’s founder and chief executive, Lavingia, said the idea sprang from a desire to create liquidity ahead of an exit.

“I believe in what I’m building over the next 30 years,” Lavingia said, “and I’m not really in a rush to sell.”

Browder said he didn’t think it would have any takers even if his startup made a tender offer. “I don’t think anyone would sell,” he said. “The only deal we could push through was one where we give them money for nothing in return.”

DoNotPay is backed by Andreessen Horowitz, Greylock, and Founders Fund, as well as a raft of operators like Figma CEO Dylan Field, Adobe executive Scott Belsky, UiPath cofounder Daniel Dines, and Balaji Srinivasan.

Cash rewards

Browder said he wanted to offer a dividend to reward those employees and investors who bet on the startup early. He worked with his company lawyer to determine the size of individual payments and how much to withhold for taxes.

Employees do pay taxes on qualified dividends, but they’re taxed at a lower rate than income, Seidenfeld said.

The company plans to continue paying dividends at least twice a year, according to Browder.

Browder said there’s also a business case for the dividend. It rewards employees, which helps retain them, he said. One employee put the funds toward a down payment on a home. The buzz around the dividend might also attract job candidates who “like to see a sustainable and growing operation,” he said.

By comparison, a dividend doesn’t do much for investors. It provides a small sum that, according to Seidenfeld, might flow back into the fund for investing or get distributed to the limited partners. But, Browder believes a dividend shows his investors how efficient the company is. He said it spends very little to acquire new customers, and employees use software to juice their productivity.

“We are in a new paradigm where massive companies can be built with small profitable teams,” he said. “Moving in this direction makes the company more valuable.”