User deleted post
CMV: All employees should be given equity in the company they work for.
As is the case with many existing equity structures, there are vesting benchmarks before their equity becomes valid - business owners could certainly continue to utilize vesting structures.
I’m not sure exactly how this relates specifically to felons.
Well I would think it's justifiable that I may want to give a second chance to a felon and allow him a chance to live life, but I do not want any business decisions or input from him.
So, are you changing your position from "all employees" to "some employees, after they've been with the company for a certain period of time?"
If you can't trust someone to have some fraction-of-a-percent influence over your business operations, then you probably shouldn't hire that person.
I was just asking the relevance, not saying felons shouldn’t be provided equity. If you don’t want to hire a felon under this structure, then don’t.
Well the relevance would be that some people who happen to be felons and would benefit from and possibly turn their lives around given a second chance would now be SOL, so to speak.
I think that would be a bad thing.
Why? OP already explained the concept of "vesting"- the felon doesn't immediately get access to any equity at all. After a year, or any amount of time that you want to specify - then they get the equity. Not even all of it at once, just the first portion. Example:
You hire FelonA with the promise of 10 shares of your company, equivalent to a 1% stake, vested over 5 years. On their start date, the shares are technically theirs but they cannot do anything with them and if they quit they forfeit the shares. A year later, 2 of the shares have vested and they can sell them or hold on to them. After another year they get another 2 shares, until after 5 years they have the full 10 shares.
Knowing this, you understand that there is no immediate extra risk when hiring a felon. The only extra risk is that they 'lay low' for 5 years and then all of the sudden they 'go mad' after they have control over their shares... what are you afraid they're going to do with 1% of your company? They have no power to make any decisions with that. At worst they can sell the shares, which any other employee could do as well. So why are you all-of-the-sudden discriminating against felons? It doesn't make any sense.
I'm an accountant. The cost to do this for a small business owner would be insanely expensive. They would all have yo create an ESOP (employee stock ownership plan) which is expensive to set up and then must get audited annually along with the the company's financials. This also creates significant problems for entities like partnerships and LLCs. This also doesn't take into consideration entities that cannot have unlicensed individuals as owners as a matter of regulation or law. This includes CPAs, attorneys, and a host of other professions. I could give you hundreds of other reasons why this is not only a bad idea, but impossible to implement.
I didn't even know this side of things. Really interesting. So if OP really wants to do it, they'd need to change a lot of the laws around these things first.
Change an incredible amount of laws, regulations, and so many other things I couldn't describe. Both at the federal and state level.
It would certainly create hundreds of thousands of jobs for accountants, while creating an incredible disincentive for anyone to hire their first employee. Most small businesses don't need an annual audit presently. If they had to get one, (which would have to be required to do this) that's easily $20-30k per year for the most basic company. Then to just set up the ESOP, easily another initial $20-30k, plus another $5-10k for the add on to the annual company audit.
I also don't think there would even be a way to set up an ESOP or that an equivalent exists for a partnership or an LLC. There are also issues with non-US citizens that don't qualify as residents being able to have ownership interests in S corps. Like I said, many reasons why this is impossible. I could go on.
True. And I actually think having a vesting period would be more beneficial for this specific use case than in general, even, helping people without a clear direction have something to keep them motivated and invested in society and keeping their lives on track.
Why would you offer a signing bonus to someone who you aren’t certain is going to stick around? The same concerns and protections (vests after a year of service or paid back) apply.
If I'm a small business owner who believes in second chances for felons, do you think enforcing this would encourage or dissuade me from hiring them?
Logically wouldn't this discourage them from stealing from you since they would then be stealing from themselves? It seems like an unrelated concern.
Would you want to provide equity in your business to an employee you aren't certain is going to stay beyond a couple weeks?
In this ownership structure in existing companies, equity is typically not transferable and forfit if you leave. This means they are entitled to makign decisions regarding the business. If the employees vote and choose to disburse profits they can do that. It isn't always disbursed evenly but the important thing is that they get a vote. Employees can also choose to reinvest in the business since that is also in their interest
Since when do people vote for thier interest?
I mean, this seems like you don't have a very strong belief in second chances.
There are ways to get around this that currently exist. For instance, many startups have a vesting period where you are entitled to a certain amount of stock, but only if you work there for at least X amount of time. I think having something like that could be relatively beneficial as a clear way to motivate someone to stay at your business for longer and invest in their future.
I think there's a big gap between refusing to hire a felon, and offering equity in your business. Giving someone a second chance on life doesn't mean I have to trust them equally relative to a non-felon, it just means I'm giving them an opportunity that others may not.
Sure, just because you're trusting a person more than somebody else would trust them, doesn't mean you have to trust that person more than you would trust another person.
I just think you might be more effective giving felons a chance by giving them a stake in getting things right long-term, and not just until their next paycheck.
It would probably be more effective, but my primary goal in my business is not to help felons, it's to make money and be successful.
If I hire felons because I think they deserve a second chance, I'm not putting that goal at any long term risk. I can fire them whenever I please. I can't, however, just take back equity at any point I wish.
It would probably be more effective, but my primary goal in my business is not to help felons, it's to make money and be successful.
And I think you can absolutely run your business however you want. Unlike OP, I don't think sharing equity is the right example in every situation. I do think it's more effective in helping felons in this specific situation, but I can totally understand why you might still prefer not doing that and running your business as sole owner, because there is that risk involved.
Well, most small businesses are exempt from providing all kinds of benefits, like health plans and such.
Something like this would likely exempt small businesses as well.
But large, well capitalized companies? Could be pretty interesting if they were required to be partly employee owned.
For one, it would dramatically reduce the amount of off-shoring.
Does the employee still get a guaranteed wage? If the company has a loss, does the employee have to pay into the company?
If the company has a loss, stakeholders would have a loss. If the company has a loss, all employees would have a wage (CEO or intern).
How are these companies going to come to exist? It takes capital to build a business. People invest capital because they get a return on that investment. So if the employees are contributimg capital to fund the business, it makes sense that they share in the success. And if they company fails, they also take the loss of their investment.
They already exist. Sometimes it involves the owner wanting to retire and leaving the business to the employees collectively.
There are also governments that have laws that promote the creation of these types of companies (often called worker coops). For example, in Italy, if a company does mass lay offs, the law allows workers to take their unemployment up front and matches that amount 3x to start a worker coop.
OP is talking about all companies. I agree there are examples where something similar has happened, but such a system would not be compatible with most businesses.
They deleted the post but the OP was pretty open in their view. I don't think the model should be applied to all businesses but I think there is a lot of room to encourage a more fair economy through measures like what the OP described. Something like a Marcora law a profit threshold or just a alternative government lending system for things like this.
Obviously there is no fair way to do this with bloated corporations with existing shares but there could be a law that gives employees the right of first refusal to purchase any shares when a company does a stock buyback. There are also things like employee participation laws where employees get to name some percentage of representatives to a publicly traded corporation's board of directors to represent the idea that there are interests in a company beyond stock holder interests.
How is it not already fair? If you work for a publicly traded company, nothing prevents you from buying shares in the company so you can share in the company's success. If you don't, nothing prevents you and your coworkers from leaving and starting a competing business.
And what good would a right of first refusal do? Whether a company buys back stocks or not, you can still buy shares in the company.
Let's sat a company intends to buy back 1000 shares of it's stock. The company notifies its share holders that the company will buy some amount (they probably aren't going to explain how many) of stocks back and that they assume this will cause the price of the stock to go up. The company retires those shares after the buyback typically which boosts the stocks earnings per share.
The stock has likely already risen by the time an average worker has a chance to buy on the market since they are not reading SEC reports consistently so the it's not already fair. The shareholder doesn't have to do anything and they have had their share price inflated or the drop in share price diminished.
This would obviously be a huge benefit to the worker if they made it so the employee could choose whether orr not to buy outstanding shares for the buyback purchase price since they would know if the share increased or decreased in value.
The thing to remember though is that this company already made a surplus of money and instead of honoring its workers with raises or bonuses, they decided to do stock buybacks to benefit share holders. In cases where the stock lost value, the employees would obviously not buy it and the share would be retired, giving the intended benefit to the company with the struggling stock. In cases where the stock increased in value, the stock has been artificially inflated by forces outside the market. Before the 1980s, the SEC easily could have considered this market manipulation.
The stock has likely already risen by the time an average worker has a chance to buy on the market since they are not reading SEC reports consistently so the it's not already fair.
A stock buy back does not change the value of the shares, and you can buy shares at anytime. In a stock buy back, the company buys its own stock. This reduces outstanding shares, but it also reduces the value of the company because it is given up assets to acquire those shares.
The thing to remember though is that this company already made a surplus of money and instead of honoring its workers with raises or bonuses, they decided to do stock buybacks to benefit share holders.
No, they did not make a surplus. What you don't seem to understand is that it takes capital to build the company. Every worker gets a guaranteed wage even if the company loses money. Shareholders don't get guaranteed compensation. Shareholders give up their money to fund a company. They do that so that they can get a return on that investment.
A stock buy back does not change the value of the shares, and you can buy shares at anytime.
Buybacks inherently make shares more valuable. It's doesn't automatically make the stock itself worth more money but that's not the only value attached to stocks.
Less outstanding shares means each share is inherently worth a higher percentage of the company. This means that each share's vote power is worth more. It means that if the company issues a dividend based on a profit ratio, the shares get a larger dividend. There are many ways that stock buy backs increase the value of shares inherantly.
This reduces outstanding shares, but it also reduces the value of the company because it is given up assets to acquire those shares.
Yes. This is exactly my point. The biggest share holders in the company harm the health of the company which overwhelmingly harms the lower level employees. My argument is that our economy needs additional checks against this that represent the interests of the employees. This is why the USA is going to eventually lose it's empire and position as a world power. The rich continually sell out American workers for their own short term benefit.
No, they did not make a surplus. What you don't seem to understand is that it takes capital to build the company. Every worker gets a guaranteed wage even if the company loses money.
I understand this. My problem is not people getting paid back or rewarded for their hard work and risk taking at all. My problem is just the idea that there is zero reward or acknowledgment of the risks losses for works. For example, if a worker is permanently disabled on the job, where is the responsibility for an employer if we have a system where the worker is relegated to 60% of their wage or a small disability check for their rest of their lives? It makes no sense. Especially when people receive absurd tax write offs for business expenses and business loses.
Shareholders give up their money to fund a company. They do that so that they can get a return on that investment.
Yes but there are far to many jobs that offer a loss on the investment of workers time and energy in this country (USA). That is to say that in many places at $7.25 an hour, the pay doesn't even provide enough money to safely replenish the calories and sleep in a secure location so that the worker can go back to work long term. The workers in that situation need to rely on their loved ones or government aid to continue working at that rate.
This is not a reasonable investment and companies know that they can just continue while influencing the government to do nothing or provide more aid. That's why Walmart assists workers to get on welfare.
Yes, they get a guarenteed wage. No, they don’t have to pay in on a loss - that’s not how equity works.
they don’t have to pay in on a loss - that’s not how equity works
Ummmm... except it is.
$7,000 payroll is due on Friday and the business only has $1,000 in the bank. What happens?
The payroll isn't paid, none of the workers show up on Monday, and the business ceases to exist, or
The owner fronts the business $6,000 so payroll can be covered and the business continues to exist, or
The business gets a loan (likely requiring a personal guarantee from the owner) for $6,000 and covers the payroll [obviously, you can only do this for so long until the bank says no].
Those are cash flow examples as opposed to profit/loss, but consistent losses will always lead to cash flow issues. You can be profitable, and still have periodic cash flow challenges. You can't be consistently unprofitable and avoid cash flow challenges.
I want him to answer this
This is a reminder to myself :)
And you don't see the problem with that? Shareholders get to share in the profits because they take on the risk. Your proposal gives equity to employees while also insulating them from all risk.
How are these companies going to be created when you are expecting those who fund the company to take on risk, but not get the benefits of that risk?
Yes, they get a guarenteed wage. No, they don’t have to pay in on a loss - that’s not how equity works.
You clearly don’t understand how company ownership works. If the company doesn’t have enough cash, it can raise funds through a few channels (issue new shares; issue debt; capital call from shareholders).
One of those is to go to existing shareholders for funds.
In small business, the shareholder(s) are a very likely source of business funding if there is a shortfall or other requirement beyond what the business can self fund.
How much lower would the wages be in exchange for the equity?
The fact you know this little about how equity works tells me all I need to know. I would not want you anywhere near a position that influences business regulations.
I believe that all companies, no matter the size, should provide each of their employees with some percentage of equity, scaling with your role - the more senior you are, the more equity you receive.
In return for what?
I start a company. I own it outright. I put all profits back in. Now I hire four employees (a basic bookkeeper, an asst., a gopher, someone else) and I have to dilute my ownership and not only pay them but give them equity?
Even if it's 1% -- I have 10 employees, they own 10% of my company, and any fundraising I do I'm offering less and diluting my share more.
Also, do they have this in perpetuity? The 22-year-old who worked as a jr. assistant for 3 months before they went back to school owns 1% in my company and the person I hire to replace them ALSO gets 1%??
What happens if I need 50 employees bc my company is, say, a bakery so I need bakers, floor workers, bookkeeper, etc., truck driver, cleaner, delivery people. Suddenly upon opening I only own 50%?
Almost like there's a reason this isn't a thing already. It's just not a feasible idea.
What my grandfather implemented in our business, at which point (according to him, I was just a kid then) was when the company really skyrocketed, was not giving out shares of the company but sharing a % of profits at the end of the year. It has varied over the years but right now 25% is allocated to employees. This has allowed me and my family in general to have a relatively hands off approach to the business and focus on other things, since everybody's interests align with ours, making the company more profit.
In return for what?
The worker gets it in return for the work they put into making the company good, and the business owner gives it in return for dedicated employees.
Even if it's 1% -- I have 10 employees, they own 10% of my company, and any fundraising I do I'm offering less and diluting my share more.
Given that there are plenty of companies with more than 100 workers, obvious to me that increments smaller than 1% are entirely doable and reasonable.
Also, do they have this in perpetuity? The 22-year-old who worked as a jr. assistant for 3 months before they went back to school owns 1% in my company and the person I hire to replace them ALSO gets 1%??
There are ways to deal with this, for instance, you don't get any stock until you've worked at the company for 2 years, or You have to give up your stock if you leave the company within 2 years of being hired.
The worker gets it in return for the work they put into making the company good, and the business owner gives it in return for dedicated employees.
That's what wages are for.
Given that there are plenty of companies with more than 100 workers, obvious to me that increments smaller than 1% are entirely doable and reasonable.
Sure but same problem applies.
There are ways to deal with this, for instance, you don't get any stock until you've worked at the company for 2 years, or You have to give up your stock if you leave the company within 2 years of being hired.
OP says ALL employees at ALL companies.
That's what wages are for.
Wages are good, but I do believe there can be additional incentive, depending on the kind of work (e.g. startup, self-owned business) If you give someone a stake in the business going well besides just "you'll lose your job if it fails"
OP says ALL employees at ALL companies.
And this is where I disagree with him. I think equity sharing is a good idea sometimes, but I don't think it's the right answer for everyone everywhere.
I agree, that's why startups often offer equity. Requiring it for every employee of every company though is just unfeasible though. Companies are completely allowed to offer what you're proposing, most people would rather just have more salary
I definitely agree. Equity is a good answer for some specific problems and use cases, but I don't think every business should do this with every employee.
And this is where I disagree with him. I think equity sharing is a good idea sometimes, but I don't think it's the right answer for everyone everywhere.
I don't disagree with that. I'm not against employee equity, profit-sharing, even employee-owned companies. But it's not the right thing for all companies and employees across the board, which is the cmv.
But it's not the right thing for all companies and employees across the board, which is the cmv.
For sure. I think I've gotten down voted in this post a decent amount because I don't agree with OP but I also don't agree with the people who say it's entirely impossible and ridiculous to ever do equity sharing, profit sharing, etc. companies.
For sure. I think I've gotten down voted in this post a decent amount because I don't agree with OP but I also don't agree with the people who say it's entirely impossible and ridiculous to ever do equity sharing, profit sharing, etc. companies.
I think the hole you tripped into is presuming that people arguing against the OP are all the way over to impossible to do equity sharing, etc.
I don't think that's most people's position. I think most are just saying what the OP wants is not feasible or reasonable.
So how do you scale to make sure the company doesn’t run out if equity to give away
I'm not an expert, but given that there exist large co-ops like WinCo, this is a solved problem.
You don’t have to provide 1% which is a pretty large amount, you could provide 0.1%, or lower. It will just be another competitive edge in recruiting, and employees will go where they feel most valued.
It will just be another competitive edge in recruiting, and employees will go where they feel most valued.
And, as I said in another comment, if Company A offers $59,500 + worthless equity; and Company B offers $60,000, Company B has the competitive edge in recruiting.
You don’t have to provide 1% which is a pretty large amount, you could provide 0.1%, or lower. It will just be another competitive edge in recruiting, and employees will go where they feel most valued.
Same problem applies, just at lower levels.
And then it'll be a race to the bottom where someone desperate and clueless offers 5% and then they go out of business, so you have 5% of nothing, but then....
I believe this would not only be an opportunity for employees to make more money
I think this is the part of it that gets weird. If you think of this as just a weird "raise" for employees, I think you have to ask whether or not "equity" is something that the employees actually want! There's two ways to think of this:
- One way to think of this is that total compensation doesn't actually change, and employees are just given equity instead of part of their salary. You could imagine "minimum wage" decreases as a dollar amount, but then gets a "minimum equity" attached to compensate for the loss. But I think we would probably agree that most low wage workers would kind of hate this, right? Like, they want food on the table and rent money, not equity in a company, and if forced to take this odd deal, would often sell their equity at the first chance they get.
- Or you could say, well, this is on top of their current wages. However, this immediately raises the question of how you would enforce this for new employees outside of minimum wage workers. If companies were forced to give out equity as part of the compensation, they would certainly prefer to reduce the base salary, and once you're past minimum wage, for new hires, there's not really any way to tell the difference here. But lets hand wave past that and say, "okay, everyone essentially gets a raise in addition to their current salary, but it comes in the form of equity". You end up with the same problem as the first bullet point. Even though its strictly an improvement, if you're going to ruffle the feathers of demanding all companies increase compensation, many if not most employees on the lower end of the spectrum would prefer a basic salary bump. And this is going to be true even if the equity option is a better deal long term.
In other words, I think there's a temptation to try and help "workers" by structuring their compensation like you would a CEO or a software engineer, but the needs of low wage workers are much more immediate, and this often just doesn't really make sense for their situations. And one way to see this in the publicly traded company example is that if the employees want equity, they can just set aside a portion of their wages to buy stock! Nothing is stopping that, but investment isn't always something that makes sense for them! And in fact, equity based compensation is usually something that's more beneficial for the company in the short term. The reason startups give early employees equity isn't because they're being really nice to their employees, its because they don't have the money yet, so their doing something that's helpful for their short term cashflow, but is passing risk to the employees, where its only beneficial to them in the long run if the company succeeds. But this is not a good model for people struggling to pay their bills now.
Just to be clear, are you saying this should be legally enforced? Or are you saying this is just the moral way every business owner should run their business, but without the backing of the law enforcing it?
I haven't necessarily determined if it should be legally enforced.
But at the very least, yes, it's the moral way a business should be run and I think it would be beneficial for everyone involved.
I think it would be beneficial for everyone involved.
A lot of business owners would say this clearly doesn't seem beneficial to them.
Is there a reason besides "If everyone else is doing it, the market will push you to do it too"/"it's a nice way to retain employees" that a business owner should choose to adopt this way of running their business?
It may not be monetarily beneficial to the business owner in the short term, but the productivity of their business could soar, and their employees would likely be happier.
Do you have any evidence this would increase productivity more than a normal pay raise or performance bonus
It certainly wouldn’t decrease productivity, given employees would still be able to get things like raises and bonuses. This leaves us at better or equal performance.
But is it better than the alternatives
I don’t think it’s necessarily an alternative to raises and bonuses, rather an additional avenue for compensation.
You realize this is a direct trade off with the alternatives. A business owner is going to give lower wages and bonuses if they are also required to give equity. This isn’t some infinite money glitch you think you’ve created. There are always trade offs and opportunity costs to every business regulation and decision.
Amen to this. OP is basically saying "in the compensation package given from employers to employees, which includes salary/wages, insurance, PTO, etc. employers must pay some of that in equity instead of through other means (e.g. a higher salary)", but I'm not convinced this is always - or even often - the right choice.
Or you could just give larger wages and bonuses. So once again is there evidence a dollar spent on giving equity increases performance more than a dollar in wages
Why would this way of incentivizing employees be better than just giving large salaries, big bonuses, a chill office culture, good work-life balance, etc.?
Why can’t you have all of those things? I don’t see how “chill office culture” and equity are mutually exclusive.
In economics, "there are no solutions, only trade-offs". Many of the examples I mentioned, like increased wages, directly cost the company money. This is money that they wouldn't have to give employees equity.
Many people look at the returns of a job holistically - It may fulfill a passion, it gives them money, it lets them work with people they enjoy, etc. getting equity in the company is merely one piece of that puzzle. I mean, I work at a non-profit, so getting equity isn't even really on the table, yet I still like working here for various other reasons.
I think equity can be a good incentive in some situations, like with startups. But I don't think it's the right answer in every case. If I just want a summer job, I'd prefer to just get paid in money and not vestable stock options, for instance.
My point in listing chill office culture is not to say it is incompatible with equity, but to mention that different things inspire employees besides money/equity. If you had to choose working at a place that gave you equity but was borderline abusive, and working at a place that paid the same, didn't pay any equity, but you felt loved, supported, and encouraged, most people would take the second option.
Okay, sure, but it could also NOT do that.
Here's the problem. Equity is ownership. It has monetary value and it has voting power in the company.
This undermines the actual owners of the company. A person who put nothing in and has contributed nothing but got hired and comes to work on day 1 now has some control and ownership of a company.
The fact is - a person who wants to own a company can either start one or purchase equity in publicly traded companies. There is no entitlement to buy things not for sale.
The employee relationship is very similar to a contractor relationship.
If you have a house, and you pay a contractor to remodel your kitchen, does that contractor now own part of your house - since you paid them to work on it?
That is what you are asking here. Employees who are paid to work to be given ownership of part merely because they were paid to do some work.
It wouldn’t just happen on day 1, the employer could determine a vesting structure that would make them comfortable.
Let me ask again:
If you have a house, and you pay a contractor to remodel your kitchen, does that contractor now own part of your house - since you paid them to work on it?
What is your answer to this?
How exactly would that work? Let's say you work at a franchised McDonald's restaurant for a summer and quit. It doesn't make sense to be given McDonald's stock because you aren't actually working for the McDonald's corporation. If you get paid in equity I'm the restaurant, you maybe are entitled to a few dollars of profit from the restaurant every year due to your short tenure. It would cost more money in overhead to manage your equity than the profit you're entitled. Also, how can you be sure the restaurant isn't screwing you over?
Also, any equity based compensation is going to come out of your cash compensation, and if you're working a low-income job, you'd probably prefer to have cash.
How are you not working for the McD’s corporation?
Also, the employer could implement a vesting structure to prevent people grabbing equity and leaving after two weeks or some other short timeframe.
I also don’t think it necessarily HAS to come out of your pay, but maybe there is an election process where you determine your allocations if necessary.
Franchises are not owned by McDonalds
Ok, news to me lol. I’m not sure that’s common knowledge, but thank you for sharing and now I know!
I’m not sure that’s common knowledge
Are you seriously suggesting that it’s not common knowledge that McDonald’s, the company famous for building out a massive global franchise empire, uses a franchise structure?
Dude this is like business 101, its about as common knowledge as you can get
OP just showing they have no business commenting on this subject
How are you not working for the McD’s corporation?
Because that's not how most franchises work?
A franchise is usually an independent business entity who pays the parent company for the opportunity to use their branding etc. The individual franchise operator is responsible for hiring and paying the employees of their business, McD's has pretty much nothing to do with that part of the equation and employees of the franchise are not employed by the actual McDonald's publicly traded entity.
Also, the employer could implement a vesting structure to prevent people grabbing equity and leaving after two weeks or some other short timeframe.
What's to prevent a business owner from saying you have to be employed for 100 years before you're eligible for equity? Now you're in the world of arbitrary restriction enforcement, and for what? There's no real effect at this point other than yet another contrived barrier to business operation.
I just recently a Business Degree, and this is something I researched a fair bit.
I believe that equity and profit sharing bonuses are very often a win-win. For roles where companies exercise a lot of decision making and have high high individual impact on the company’s success, stock options were successful in boosting employee performance, and employees enjoyed stock options as a risky and long-term but more rewarding compensation plan.
However for other roles where the job is more rigid and individual impact is very low, it’s intuitive that this wouldn’t change employee performance. With certain jobs you just can’t realistically change the stock price yourself, so you have no incentive to prove your performance.
These jobs are often low or minimum wage jobs, so switching a portion of their compensation from cash to stock options or a variable bonus would not be appreciated. These employees often are not in a place financially where they can afford to be paid less than expected in a down month, or wait too long on a payout.
For jobs like these, equity becomes a lose-lose.
Except that as an employee, I could want my compensation to be in my wages instead of equity so I could invest or spend that money more profitably elsewhere.
Even having the ability might be nice/ interesting, if you believe that investing in the company at favorable rates is a good investment.
This is in addition to salary.
Yeah, and I could want that raise or addition as salary instead of as equity so I could invest or spend that money more profitably elsewhere.
All stock options are a part of salary, usually as referred to as "total comp."
People who get paid partially in equity do so knowing that it replaces a part of their salary, and that if equity wasn't offered then their salary should be higher to compensate for that.
If employees are getting equity, it means they're getting less salary. Unless your argument is that basically all people should get a pay raise.
The thing about this view is that it kinda always goes the same way.
This might work for the giants but no one else
Put simply your small mom-and-pop shops generally don't make enough to split up to half their profits after paying their employees. If this was a law across the board, lots of small businesses would be even more burdened than they are already.
Are we prepared to let the employee suffer the cost?
Let's say I bust my ass and put every last bit of my savings into a company, work for 5 years making only losses/barely making even, and then suddenly pop big. Why is it that for the 5 years that I wasn't making money and even bleeding cash the employee was getting a check; but now when it's the turn of the person who risked it big they suddenly are expected to share the profit? If employees are so vital that they make or break a company then shouldn't they be willing to eat the losses as well as the profit? Or are we getting rid of paychecks and paying by equity alone?
Most people would hate this model and reasonably so. It's all well and good to look at a profitable business and go 'I deserve a slice of the pie' but I've yet to meet someone who'd be willing to eat the losses for their employer too.
Nobody said the mom and pop has to split half the profits, but they may be able to split a twentieth.
The employer does take on risk by starting a business, but I don’t think anyone would argue the employee should HAVE to take on that risk in return for a very small slice of the pie (even less than 1% in many cases).
The employer does take on risk by starting a business, but I don’t think anyone would argue the employee should HAVE to take on that risk in return for a very small slice of the pie (even less than 1% in many cases).
Would you really want this? You realize some companies crap out with billions of dollars in debt right? 1% of which you would be liable for?
I think you have a fundamental misunderstanding of how equity works. What you’re describing is profit sharing, not equity. Equity is largely meaningless unless the company is public or exits, when there is market demand for the shares you are granted as you have to be able to sell your shares in order to actually profit. Even then, you may still not profit from equity if the share value drops as the value of your equity is tied to the company’s value—that’s why people who work at startups often end up with nothing despite owning considerable shares. In some cases people can even end up even losing money due to timing and taxes.
The more employees you have to do this for, the more ownership gets diluted. Hardly fair for a business owner
The ownership would be diluted, but you could set up your equity structure to a point where the owner will always control a certain amount, the employees will split another amount.
If you decide you want 99% and the remaining 1% will be split among the employees, they'll just decide to work somewhere else with better equity allowance.
Dude this comment destroys your entire position. If it can be 1% it's defacto 0%.
You're assuming a significant percent of people care about owning equity in the company they work for. I highly doubt most people care. If most people cared wouldn't this be a more common position for people to hold?
I don’t understand your first point - it would have to be above 0% by definition.
I imagine a large percentage of people do want this, but may be uneducated on the idea of it, and purposefully kept that way by our existing employment structures.
What he means is that if the business owner is allowed to keep 99% and split the remaining 1% amongst all employees the division will become so miniscule that it is, for all practical purposes, nothing.
Sure, but that would make the employer giving 0.0001% to an employee much less attractive than the employer giving 0.1%. It’s just another benefit to be used to attract the talent you’re looking for.
"I don’t understand your first point - it would have to be above 0% by definition."
This is likely because you aren't familiar enough with the word defacto.
"I imagine a large percentage of people do want this, but may be uneducated on the idea of it, and purposefully kept that way by our existing employment structures."
The first half of this is an assumption just like I said before.
The second half is more assuming but it also falls into conspiratorial thinking which I disagree with.
I understand the word, and I’ll forgive the rudeness. What would be a meaningful minimum to you?
I disagree with your entire premise, so there is no minimum I would support
Okay, I will start a new business and each employee will get 0.00001% equity when they join. Do you see how that’s effectively 0? That’s what the person above you is saying.
If you decide you want 99% and the remaining 1% will be split among the employees, they'll just decide to work somewhere else with better equity allowance.
I'm a bit confused by that example, as you are describing an in practice "no equity sharing" policy.
Do you think everyone should share equity, even if in practice it's negligible? If so, why?
I'd note that in actuality, employees do chose to work at companies that don't share equity, so I'm not sure that your example is accurate.
- Negligible is up to the potential employee to decide.
- Can you expand on that? I think it’s more reasonable to say most opportunities don’t provide equity, so by definition most employees have taken jobs without equity. This isn’t a substitute to a salary, it’s additive.
Just on point one, if it's up to me to decide, then I could decide to share 0%, right? After all, it would be silly to consider sharing .000000000000000001% equity different from sharing 0% equity.
And, in that light, the current system is exactly what you describe, and exactly as you point out, most opportunities don't provide equity. Clearly the "free market" (in scare quotes as arguably a true free market doesn't actually exist) doesn't force employers to share equity.
This sounds effectively like stock options, which makes a lot of sense in many scenarios. It aligns the interests of the company with the interest of the employees, and it allows incentives of future rewards during stages of growth when cash might be limited.
There are, however, cases where it makes less sense. In a large public company, individual employees likely won't have much of a say given their small share of the total equity. Keeping their money in the form of equity is often not ideal, because that money might be better invested into a diversified portfolio. If it's in their best interest to sell the stock as soon as they get it, that's more of a random hurdle than anything.
So, in other words, employee equity makes sense except when it doesn't. Companies should absolutely use it, but forcing it into every scenario makes little sense.
I'm going to come from this from the other side. I'm an employee who is compensated in large part in RSU (restricted stock units). I find it entirely a hindrance and would prefer to be paid cash.
Cash is predictable and I can plan my life around it. I can't really say I won't pay my mortgage because my employers stock is low.
Additionally it makes my taxes more complex and requires me to sell stock whenever it vests to make cash. I don't want to hold company stock as I don't believe in putting all my eggs in one basket by having my savings and pay based on the same company.
If anything if they want to make me care about profits, just give me a cash bonus based on profits.
The existing alternative to this is not a flat pay in the first place. Companies usually have individualized promotions and bonuses that should in principle be much more effective incentives towards employees working more diligently than a benefit that depends on the collective performance of the company.
I understand that benefits based on collective performance should in principle encourage collaboration and helping other people in the company out, but how effective this is vs simply using bonuses would depend on the role one plays in the company. I don't think a blanket statement about all employees makes sense here.
Your underlying idea about employee performance with equity is right, it’s just very hard to implement for non-public companies and will just hamstring companies more the smaller they get. Equity is used for two things, 1) as a way to raise money (I.e. someone invests 100k into a business in exchange for 10% of equity, and the company will invest that 100k into the company to make the total company more valuable). 2) it can be used as compensation for employees, to motivate them to perform, to keep them around for the long haul, and so that they have to pay less cash to them. For that second part, a key is that it’s typically a portion of an employees total compensation. So say you’re an employee that makes 50k a year and have 40k a year in personal expenses. Also assume you have the option to make 50k in cash, or 40k in cash and 10k in equity of your company. If you choose the 50k cash option, you could invest your extra 10k in the S&P 500 which generates around 10% a year, and you can sell your shares whenever you want. If you choose the second option, it will likely need to be vested (you don’t actually legally get that equity until a few years pass), you’ll be hard pressed to actually sell your equity stake if you need cash. You won’t actually get paid in cash until your company gets sold. You have to file your ownership on all of your taxes (potentially have to pay on unrealized gains if new legislation passes), so imagine fifty years in the future trying to track down tax forms from a restaurant you worked in as a teen. Most importantly, under your scenario, imagine that every time an employee gets hired after you, the value of your equity decreases. Moreover, every employee that leaves would keep their ownership, and their replacement would require more equity issued making your stake less valuable. For you to choose the second option, it’s only really worth it if the company expects to grow exponentially, hence why start ups are the only companies where the math works. If you think of it from the perspective of a restaurant, it would result in employees being paid less cash, and any turnover would increasingly reduce the value of everyone’s stake, which would reduce the restaraunts ability to raise money to stay afloat (let alone grow).
This really doesn't work very well for small, mom & pop businesses with less than 5(ish) employees. Think of a flowershop or parking lot light maintenance company.
In many of these businesses, there is no equity. They don't really pay the owner a salary, the owner just gets the money leftover (if there is any) after all the expenses, including payroll expenses, are paid. If the owner were drawing a reasonable salary, there would be no profit, but a loss.
And there's no real market to sell these business for anything above the value of the assets that they hold. The business itself has no value because the value comes from what the owner puts into it. If the owner isn't there anymore, the business falls apart.
As a result, most rational employees wouldn't want a portion of their salary to be paid in equity in the business. That equity is useless. It can't be sold or bartered. All it can do is let you say "yeah, I own part of this business". And anyone rational, if given the choice between:
$60,000 annual salary, or
$59,500 annual salary plus worthless equity shares
is going to choose the $60,000.
What you are describing is similar to an ESOP an employee stock ownership program. When the company I worked for was ready to sell. Instead of the owner selling to a larger company, they decided to sell it to the employees as an ESOP. So the ownership goes to a trust and the trust distributes shares to the employees. There is a vesting time and you are distributed shares based on the profit of the company and your compensation. When you leave you have to divest your shares and you will get paid out whatever they are worth at the time. And the shares will be distributed amongst the remaining employees. Over time it allows employees that have remained at the company the longest to really own a large part of the company. You are voting in board of directors to make decisions for you as a company and they decide who runs the company, like a CEO.
For the most part it was definitely a motivation for the employees. It shows that with their hard work they can get more out of the company and help it to succeed.
So let's say you do a 1-month summer job where you are a part-time life guard. Should you be entitled to own a piece of the company, forever ?
Going back to the point, the logic seems to be that if you contribute to build something, you should own part of this something. Following this logic, if you pay a construction company to build your house, should you also give part of your house to the construction company ? If a tradesman comes to your house for a small repair, do they own a small percentage of your house ?
The second idea about redistributing profits to the employees makes much more sense : you worked for 1 year in a company, you contributed to generate XM$ profit. This is actually very common in France (I could not find any English description, but it's called "Prime de participation" and "Prime d'intéressement")
How would this even work for non-profits? Does any employee have to have a meaningful share in decision making?
How does this possibly work for company mergers/acquisitions without compromising the point?
Consider a company owns some asset but for whatever reason can't exploit that asset. So the owner wants to sell the company to a larger company that can. This doesn't work if Greg who worked there for 4 years and quit after a falling out doesn't want to sell.
There are workarounds for this. A normal one is that the shares can be purchased by the majority holder as a part of the contract for the share. But if that works, then the company could simply issue and buyback the shares on payday using the same rule, making this addition an over complication for taxes and nothing else.
I believe this would not only be an opportunity for employees to make more money, it would also likely drive them to be more passionate and motivated at work - if the success of the company directly impacts their pay, rather than just being paid a flat amount regardless of the performance of the company, employees will work more diligently and more intelligently.
The success of the company =/= the share price.
For example, a stock buyback will boost the share price and the value of equity, but doesn't really help the company at all (arguably, it harms it because it now has less cash to invest).
Since you give the largest share of stock to senior figures who would make this decision, you risk introducing (in so far that it doesn't already exist) a perverse incentive.
So there is a very simple and easy process to get around this. It's called a liquidity preference which ensures one class of shareholders is paid first and all common (or lower preference) are paid out on the remaining.
There are other issues, especially will employee turnover (or employee capture) where they cannot leave employment without leaving equity on the table.
The tradeoff is usually a consistent paycheck, or a pop off in equity price. Some places do both where they offer the employee "below market rate* for their salary, but give a bonus in equity to make up for it.
That's what equity is, the gamble. The business owner doesn't know their business will succeed, they sacrifice years with no pay hoping it comes back one day.
Someone who has a consistent paycheck from the day they were hired doesn't need that equity. If they want to gamble, they can gamble too, but employees can't get the best of both worlds.
I think this is a good way of putting it. I think equity sharing is good sometimes, and in some kinds of businesses. Startups are a great example, for instance. But I don't think it's the right answer or the right incentive for every business to try to offer.
Most larger companies do give equity, but if everyone gets equity then should everyone also be liable equally for loss proprtionate to their equity? For example, a small business goes out of business and is liable for debt and the remainder of the balance for their office space lease.
It’s this kind of take that explains exactly why employees generally don’t get equity, outside of executives (because they run the business so stockholders need to align incentives by making the majority of their comp tied to the performance of the company) or highly in-demand positions (because it’s just a form of payment for a business to obtain talent while essentially financing wages to avoid cash flow issues, primarily found in tech companies).
You just don’t understand basic business, so you shouldn’t be a business owner. Continue collecting a wage.
Why would employees as a class prefer risky illiquid equity to cash? The average labormonger is operating close to their financial margins. In terms of paying bills this week, equity is worse than cash except maybe in a few exceptional cases.
The problem is that most individual employees would prefer to be compensated either in cash bonuses or via something like matching 401k contributions. Flexibility of spending and diversification of investments is important to people. This means that any equity-sharing by a company would probably need to be in addition to bonuses or 401k matching, not in lieu of those things - otherwise, employees are going to look for employers that better forms of compensation.
I like this idea from an emotional standpoint, but I don't think you've really thought through the consequences and implications. Let's start with the big one:
I believe this would not only be an opportunity for employees to make more money...
Equity does not automatically translate to more money. It usually means the same amount of total money, but less cash flow because some of it is equity instead. You only get cash from your equity if you sell your equity, and then you don't have equity anymore. In fact, this is the real reason current businesses usually only offer direct equity to highly paid high ranking positions - those employees can afford to make the tradeoff to have less cash and more equity, while the more typical position needs all of their available cashflow to pay bills with.
There is a type of business that often does what you want: Small startups very frequently make equity a significant part of the pay for most of their workforce. They don't do this because it makes the employees rich (although this sometimes happens). They do this because the business does not have enough cash to actually pay market competitive wages, and so the employees suffer through having terrible pay for long hours until the business can grow enough to make that equity worth something. And if the startup fails, (a very common outcome for startups), all of that equity is worthless.
The next challenge is determining how to compare the equity value of this year's work with the equity value you already assigned in previous years. Or more generally, the equity value for all of the existing owners (whether that's due to work or cash investment). You can't simply reset the ownership of the company every January 1st and say this year's profits will go to this year's workers. You can use some math and accounting to assign a value to the existing equity, and add the new equity on top of it, and I won't argue this is terribly difficult. But it does require you to be very specific about what you think the value of the "new equity" is, and in a large established company this is likely to be very small compared to the existing equity. This reinforces the first point: Whatever value you have assigned to the new equity was probably calculated based on a similar reduction in direct pay.
I'm also considering the idea that this equity should translate as the corresponding percentage of the company's annual profits delivered to the employee at year end (i.e., if I have 1% equity, 1% of the company's profits will go to me at the end of the year)
That's just called a "Dividend" and already happens, although usually the company doesn't assign ALL profits to dividends because they need to keep some for business growth.
Like an ESPP? A lot larger companies do that. Small companies do to but it doesn’t mean much. How many tech workers have been burned by taking large equity packages from startups that failed?
I don’t agree in equity for every employee, I do believe profit sharing would be a win-win for both parties in the vast majority of cases. I
Aren’t you essentially describing a co-op?? A business structure that already exists…
This is the dumbest thing I have ever heard
In a huge company I don't think this will substantively change employee motivation. If the company has over a hundred thousand employees for instance, the effect of your own efforts on how much money the company makes is effectively nil.
It's also bad finance to have investments in the company you work for, because it increase your personal risk: if the company goes bad then you can lose both equity AND your job.
Congrats, you invented socialism
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If I'm a small business owner who believes in second chances for felons, do you think enforcing this would encourage or dissuade me from hiring them?
Would you want to provide equity in your business to an employee you aren't certain is going to stay beyond a couple weeks?