Employee Equity Structured for Long-Term Alignment
Equity. For employees, it *can* be life-changing, it usually isn’t, and it rarely lives up to its name.
It increasingly takes the form of RSUs, options, and stock grants. Companies using these tools give employees equity with the expectation that they’ll eventually go public, be acquired, or — if the company’s already public — that growth and higher share prices will continue.
For employees at these companies, especially in the early stages before product-market fit is found, their equity can feel like a lottery ticket. The reality is that their equity has the cards stacked against them. Founders, early investors, and VCs have minimum returns locked in if the company hits a liquidity event, which puts employees at the bottom of the cap table. And the cold hard truth is that most startups fail and will never see that big payday.
Many of my former peers from the startup world struggle with the paradox that they know equity in a company can be life changing, but they’re jaded from past experiences with it. Jaded by the fact that they were encouraged to take a “startup discount” in their salaries, in return for what turned out to be worthless lottery tickets.
But that’s a cynical, jaded view of employee equity.
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In the Midwest, you’ll find several companies, like HDR Inc., Black & Veatch, and Burns & McDonnell, that are doing billions in revenue and have thousands of employees. If publicly traded, they’d be solidly in mid-cap, or perhaps even large-cap territory. But they’re not public. They’re 100% employee owned. And at these kinds of companies:
- Retirement savings are substantially higher. Employee Stock Ownership Plan (ESOP) balances are $67,616 larger than the average balance of an employee at a company that only offers a 401(k) according to a study by the National Center for Employee Ownership (NCEO; note: that’s also after controlling for industry, geography, and size).
- Furthermore, those larger retirement accounts were driven by the fact that 94% of the retirement contributions came from the employer (not from employees deferring their own compensation). For employees at companies offering only a 401(k), only 31% of those (much smaller) balances came from company contributions. (source)
- Employee quit rates are ⅓ the national average (source)
- Want more data? Check out the NCEO’s research page for more on how workers at 100% employee owned firms tend to be better off and more loyal than their non employee-owned counterparts.
The data points to these companies being run in a totally different way.
The leadership at these companies isn’t worried about hitting revenue, growth and earnings numbers every quarter to satisfy analysts and investors. They aren’t navigating the tension of large stock based compensation diluting EPS. They’re not trying to minimize compensation to rank and file employees while senior executives max out their retirement accounts, or running opaque performance review processes where employees are left being made to feel lucky and grateful for an equity award that’s in truth a pittance.
Employee-owned companies appear to be operating differently.
I’ve been doing a dive into the world of employee owned companies, and have found that interest in ESOPs has been growing substantially since the pandemic.
Increasingly, these companies are being operated as private S-corps that offer their ESOPs in combination with a 401(k), creating what’s colloquially referred to as a “KSOP.” It’s a plan that operates under special rules (e.g., tax-deferred, employer-funded, etc.) that allow employees to accumulate and grow their equity stake in the company. These companies, motivated by the fact that their only shareholders are their coworkers, tend to take a long term view, and know that growing the company — its revenue and its profits — can only serve to benefit (and reward) the team more and more as the years go by.
Sectors, industries and “best practice” tactics go in and out of style. The most enduring companies and strategies adopt things that never go out of style. Things like quality, paranoid risk management, and a long term orientation.
If you want to learn more about KSOPs, check out what I wrote here. My next post will look at how a sample of ESOP companies has actually performed against their publicly traded peers over the last decade.
