The Red Hat IPO experiment to pay maintainers: 25 years later

Twenty five years ago this week, on August 11, 1999, Red Hat went public in a stock offering that at the time was one of the largest ever, ending its first day of trading worth $3.5 billion.

I thought it would be interesting to look back at the Red Hat IPO on this anniversary, but not for its financial impact on the company, which looks small against the backdrop of other Red Hat financial and business milestones across the years. What remains particularly notable about the IPO today is that it was the first-ever experiment in paying open source maintainers and other community contributors in return for the value they create. Red Hat did this by giving a select group of community contributors the option to buy stock through its IPO.

Over the last several years, the open source community has been increasingly focused on addressing the issue of unpaid or underpaid maintainers. For good reason: the increasing use of open source software in mission critical applications means that open source maintainers are being asked to do more than ever before to ensure their projects are well maintained and secure. Meanwhile, according to our Tidelift state of the open source maintainer report, 60% of maintainers report that they are currently not paid for their work. Only 13% earn most or all of their income from their work on open source.

This is a dangerous situation for any organization that relies on open source software. The recent xz utils social engineering hack where a malicious actor compromised a popular package maintained by an unpaid volunteer through a supply chain attack years in the making is only one example of what can go wrong when the work of open source maintainers is not adequately supported.

So how did Red Hat’s original experiment to pay open source contributors play out? Let’s take a look back.

The roots of the idea

I reached out to Bob Young, Red Hat’s co-founder, and asked him to share some of the history of how the company originally came up with the idea of including open source community contributors in the stock offering.

“It started with a board meeting shortly after the Benchmark/Greylock investment in the summer of 1998 when we were explaining risks of our business model to our new directors. The conversation started with Linus [Torvalds, the founder of Linux] who we sent shares to in 1998,” Bob said. “But as our IPO approached and we realized that it was likely to be either successful or very successful (no one foresaw just how big it became), we (the board) felt an urgency to both reward more members of the community but also to make the point that we recognized our success was not possible without the support of the larger community of contributors.”

Interestingly, the Red Hat board even in these early days saw that building a company on top of open source would require investing back in the open source projects they relied on, and Red Hat’s investors understood why it was important as well.

“We recognized, and needed to communicate this clearly to the world, that if we were going to build a for-profit company using open source software we had to play by the rules of the community who were producing the open source software our business depended upon,” said Bob. “We were fortunate that our new directors (Bill Kaiser from Greylock, Kevin Harvey, and Eric Hahn) were very interested and open to understanding our business model. They, and Eric in particular, actively pushed to issue more shares to more members of the OS community prior to the IPO.”

Deciding who to reward with IPO shares

A Linux Magazine article from November, 1999 (which is no longer available online but was captured in this blog post by Harish Pillay) tells the story of how Red Hat chose who would be invited to participate in the IPO.

“It was clear that Red Hat wanted all the open source developers who had made its success possible to participate in its public offering. Red Hat would be nowhere without the hackers, and the company knew it.

Red Hat Director of Technical Projects Donnie Barnes spent three weeks scouring the Internet, digging up all the contributor lists to all the open source projects he could find. Red Hat then had to craft a letter to this list of developers. The SEC has a complex set of rules about what companies can and cannot say when they offer shares to the public. If a company doesn’t stay well within the rules, the SEC can—and regularly does—withhold permission to proceed with an IPO.

Red Hat ended up with a letter which, while legally acceptable, was ‘sufficiently badly worded to end up alienating a significant percentage of the developers we mailed it to,’ [Bob] Young said.”

The open source community meets Wall Street

As so often happens, the original genius idea—rewarding those who had contributed to the open source software Red Hat relied upon—became more complicated once Wall Street got involved. Many of the open source community members did not meet the SEC criteria to be allowed to participate in the IPO.

The Linux Magazine article shares more details:

"Unfortunately a significant percentage—about 15 percent—of the developers to whom Red Hat offered shares were either students or otherwise inexperienced investors by the SEC’s standards.

‘And of course this offer was not being made by the SEC—it was being made by Red Hat and E*TRADE. So when members of the development community that we had extended the offer to found themselves declared ineligible, they initially naturally blamed Red Hat and E*TRADE,’ Bob Young said."

The final result was that well over one-fifth of the developers on the list were interested, eligible, and able to participate in the Red Hat IPO.”

At the time, Harish Pillay was one of the people invited to take advantage of the Red Hat offer, and later went on to work at Red Hat for almost 20 years. He has positive memories of the IPO and Red Hat’s generous offer, which he shared with me recently.

“I was one of the recipients of shares from Red Hat as a person who contributed to Linux. I never expected those shares and don't recall how many were offered. But when the email came, I thought it was spam. I had to open an account in a service to accept the shares and it was itself quite an experience,” Harish said. “Thanks to all those who understood that an organization like Red Hat would not happen without the community around it. The community did what the community did. Red Hat played a crucial catalyst in moving the validity and credibility of the open source way.” 

Fast forward to paying maintainers today

A long time passed between this early experiment in paying open source contributors (and a similar one by VA Linux a few months later) and the next set of meaningful efforts. In the ensuing years, open source usage has grown exponentially. In 1999, Donne Barnes could scour the Internet and find all of the contributors to open source in the world and email them about the Red Hat IPO in less than three weeks.

According to the 2023 GitHub State of the Octoverse report, there were 4.5 billion contributions to all projects on GitHub and a staggering 2.2 million people became first-time contributors to open source projects in 2023. It would take much longer, and be exponentially more expensive, to undertake a project like Red Hat’s community IPO stock offer today.

Meanwhile, open source has become an irreplaceable resource relied upon by organizations around the world. And many of these organizations have made investing in the success of the open source projects they rely on a priority, either by becoming contributors or by financially supporting open source maintainers. 

Leading technology companies like GitHub, through its GitHub Sponsors program, have made it possible for organizations to donate directly to projects and their maintainers. And here at Tidelift, we have scaled a model that pays maintainers recurring income to ensure their projects follow secure software development practices, and make commitments to continue these practices into the future so enterprise users can build applications using open source with confidence.

Returning to Bob Young’s memory earlier of why Red Hat made the decision to include community contributors in the stock offering, emphasis mine:

“We recognized, and needed to communicate this clearly to the world, that if we were going to build a for-profit company using open source software we had to play by the rules of the community who were producing the open source software our business was dependent on.”

In 2024, even as many organizations are contributing to projects by writing code or by financially supporting open source projects, many still do not. Some organizations treat open source as a bottomless resource, strip mining without participating in sustaining its long-term health.

They do so at their own peril. 

What Red Hat recognized in 1999, and leading organizations still realize today, is that contributing back to open source is a business requirement. It is in any organization’s direct financial interest to ensure the open source projects they depend on, and the open source maintainers behind them, have the resources and support they need to keep their creations healthy, secure, and properly maintained. By investing in this important work, they protect their own revenue, data, and customers. But they also follow in the footsteps of pioneering organizations like Red Hat, doing their part to ensure the continued growth and vitality of open source.