Would you buy shares of private company where you work?

[Jimbo]

If provided with the opportunity to buy shares of a private equity firm where you work, would you do it?

Company is stable, solid, generating good revenue... Basically obtain a share of the dividends, future growth and capital if the company gets bought out.

Curious to hear your thoughts on this.

[PhrugalPhan]

Sure If you feel the company is good put some money in you aren't afraid to lose. How much that is you'll have to decide.  I worked at a small company for a few years and the yearly profit sharing allowed us to buy into the company.  I used 50% to buy in and the rest went into my 401k.  About 5 years after I left they were bought and my shares were now tripled in price. I put that money into an IRA.  Wasn't life changing but it was a nice boost.

[Moustachienne]

I wouldn't.  You'd be investing too much in one source, your livelihood and extra money. Better to diversify and spread the risks. You're already invested in the company as your pay source.

This advice thanks to a financial advisor we had. We were wondering about investing more in high tech stocks at one point and it was pointed out that since my husband was employed in that volatile sector we'd be adding more eggs to the same basket.  That hadn't occurred to us!  Now we are very diversified through ETFs and mutual funds.

[Jimbo]

Thanks for the replies.

I understand the lack of diversification - it is a good point. If the company goes under it is a double whammy of negative outcomes.

I do feel that a scenario like this is the best way to grab a piece of the profits you help generate. And I would estimate the chances of the company being bought out in the next 5 years at 50%... So this creates an incentive.

Putting in money I can afford to lose is a good piece of advice.

[NorCal]

I've done it, but the recommendation to do so is pretty situation specific.

Considerations:
1. Are you already in a good financial spot with a well diversified portfolio, and no other urgent needs for the cash?  I personally wouldn't put more than 5% of my portfolio in a company I work for.

2. What is the track record and strategy of the Private Equity firm?  Are they the type of firm that holds onto investments for 30 years without paying dividends?  Or is it a venture fund with a mandate to sell their stakes within a decade?  Think through what liquidity might look like.  A share that quadruples in value, but you can't sell is worth $0 in cash today.

3. What is your confidence level that the management and investors will continue to make good long-term business decisions?

[Maenad]

I did this for the tech company I worked for in 2000. The dot-com crash cost me $40K. And that's nothing compared to what Enron employees suffered.

I echo "only do this with money you're prepared to lose". I don't know how good you are at evaluating companies, I do know that people tend to think they're better at it than they actually are. If you do it with "spare" money, you won't suffer if you lose, but you'll get a nice little bump if you win, which I think is a pretty good deal overall.

[Jimbo]

I've done it, but the recommendation to do so is pretty situation specific.

Considerations:
1. Are you already in a good financial spot with a well diversified portfolio, and no other urgent needs for the cash?  I personally wouldn't put more than 5% of my portfolio in a company I work for.

2. What is the track record and strategy of the Private Equity firm?  Are they the type of firm that holds onto investments for 30 years without paying dividends?  Or is it a venture fund with a mandate to sell their stakes within a decade?  Think through what liquidity might look like.  A share that quadruples in value, but you can't sell is worth $0 in cash today.

3. What is your confidence level that the management and investors will continue to make good long-term business decisions?

Excellent points! Let me assess them briefly and hopefully you can flesh out more advice. :-)

1. I would say yes - we are not FI but we are on the way. We do have a solid portfolio of diversified ETFs and would not to touch it to buy these shares. Obviously our future investing capacity would be reduced with a reduced cash flow as we purchase these shares. As for short term needs for cash... Well, we want to buy a new house I guess, but we would rather use our current equity to do this, and hopefully not increase our cash flow too much (have not bought the 600k property mentioned in previous posts. Looking for creative ways to spend less on housing). 

2. The firm is a consulting firm, so the value is in the billable hours for the line of work. They have a good track record over ~10 years. Have generated profits from day one, and built on since. Growth has slowed down a bit but revenues/profits are still solid. Dividends are paied yearly, or even 2-4 times per year - unsure at this point. I know a healthy amount of cash reserve is kept available at all times.

3. Management group is good. I know of incoming projects for the next 12-18 months. Need to find clients is always going to be there moving forward. Company expertise is pretty good and getting worldwide exposure. This said, management is looking to retire within next 5-10 years, which makes me think the company being sold is likely. The company could survive without current managers/owners in the future, but probably not in the short term. Wording this out, I see a red flag, right?

[Jimbo]

I did this for the tech company I worked for in 2000. The dot-com crash cost me $40K. And that's nothing compared to what Enron employees suffered.

I echo "only do this with money you're prepared to lose". I don't know how good you are at evaluating companies, I do know that people tend to think they're better at it than they actually are. If you do it with "spare" money, you won't suffer if you lose, but you'll get a nice little bump if you win, which I think is a pretty good deal overall.

Right, this money could be lost. I dont think consulting businesses go under as fast as tech companies, though, right? And in the meantime I access some (based on past performance) higher than market rate dividends....

So, would you do it again? ;-)

[socaso]

If I were in your position and already had a pretty diverse portfolio I would absolutely do this.

Considering your mention of management's potential retirement I think it bears asking a question about what will become of the stock if they sell the company. It sounds like the intention to retire is probably no secret so it wouldn't be out of line to ask the question in that case.

[Jimbo]

If I were in your position and already had a pretty diverse portfolio I would absolutely do this.

Considering your mention of management's potential retirement I think it bears asking a question about what will become of the stock if they sell the company. It sounds like the intention to retire is probably no secret so it wouldn't be out of line to ask the question in that case.

I will ask questions, yes. I think if they sell, the plan is pretty clear: shareholders get a piece of the pie nased on their stake. This would probably (speculating here) come with some golden handcuffs like 'you need to work there for X extra years to transfer knowledge'. I don't think that would apply to me, but in the future, it very well might.

It gets fuzzier if they just retire. Then they might want to sell back their shares (or a portion) to the shareholders and transfer ownership. I think at that point (again speculating) I would suggest selling to a bigger outfit.

Does this make sense?

[Jimbo]

Another point: they have valued the company as 5 times the EBITDA (averaged over last 3 years).

Is this reasonable?

[FIRE@50]

The standard financial advice is to not buy individual stocks and NEVER buy the stock of the company you work at. Having said that, I still have about 15% of my 401k in the company that I work for. Nonetheless, I'm still looking to reduce that amount as time goes by.

So, as other have said, I would be willing to do it if it was a relatively small amount of my overall portfolio. The questions I would have are: Do you have access to audited financials or are these just numbers that you hear people casually throw around? What are the risks of fraud at this company? If you wanted to sell you shares at any time, how liquid would they be?

Good luck with whichever route you choose.

[Jimbo]

The standard financial advice is to not buy individual stocks and NEVER buy the stock of the company you work at. Having said that, I still have about 15% of my 401k in the company that I work for. Nonetheless, I'm still looking to reduce that amount as time goes by.

So, as other have said, I would be willing to do it if it was a relatively small amount of my overall portfolio. The questions I would have are: Do you have access to audited financials or are these just numbers that you hear people casually throw around? What are the risks of fraud at this company? If you wanted to sell you shares at any time, how liquid would they be?

Good luck with whichever route you choose.

Will have access to the financial books once I indicate I am interested. Not sure what we mean with the fraud point... We have been operating for 10 years, been audited by CRA (canadian IRS) at least a couple of times and no issues... I will investigate the liquidity aspect more as part of my follow up questions.

thanks for the feedback!

[jlcnuke]

If the company was publicly traded, would you take your money and buy shares of it? If you would not, it's not what you feel is the best place to invest your money. If you would, then invest in it if you are agreeable to all the other stipulations involved.

[Jimbo]

If the company was publicly traded, would you take your money and buy shares of it? If you would not, it's not what you feel is the best place to invest your money. If you would, then invest in it if you are agreeable to all the other stipulations involved.

I think I would... Even though I know ETFs are the bee's knees and provide diversification, and are just such great investment vehicles... But in investing in this company, I get a share of current profits (expected dividends around 8-10%) and a piece of the pie if we get bought out... Seems like a worthy gamble, I would think (hope)...

[bognish]

No. I would never by shares of any private company. I was a controller for a private company. Without a public market for the shares the company can make up and justify pretty much any share price they want. They can stop paying dividends and raise executive salaries or pay consulting fees to the private equity. The majority shareholders have every ability to screw small shareholders and no real incentive not to. Even if you trust the current management team, those people can change very quickly and you will be the last to know if you are not in the Board Meetings.

[Christof]

But in investing in this company, I get a share of current profits (expected dividends around 8-10%) and a piece of the pie if we get bought out... Seems like a worthy gamble, I would think (hope)...

How about if you don‘t get any dividends? 10 years means you really do not have experienced an economic down turn yet. Would you dislike your work if next year you don‘t get any dividends while your bosses have the same salary as the year before or maybe even more?

[A Fella from Stella]

I tried to buy into the last private company where I worked, but it didn't work out.

[WhiteTrashCash]

The upside of owning shares of the private company where you work is that you could sell the shares if they fire you, which would be the Mustachian equivalent of kicking over display cases on your way out the door.

[Villanelle]

Unless I was getting them at some kind of discount, why would I value that company over any other company?  If there was no special advantage, no, I wouldn't even consider it.  Why should I put more weight on a piece of the profits I help generate vs a piece of the profit someone else generates?  My investments are not emotional things; "home town" love as no place in my decision metric. 

I also think "would you buy this if you didn't work there" is the first question to ask.  If not, then what difference would working there make?  In what real way does "I get part of the profits or part of the losses I help generate" meaningful when it comes to finances?  Do you, in your role in the company, truly have the ability to actively and significantly influence the company's profits?  Will you work harder and actually do that if you own?  (Yes, every worker contributes to a company's successes, and failures. But very, very few can directly increase profits, and of the few in that position, fewer still would do more/better/different work if they owned instead of just going to work. 

[Jimbo]

Darn, a lot of good points being made here... I agree they can justify any price point they want because they are not on an open market... They have used 5 times the EBITDA (averaged over last 3 years). Does this seem reasonable? To me it does, but I can investigate this further with them and try to haggle a lower share prices (higher stake).

There are a lot of billable hours in this company, every worker typically works 40-45 hours and bills a good chunk of that (will know the actual ratio once I look at the books). Even the manager bill a high portion of their hours. We have low overhead, and really the profits seems to pile up in the company's books. We stash some for the low times but they havent arrived in te past 10 years (we did have some contracts not renewed, but no mass layoffs really). The dividends are distributed to the share holders yearly and a cushion is kept - minimum of 3% dividends but obviously hoping for more. Agree we have not seen a market downturn yet, but there were some lean times for sure (we work in the primary sector).

I would get to be at board meetings.

I definitely feel owning shares would make me unfire-able, to a point of course.

As for this:

Unless I was getting them at some kind of discount, why would I value that company over any other company?  If there was no special advantage, no, I wouldn't even consider it.  Why should I put more weight on a piece of the profits I help generate vs a piece of the profit someone else generates?  My investments are not emotional things; "home town" love as no place in my decision metric. 

I also think "would you buy this if you didn't work there" is the first question to ask.  If not, then what difference would working there make?  In what real way does "I get part of the profits or part of the losses I help generate" meaningful when it comes to finances?  Do you, in your role in the company, truly have the ability to actively and significantly influence the company's profits?  Will you work harder and actually do that if you own?  (Yes, every worker contributes to a company's successes, and failures. But very, very few can directly increase profits, and of the few in that position, fewer still would do more/better/different work if they owned instead of just going to work. 

I mean... are there so many companies where there were 8-10% dividends in the past 5-10 years? I don't know them I guess. The consulting business has definitely underperformed in the recent past... But we've done well. I agree with your point about the workers though. But in this context, working hard is doing the work and billing the hours to the client. The more hours, the better. I feel like this is being achieved by all at this place.

Please let me know if I am overly optimistic.

[Car Jack]

No, not ever, never.

I did with a big tech company I worked for.  Employee stock purchase with a 15% discount at $48 a share.  I left the company and during that period, the price continuously dropped.  I sold at $12 a share.  The company bounced back many years later.  Today, I get employee stock and it sells miliseconds after vesting. 

I don't care how stable you believe your company is.  Sorry, but you know nothing.  Enron and Worldcom employees thought their companies were stable too.  And Polaroid and DEC and Lehman Brothers and GM and.......

[Jimbo]

Interesting, and I hear you. I have also had poor experience with publically traded big companies employee share purchase plan. 15% rebate is pretty crappy too.

Do you feel the same applies to smaller, private equity firm though? I feel they are not the same animals...

[PDXTabs]

I don't care how stable you believe your company is.  Sorry, but you know nothing.  Enron and Worldcom employees thought their companies were stable too.  And Polaroid and DEC and Lehman Brothers and GM and.......

Do you realized how much money you could have made with pre-IPO DEC, GM, and Polaroid?

But yes, I would never have more than 10% of my net worth in one company, especially the one I worked at.

[Villanelle]

Darn, a lot of good points being made here... I agree they can justify any price point they want because they are not on an open market... They have used 5 times the EBITDA (averaged over last 3 years). Does this seem reasonable? To me it does, but I can investigate this further with them and try to haggle a lower share prices (higher stake).

There are a lot of billable hours in this company, every worker typically works 40-45 hours and bills a good chunk of that (will know the actual ratio once I look at the books). Even the manager bill a high portion of their hours. We have low overhead, and really the profits seems to pile up in the company's books. We stash some for the low times but they havent arrived in te past 10 years (we did have some contracts not renewed, but no mass layoffs really). The dividends are distributed to the share holders yearly and a cushion is kept - minimum of 3% dividends but obviously hoping for more. Agree we have not seen a market downturn yet, but there were some lean times for sure (we work in the primary sector).

I would get to be at board meetings.

I definitely feel owning shares would make me unfire-able, to a point of course.

As for this:

Unless I was getting them at some kind of discount, why would I value that company over any other company?  If there was no special advantage, no, I wouldn't even consider it.  Why should I put more weight on a piece of the profits I help generate vs a piece of the profit someone else generates?  My investments are not emotional things; "home town" love as no place in my decision metric. 

I also think "would you buy this if you didn't work there" is the first question to ask.  If not, then what difference would working there make?  In what real way does "I get part of the profits or part of the losses I help generate" meaningful when it comes to finances?  Do you, in your role in the company, truly have the ability to actively and significantly influence the company's profits?  Will you work harder and actually do that if you own?  (Yes, every worker contributes to a company's successes, and failures. But very, very few can directly increase profits, and of the few in that position, fewer still would do more/better/different work if they owned instead of just going to work. 

I mean... are there so many companies where there were 8-10% dividends in the past 5-10 years? I don't know them I guess. The consulting business has definitely underperformed in the recent past... But we've done well. I agree with your point about the workers though. But in this context, working hard is doing the work and billing the hours to the client. The more hours, the better. I feel like this is being achieved by all at this place.

Please let me know if I am overly optimistic.

How does it in any way make you unfireable, or even meaningfully less difficult to fire?

Also, sure, that's a great rate of dividends.  But if a company's stock is growing quickly, you can't just dismiss that part of value.  Dividends are only part of the picture.  If the stock (or shares of a mutual fund) has lower dividends but has gained in value, then you've likely increased your financial picture more than great dividends and fairly stagnant share value.  Also, past performance isn't a guarantee (or often even an indicator) of future performance, and that's so much more true when you are talking one company, instead of a diverse pool of companies.

If the "more hours, more money" is already being achieved, they why do you need to be an owner? That's already inherent in the value (assuming you get a fair valuation, something about which I'd be exceptionally skeptical.  My comment was mostly in regards to the notion that you thought owning would somehow allow you to benefit from you own labor.  You are already doing that, in the form of a paycheck.  Outside of that, you benefit by being in owner in exactly the same way whether you work for a place you partially or not.  That's why I brought up a likely inability to make fundamental changes as a partial owner that truly make the company, and your share of it, worth more.  If you can't do that, then there's no advantage to owning part of the place you work vs part of the place Mark Zuckerberg works.  In other words, workers and ideas and products will drive the value of the company you partially own, whether you work there or you won via equities.  So what is the supposed advantage to owning where you work.  Imagine the janitor is considering buying in to your company because he wants to "benefit from his labor".  Does he clean faster or more thoroughly now that he owns?  And even if he does, does that increase the value of the company and his holding of it?  No.  You are likely a bit further up the food chain, but the question is the same.  Will owning make you behave differently, and if it will, will that be in a way that meaningfully increases the value of the company?  If not, then you aren't really "benefitting from your labor" in a way that causes it to make sense to own.  And that's even more true when you are taking on a lot more risk by owning this than you would be by holding far more diversified holdings. 

[koshtra]

Nope. It doesn't seem like a particularly bad bet, but it doesn't seem like a particularly good one, either. Why bother? It would just add complexity (and the danger of various biases) to your investment equations.

[Jimbo]

@Villanelle (dont want to quote so I do not create a wall of text)

Trying to assess your points: They are not offering these shares to everyone, but only to core employees. Which is my case. They don't make me un-fireable, I meant less likely to be laid off if a downturn occurs, right?

Regarding company valuation, well sure, dividends are not the only thing. They value the company as 5 times the EBIDTA, so if that grows, the company valuation grows as well. For sure past performance does not predict future... But we are doing similar things to the past, with a similar team receiving a similar base pay, and we are invoicing hours to our clients... The business model keeps working (for now of course).

Regarding the more hours, more profits. This is how consulting services work, right? They pay a salary to their employees. The employees bill hours to clients. The hourly rate invoiced is much higher than the overhead of the firm (which includes salaries) to account for non-billable work, downtime, and allow for a profit. By being an owner, I access my salary and a share of the profits. It allows me to benefit further from my own labour and also most importantly, from everybody else's.

The risk point, linked to lower diversification, I agree with. I guess that is why I am hesitating, evaluating options and connecting to the mustachian brain hive.

[Jimbo]

Nope. It doesn't seem like a particularly bad bet, but it doesn't seem like a particularly good one, either. Why bother? It would just add complexity (and the danger of various biases) to your investment equations.

yeah, that is a good point. Much more complicated than keeping trudging along and investing on my own.

Another fear I have is it creates the perfect golden handcuffs down the line. Why quit or leave when you OWN the company, right?... Then the owners will want to sell their shares and retire... That is not too appealing.

[Fishindude]

It really depends upon the company's track record.   
If they have a long history of steady growth, decent dividends and treating their shareholders well, I would most certainly invest.

By investing in the company where you work, at least you have some sort of feeling for where the company is going and how they are performing -vs- having your dollars in some Vanguard or similar fund where you have no idea who are what you are invested in.

[Villanelle]

@Villanelle (dont want to quote so I do not create a wall of text)

Trying to assess your points: They are not offering these shares to everyone, but only to core employees. Which is my case. They don't make me un-fireable, I meant less likely to be laid off if a downturn occurs, right?

Regarding company valuation, well sure, dividends are not the only thing. They value the company as 5 times the EBIDTA, so if that grows, the company valuation grows as well. For sure past performance does not predict future... But we are doing similar things to the past, with a similar team receiving a similar base pay, and we are invoicing hours to our clients... The business model keeps working (for now of course).

Regarding the more hours, more profits. This is how consulting services work, right? They pay a salary to their employees. The employees bill hours to clients. The hourly rate invoiced is much higher than the overhead of the firm (which includes salaries) to account for non-billable work, downtime, and allow for a profit. By being an owner, I access my salary and a share of the profits. It allows me to benefit further from my own labour and also most importantly, from everybody else's.

The risk point, linked to lower diversification, I agree with. I guess that is why I am hesitating, evaluating options and connecting to the mustachian brain hive.

Why?  I own some Facebook shares.  Would that make me less likely to be fired (in a scenario where I worked there)?  (Yes, I know that's not closely-held and thus is a different animal.) I really can't see why it would make them less likely to fire you.  Maybe I'm missing something. I suppose it would be slightly more awkward, but if a company is going to made decisions about who to fire or not based on "awkward", then that would be just another reason I wouldn't want to buy in.  there's no reason they couldn't have someone who owns 5% of the company who doesn't work there, whether they initially did or not. 

[FIRE Artist]

@Villanelle (dont want to quote so I do not create a wall of text)

Trying to assess your points: They are not offering these shares to everyone, but only to core employees. Which is my case. They don't make me un-fireable, I meant less likely to be laid off if a downturn occurs, right?

Regarding company valuation, well sure, dividends are not the only thing. They value the company as 5 times the EBIDTA, so if that grows, the company valuation grows as well. For sure past performance does not predict future... But we are doing similar things to the past, with a similar team receiving a similar base pay, and we are invoicing hours to our clients... The business model keeps working (for now of course).

Regarding the more hours, more profits. This is how consulting services work, right? They pay a salary to their employees. The employees bill hours to clients. The hourly rate invoiced is much higher than the overhead of the firm (which includes salaries) to account for non-billable work, downtime, and allow for a profit. By being an owner, I access my salary and a share of the profits. It allows me to benefit further from my own labour and also most importantly, from everybody else's.

The risk point, linked to lower diversification, I agree with. I guess that is why I am hesitating, evaluating options and connecting to the mustachian brain hive.

What is in it for the company?  Why are they trying to raise money this way?  If they want to reward core employees with ownership, why not just give you some stock as a bonus?

[Jimbo]

@Villanelle (dont want to quote so I do not create a wall of text)

Trying to assess your points: They are not offering these shares to everyone, but only to core employees. Which is my case. They don't make me un-fireable, I meant less likely to be laid off if a downturn occurs, right?

Regarding company valuation, well sure, dividends are not the only thing. They value the company as 5 times the EBIDTA, so if that grows, the company valuation grows as well. For sure past performance does not predict future... But we are doing similar things to the past, with a similar team receiving a similar base pay, and we are invoicing hours to our clients... The business model keeps working (for now of course).

Regarding the more hours, more profits. This is how consulting services work, right? They pay a salary to their employees. The employees bill hours to clients. The hourly rate invoiced is much higher than the overhead of the firm (which includes salaries) to account for non-billable work, downtime, and allow for a profit. By being an owner, I access my salary and a share of the profits. It allows me to benefit further from my own labour and also most importantly, from everybody else's.

The risk point, linked to lower diversification, I agree with. I guess that is why I am hesitating, evaluating options and connecting to the mustachian brain hive.

Why?  I own some Facebook shares.  Would that make me less likely to be fired (in a scenario where I worked there)?  (Yes, I know that's not closely-held and thus is a different animal.) I really can't see why it would make them less likely to fire you.  Maybe I'm missing something. I suppose it would be slightly more awkward, but if a company is going to made decisions about who to fire or not based on "awkward", then that would be just another reason I wouldn't want to buy in.  there's no reason they couldn't have someone who owns 5% of the company who doesn't work there, whether they initially did or not. 

Hmmm, yes? If you had enough FB shares to sit on the Board, I would say it is safe to assume they would not fire you in case of a downturn, yes. They might change the whole board of directors if they tank for too long, but I would say it makes your position more secure, yes.

[Jimbo]

What is in it for the company?  Why are they trying to raise money this way?  If they want to reward core employees with ownership, why not just give you some stock as a bonus?

They are definitely viewing this as a bonus for the chosen few, because they are giving away 1) a portion of ownership and 2) a portion of the profits. They do not have to this - they could keep it all.

What is in it for them: keeping core employees (we have had some departures of key players in the past), money from their venture, an exit strategy for down the line when they want to retire: the next generation will be part owners already. They are starting the transition into non-ownership/control of their company.

[Lanthiriel]

I'm buying in this year to be a shareholder at my little 60-ish person firm. It's only $4k, will probably net me more than that in profit sharing this year, and grants me access to shareholder meetings, etc. giving me more say in the direction of the company. Should we go under, I still think I'll find that $4k to be money well spent.

[Villanelle]

What is in it for the company?  Why are they trying to raise money this way?  If they want to reward core employees with ownership, why not just give you some stock as a bonus?

They are definitely viewing this as a bonus for the chosen few, because they are giving away 1) a portion of ownership and 2) a portion of the profits. They do not have to this - they could keep it all.

What is in it for them: keeping core employees (we have had some departures of key players in the past), money from their venture, an exit strategy for down the line when they want to retire: the next generation will be part owners already. They are starting the transition into non-ownership/control of their company.

They are *giving* this away, or are they selling it? 

And are you sure they don't *have* to do this?  It seems like a way to raise money, whether they need it to put back in to the business or to finance their personal lives.  Is it really just out of the goodness of their hearts?  How is selling something at fair market value a generous bonus for those selected?  I'll sell you a dollar's worth of candy for a dollar.  You're welcome! 

And I guess we will just disagree with how this could affect fireability. 

[NorCal]

What is in it for the company?  Why are they trying to raise money this way?  If they want to reward core employees with ownership, why not just give you some stock as a bonus?

They are definitely viewing this as a bonus for the chosen few, because they are giving away 1) a portion of ownership and 2) a portion of the profits. They do not have to this - they could keep it all.

What is in it for them: keeping core employees (we have had some departures of key players in the past), money from their venture, an exit strategy for down the line when they want to retire: the next generation will be part owners already. They are starting the transition into non-ownership/control of their company.

First off, can you clarify exactly what is going on?  Are they:

a. Offering you incentive stock options?
b. Selling you shares at fair market value?
c. Selling you shares at below market value?

The pros/cons vary wildly based on which it is.

If it is option c, they aren't "giving" you anything.  It might still be worth doing, but that's the same as buying shares of GE, Apple, or some other company.  Except you can't sell it.

I had originally advocated giving this a chance, but I'm having second thoughts based on how you've described management.  Based on my cynical 10 year career in Silicon valley, here's what I've observed:

1. Management teams that advocate employees buying stock = companies with overpriced stock and/or shady management teams
2. Management teams that offer stock-based compensation, but don't actively push participation = usually a good deal

Of course, my sample size is small, but it has held true across multiple companies.

[volleyballer]

I'll bite, here is my situation:

I have purchased shares in my company, a privately held firm, somewhere around 7k employees worldwide, with a long stable history and currently on growth track. Ownership is offered to longer tenured employees (typically >5 yrs) and to top 25% of performers. Not everyone is invited to purchase shares. They don't push shares on employees, I know folks who decided not to purchase and do just fine, but the invitation is there if they want it.

- Represents approximately 7% of my stash
- Dividends are very consistent and typically over 10% annual yield, paid quarterly.
- Modest appreciation in share price, typically 0 to 3% per year (as bognish said, this is not based on a public market demand but rather can be whatever the board decides).
- The firm, by charter, returns a set % of net profits to shareholders.
- Senior management positions in the firm require a certain threshold of buy in (not sure if I aspire to that).
- They try to keep a good distribution of age ranges of owners so retiring owners can liquidate to the next generation.
- Shares are always purchased, not given as compensation (to the best of my knowledge).

Downsides, for me, are:
- I cannot purchase within a tax sheltered account.
    - I could (and, probably should) max out Roth IRA before taxable company stock, per the investment order thread. I can probably do both this year anyways. DW and I already max out 401(k)s.
    - As long as I keep my taxable income low enough through 401(k) contributions, I'm in the 0% dividend bracket (but state tax still applies). My income will probably outgrow this bracket soon though.
- Forex risk (USD is currently strong relative to company's home country, so I'm ok with this). I would prob not buy in years where USD is weaker, but dividends would then be worth more in USD.
- Have to liquidate at prevailing price on separation (more of a forex risk than share price risk, imo).
- Can liquidate while employed, but selling is discouraged and would probably affect future invitation to buy.

Overall I have been pleased with the experience, and will probably buy more, but won't make it a higher % of my stash. I think plus side of ownership is higher long term average returns and less volatility relative to the overall stock market, at the expense of liquidity and forex risk.  I'm open to opinions on my situation from the group.

Good luck op! As other posters have mentioned, I would only invest "extra" investment money after maxing out your other retirement accounts, and money that you can afford to lose.

[ericrugiero]

To me it all boils down to risk/reward. 

Buying shares in the company you work for is higher risk than a diversified mutual (index) fund.  Your investment isn't diversified like an index fund is so it's more risky to start with.  Plus, if the company struggles you can lose your job AND your investment at the same time. 

However, you may have the opportunity to buy in at a discounted price or you may believe there is an opportunity for significant increase in value.  So, MAYBE there is more potential for reward. 

Unless there is some reason to expect a significantly larger return on your investment there is no reason to take the larger risk.  If a larger return seems likely then you still need to plan for the higher risk and only invest money you can afford to lose.  Don't be like the Enron employees who had all their investments AND their income in one basket. 

[PaulMaxime]

My 2c. I work for a medium sized (500+ employee) growing startup company and have significant equity. We've been given two opportunities to sell shares to outside investors and I've taken maximum advantage of that opportunity.

In addition, I've exercised some number of my options each year and held the shares. My strike price is low so the risk is small. The advantage of this is that one day if I have the opportunity to sell I'll only pay long term capital gains taxes instead of regular income if I exercise and immediately sell the shares. These are Incentive Stock Options (ISO) so I can defer the taxes on them until I sell as long as I stay below the Alternative Minimum Tax threshold.

One thing about being an insider at a company is that you have better insight into how the business is doing than a company where all you get is the investor relations department and the occasional 10-K. Assuming you can be objective about the business prospects this can be an advantage.

Personally except for a relatively small amount in my 401K I only invest in individual equities, so I'm comfortable with a diversified portfolio of stocks instead of index  funds so that exposes my personal bias, just so you know where I'm coming from.

[Christof]

It seems nobody has yet answered your question about the company‘s valuation. Consulting companies are usually valued between 3 and 4 to 6 or 7 times their EBITDA. So your company is right in the middle. If there aren‘t any signs of decreasing business and if the company isn‘t operating in a declining market, it does look like a fair evaluation. Nothing special, but not overly expensive either.

[bognish]

Who and how many people are bringing in the business for this company? If those are the people that are looking to sell their shares and retire this would not be a great investment. In a consulting business you are buying into the company's ability to bring in new profitable business.

[mizzourah2006]

I think it depends how and why you are buying in and how much of your NW it would be. My wife had this option, but so far we have only put in $5k. It produces ~$32/month in dividends.

I have something a bit different with my company as they offered me options to purchase shares vesting over a 7 yr period or immediately upon the sale of the company. So I don't really have to pay anything until I decide to execute on my options and then they take the strike price out of the current price and pay me the difference.

[mm1970]

My husband has done this, he gets dividends. 

[Jimbo]

hey everyone. Sorry for the lack of communications. Things got crazy at work. I will try to reply to the comments and give more details. At this point my plan is to send a bunch of questions to them and stall the process a bit.

[Jimbo]

I'm buying in this year to be a shareholder at my little 60-ish person firm. It's only $4k, will probably net me more than that in profit sharing this year, and grants me access to shareholder meetings, etc. giving me more say in the direction of the company. Should we go under, I still think I'll find that $4k to be money well spent.

I am also expecting dividends to be at the same level as cash outlay... With possibility of being over if we have a good year (which we are lined up to at this early point - fiscal year starts in Jult). Seems like a good deal.

[Jimbo]

What is in it for the company?  Why are they trying to raise money this way?  If they want to reward core employees with ownership, why not just give you some stock as a bonus?

They are definitely viewing this as a bonus for the chosen few, because they are giving away 1) a portion of ownership and 2) a portion of the profits. They do not have to this - they could keep it all.

What is in it for them: keeping core employees (we have had some departures of key players in the past), money from their venture, an exit strategy for down the line when they want to retire: the next generation will be part owners already. They are starting the transition into non-ownership/control of their company.

First off, can you clarify exactly what is going on?  Are they:

a. Offering you incentive stock options?
b. Selling you shares at fair market value?
c. Selling you shares at below market value?

The pros/cons vary wildly based on which it is.

If it is option c, they aren't "giving" you anything.  It might still be worth doing, but that's the same as buying shares of GE, Apple, or some other company.  Except you can't sell it.

I had originally advocated giving this a chance, but I'm having second thoughts based on how you've described management.  Based on my cynical 10 year career in Silicon valley, here's what I've observed:

1. Management teams that advocate employees buying stock = companies with overpriced stock and/or shady management teams
2. Management teams that offer stock-based compensation, but don't actively push participation = usually a good deal

Of course, my sample size is small, but it has held true across multiple companies.

It is option B, if we agree the way they have valued the company is fair. Which I am leaning towards at this point - 5 times EBIDTA.

One thing of note is this is a first time thing for them. They have not done this before. And they are 'actively pushing it' in the sense that they are offering it and hoping we accept.

[Jimbo]

I'll bite, here is my situation:

I have purchased shares in my company, a privately held firm, somewhere around 7k employees worldwide, with a long stable history and currently on growth track. Ownership is offered to longer tenured employees (typically >5 yrs) and to top 25% of performers. Not everyone is invited to purchase shares. They don't push shares on employees, I know folks who decided not to purchase and do just fine, but the invitation is there if they want it.

- Represents approximately 7% of my stash
- Dividends are very consistent and typically over 10% annual yield, paid quarterly.
- Modest appreciation in share price, typically 0 to 3% per year (as bognish said, this is not based on a public market demand but rather can be whatever the board decides).
- The firm, by charter, returns a set % of net profits to shareholders.
- Senior management positions in the firm require a certain threshold of buy in (not sure if I aspire to that).
- They try to keep a good distribution of age ranges of owners so retiring owners can liquidate to the next generation.
- Shares are always purchased, not given as compensation (to the best of my knowledge).

Downsides, for me, are:
- I cannot purchase within a tax sheltered account.
    - I could (and, probably should) max out Roth IRA before taxable company stock, per the investment order thread. I can probably do both this year anyways. DW and I already max out 401(k)s.
    - As long as I keep my taxable income low enough through 401(k) contributions, I'm in the 0% dividend bracket (but state tax still applies). My income will probably outgrow this bracket soon though.
- Forex risk (USD is currently strong relative to company's home country, so I'm ok with this). I would prob not buy in years where USD is weaker, but dividends would then be worth more in USD.
- Have to liquidate at prevailing price on separation (more of a forex risk than share price risk, imo).
- Can liquidate while employed, but selling is discouraged and would probably affect future invitation to buy.

Overall I have been pleased with the experience, and will probably buy more, but won't make it a higher % of my stash. I think plus side of ownership is higher long term average returns and less volatility relative to the overall stock market, at the expense of liquidity and forex risk.  I'm open to opinions on my situation from the group.

Good luck op! As other posters have mentioned, I would only invest "extra" investment money after maxing out your other retirement accounts, and money that you can afford to lose.

Ok, so this looks very, very similar to what I am describing/being offered. Couple of caveats: our company is much much smaller. To me this increases the risks.... I am also considering buying less shares to keep it as a reasonable asset allocation.

[Jimbo]

To me it all boils down to risk/reward. 

Buying shares in the company you work for is higher risk than a diversified mutual (index) fund.  Your investment isn't diversified like an index fund is so it's more risky to start with.  Plus, if the company struggles you can lose your job AND your investment at the same time. 

However, you may have the opportunity to buy in at a discounted price or you may believe there is an opportunity for significant increase in value.  So, MAYBE there is more potential for reward. 

Unless there is some reason to expect a significantly larger return on your investment there is no reason to take the larger risk.  If a larger return seems likely then you still need to plan for the higher risk and only invest money you can afford to lose.  Don't be like the Enron employees who had all their investments AND their income in one basket.

Typically, the past returns for the company HAVE been pretty spectacular. I can expect it to continue, but to a point in time. I agree with you though, I was expecting a bit of a sweeter deal. Fair market value makes this less attractive. Discounted price, bonus shares, something, would have made this an easier decision.

[Jimbo]

My 2c. I work for a medium sized (500+ employee) growing startup company and have significant equity. We've been given two opportunities to sell shares to outside investors and I've taken maximum advantage of that opportunity.

In addition, I've exercised some number of my options each year and held the shares. My strike price is low so the risk is small. The advantage of this is that one day if I have the opportunity to sell I'll only pay long term capital gains taxes instead of regular income if I exercise and immediately sell the shares. These are Incentive Stock Options (ISO) so I can defer the taxes on them until I sell as long as I stay below the Alternative Minimum Tax threshold.

One thing about being an insider at a company is that you have better insight into how the business is doing than a company where all you get is the investor relations department and the occasional 10-K. Assuming you can be objective about the business prospects this can be an advantage.

Personally except for a relatively small amount in my 401K I only invest in individual equities, so I'm comfortable with a diversified portfolio of stocks instead of index  funds so that exposes my personal bias, just so you know where I'm coming from.

Yeah, stock options are sweet, if only for how they can be sold easily. I feel/fear liquidity will be an obstacle in the future. But this has an upside: If I move on, if I cannot sell the shares, they would still give out dividends... So in that sense, it is good.

[Jimbo]

It seems nobody has yet answered your question about the company‘s valuation. Consulting companies are usually valued between 3 and 4 to 6 or 7 times their EBITDA. So your company is right in the middle. If there aren‘t any signs of decreasing business and if the company isn‘t operating in a declining market, it does look like a fair evaluation. Nothing special, but not overly expensive either.

Thanks for that! It was also the conclusion of my side investigation. A fairly typical valuation method.