As for how these get started, it's the same as any tech startup. The founding team owns the whole company at formation, and then they progressively give it away to increase the overall valuation of the company. You can do that through giving away stock in exchange for funding from a VC that you can use to pay employees, or you can give away stock directly in exchange for services rendered.
And yes, this looks bad during a down year. Tech companies have this problem all the time - employees are demotivated when the stock price goes down, which can have further negative effects on the stock price.
To clarify, the gp was asking a rhetorical question that he already knew the answer to when he stated, "How would a business [that already looks attractive for ESOP] like this get started? [... his recap similar to your recap ...]"
To put it differently, the scenario he's trying to explain is something like this given that ~9 out 10 businesses fail :
- you can't look at just a single company's successful timeline to judge the ESOP for society; you also have to consider all the failed companies and how ESOPs would play out in those timelines as well. Since ~90% of businesses fail, you have to play out the financial dynamics of employees buying into ownership of all those failed companies. And in contradiction of employee-ownership, a lot of employees would prefer getting a bigger paycheck from a dying company rather than having money deducted to buy worthless equity shares.
- e.g. of course employees would love to be significant workers-cooperative owners of Amazon Inc and Apple Inc. But the analysis also must include employees owning worthless shares of Pets.com (bankrupt 2000 and shutdown) and Commodore Computer (bankrupt 1994). Some workers got employee-ownership shares of Commodore Inc instead of Apple Inc?!? Well, it sucks to be those workers.
Note that if you run the math on the company in the article, they're considerably less generous than that. They say they have 1500 employees, $1B in revenue, and the average employee makes about 8-26% of their earnings. Figure that's maybe $20K/employee * 1500 employees = $30M in stock compensation on $1B in revenue, so they spend 3% of their revenue on stock compensation. If you figure the company is valued at $4B, they're giving away like 0.75% of the company per year, a bit less than Google and way less than a tech startup.
This is probably a PR hit for Central States Manufacturing anyway, to help their recruitment efforts.
Now, many people probably sell that stock as soon as they can, so the employee ownership isn't cumulative over the years. But it would be quite hostile to employees to stop them from doing this in an effort to make the company more employee-owned.
[1] https://abc.xyz/assets/52/88/5de1d06943cebc569ee3aa3a6ded/go...
This seems entirely rational to me - I've bet a significant part of my career on the success of the company I work for, why should I also bet my savings? Diversification has real value, and going all-in on one company is just a bad bet.
And lots of people would rather just be that supplier, who gets paid a specified amount of money for a specified provision of service, and not be forced to bear short-term risk or to hold out for a long-term upside that depends on lots of stuff they have no control over working out for the best.
"Customers"?
Mechanically it's pretty similar to if the company had just paid out cash as salaries (cash leaves the corporate treasury and enters the employee's brokerage account at market values), but the market is the intermediary, and the tax and accounting treatment is pretty different.
Also, the majority of employees in a company other than small startups do not have the ability to shift their company's success materially to make it a worthy incentive to own and hold employer issued stock.
Plus it's bad to have your investments and job in the same place. If the company fails you lose you job and savings at the same time.
Yes, there are non-financial reasons to have "shares in the place where I work". But financially it's a bad investment.
(If the shares come with management rights, responsibilities, obligations, decision making, that's different.)
That is, you should treat them like receiving cash and convert them into whatever you would normally do wisely with extra cash you received.
If your company is a shithole or fraud, then you absolutely do not want to be receiving company stock. But then, if that's the case you may want to re-evaluate working for it at all.
If that were the case and employees were compensated equally in stock vs cash, then yes there is no _rational_ difference. However, most human are not rational.
People like to take pride in their work and do a great job, this is amplified when they stand to directly benefit from their efforts. By enabling employees ownership in a company you're hoping to incentivize them to work harder and therefore amplify the return on their labor.
Most workers are not sophisticated investors and I'd rather they put excess savings into broadly diversified index funds instead of low quality equity in whatever small business they happen to be working at.
when the people in the article cash out their ESOP shares to buy a house... who's on the other end of that deal to buy those shares? is it some other employee? Wouldn't that mean that money is just switching hands between your employees rather than helping all your employees get rich?
related: i exercised some options for a startup that i used to work at a few years ago. they're now >10 years old and financially healthy, but no IPO in sight. what's the point of those shares if there's never an exit?
By enabling employees to be owners you grant them access to those profits and to participate in discussions around how to spend/re-invest profits.
We spend our profits in different ways. Some of it goes to future planning (bigger stock piles, larger cash reserves, growing headcount etc). Technically all our working capital, all our assets, all our stock, has been funded by "retained income".
That said we also pay bonuses (13th check) in profitable years , and we issue dividends to owners. The dividends can be significant. Or 0. Or less than 0 (salary deferred in bad years.)
We want long-term sustainability , but also returns for being owners (otherwise we might as well go get a job somewhere. )
Organic growth is fine, sales going up is good, but we're not looking for hyper growth.
There us no "exit" (for the business) on the cards. An IPO is out of the question, and having seen the destruction caused by corporate acquisitions that's not a route we like either.
It's not glamorous being a small business churning out regular profits. But it pays well.
Even if this assumes an equal net present value, wouldn't the volatility of stock vs. cash make a very rational difference in expected future value? For people who are risk adverse, the cash would probably be preferred; for those who are less risk adverse, the opposite is probably true.
Does that make more sense?
What gets me most is that rank and file employees in the ESOP almost never have directly exercisable rights as shareholders to vote or have any say in the business. You don’t get to say no to a merger. You don’t get to fire the CEO when his big idea is a flop. The ESOP vote is wrapped up in a trust or some abstraction controlled by an advisor or a board probably appointed by the real board of the company. Ultimately the executive staff and hand-picked insiders will have all the real authority of ownership. Employee stock thus is not much more than a complex pension program for almost everyone. Regular employees will not be real owners in any meaningful sense unless they get into the small trust network of existing owners.
If you’re an early arrival to an ESOP with good growth potential, you will do way better than someone with a little 401K match. They also get great tax breaks. Overall they’re good for employees, but the messaging is usually misleading.
Having said that no man is island of itself. Current incentive structure works great to motivate individuals to start companies
That's the second time i'm hearing that quote today from completely unrelated sources.
The quote is from David Ogilvy, in case anyone is wondering.
"Search all the parks in all your cities; you'll find no statues of committees."
----
Edit, I was mistaken in my earlier post, so I will just leave this here as a correction https://en.m.wikipedia.org/wiki/The_Burghers_of_Calais
Everyone has visions, and most great achievements today are the results of an amalgamation of them. The really big achievements are almost always the result of groups, not individuals.
People that idolize others have to turn a blind eye to everything surrounding that individual's achievement. It's simply easier to simplify big achievements as "this person was great". In reality though, it's a culmination of everything that came before that individual, the support around them, some of their decisions and much more.
In other words: monuments are a bad argument to evaluate if something is good or not. Especially in today's individualistic society.
It's a shallow Instagram motivational phrase.
No, it does not. Most ideas fail, and a significant amount of "off the ground" projects fail.
To be successful long term, it requires vision and commitment. You can find people to grind on your vision, but you cannot make them see what you see.
The overwhelming majority of massive successful projects and companies have a key figure that drove them to success.
I'd wager there are very few examples (if any) of a massive and successful companies that began life as a startup with a 30+ person board, for example.
My business has always had 3 or 4 people as owners, and hence as the "executive committee". I've found that to be helpful. If you can't convince your fellow owners then it's likely a bad idea.
(We've also turned away good ideas, and executed on bad ideas, the group approach is not infallible.)
But it really helps to develop a vision beyond just "my idea this morning" before diving into implementation.
I call bullshit. If you can't explain your vision you're a shitty leader. Good leaders can share their vision and get people to buy into them, adding their visions on top of it.
This is an oversimplification of very complex human interactions. Humans seek the simple explanation, even when there isn't one.
>The overwhelming majority of massive successful projects and companies have a key figure that drove them to success.
s/a key figure/key figures/g
>I'd wager there are very few examples (if any) of a massive and successful companies that began life as a startup with a 30+ person board, for example.
That's moving the goalpost. Nobody's saying you need 30 people for things to happen. Anything greater than 1 is, by definition, no longer an individual effort.
Take one of the most known examples: Apple. It took both Steve Jobs and Steve Wozniak to make it happen. After their initial success, it wouldn't have grown to today's behemoth without the thousands of others that came after and worked on each and every product to make them successful. It's always a group effort. We can simplify and say "Jobs did it" but it's absolutely inaccurate.
I don't understand why smart people need idols. I get why the masses need their figures, but once you think about it for 5 seconds it's obvious they are mostly myths.
It actually would not be. We got to witness Apple with Jobs, without and with-again... the track record unambiguously demonstrates how impactful a single visionary, highly motivated leader can be within an organization.
We're now seeing Apple without Jobs yet again, and while the stock price has coasted upwards under Cook, Apple has not been the "bold" "think different" Apple ever since. Present-day Apple largely relies on it's existing products and small iterations. Apple, under Cook, has produced nothing market-changing or revolutionary, like they consistently delivered under Jobs.
Uhm, do you have a 401k?
In Canada, there are 'Labour Sponsored Venture Capital Corporations' with union overseers to do this and special tax deductions for investing money through these.
They are, of course, a giant failure that neither provides easier access to capital for entrepreneurs nor generates any notable return for investors.
The same argument could be made for any other kind of shared ownership company.
As opposed to putting your retirement fund into other company's stocks, which everyone does at the same time, making those companies too big too fail without unraveling several threads of social fabric.
I think your statement actually proves why employees should have stock in the company.
If we really were worried about issues such as this we'd have universal (not attached to you employer) healthcare and a pretty robust (but minimal) retire fund for citizens.
But we have the opposite of that with none of the upsides.
On the other hand, if my wealth is in Acme Corp and they go bankrupt, I lose my wealth and my income.
The first model is less risky, yet profitable enough to be worth it. And everyone can still own the means of production.
I don't understand how your scenario is applicable; it's definitely constructed.
But any investment manager will recommend that your savings are diversified. That helps to insulate you from individual events thus making your savings more resistant to failure.
So you might invest in public shares, or property, or personal energy (residential solar) and so on. You might mix different kinds of shares. Etc.
By contrast owning shares where you work offers few financial upsides. It may or may not out perform the market. It may or may not be liquid. And so on.
It does however come with substantial financial risk. With one point of failure, one event, you can lose your income and savings.
Only you can decide if the risk is worth the upside. For most people, it's not.
Seems to me the best option would be to offer employees ownership. You could have two compensation structures:
- 100% cash compensation - 50% cash/50% equity
See which ones employees prefer. I'll bet it's overwhelmingly the first.
The one I know, it just started out with some people who were all equal co-owners. When a new employee joins, they get the same share as everyone else. When someone leaves, they lose their share. Shares can't be sold, everyone has the same amount. It's a cooperative.
They're organized at team level, teams have to write business plans that must be approved by people from other teams, teams decide whether to recruit an extra person, and so on.
Large investments (they built a new hq) are voted on by the whole company.
But the employees also have other things in mind besides profit, like their work load.
Alas this would be a big issue. It is the deferred payment test writ large. Do you want $20 now or $30 next week.
For a lot of humanity when times get difficult we will tend towards the immediate payoff rather than the long term. To eat the seed corn.
How would a business like this get started? Usually the owner is the one who invests a lot of their own time and/or money into the business to get it off the ground in the first place. Would we be asking workers to pony up in those early years when failure is likely? With Central States, the story picks up AFTER all that, when the business is already large and successful, and the owner just wants to retire.
And what happens when the business struggles or fails later? In the case of Central States, the workers were asked to buy shares from the owner, probably using a portion of the salary they'd otherwise get. IOW, they're being underpaid relative to market, in exchange for ownership, expecting to get more later when they sell the shares. So far so good, but how does this look when the business has a rough patch, even one that's not their fault?