Author Topic: Golden Opportunity!!?!?!? Or am I missing something???  (Read 3962 times)

Dmy0013

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Golden Opportunity!!?!?!? Or am I missing something???
« on: June 03, 2016, 09:16:53 AM »
I need some advice, perhaps people have been in a similar situation?

I will be as specific as I can, but I am going to leave company names etc out.

I work for a fairly large company, we operate across Canada, and dabble a little but in the US

The company has a very strong performance record, Its in an industry that is in demand and will continue to be for a very long time.

I dont foresee this company going anywhere for a long time.


They are offering an accelerated ownership plan.

I will give you the simplified version.

I can purchase "blocks" of shares at about 21,000 a pop.

They will use these shares as collateral to take out a bank loan.  Each year the dividends I should receive will go towards paying down the bank loan - I will still receive a tax bill on these of about 800 bucks a year.

I am locked in for 5 years, at the end of the 5 years the company will match how many "blocks" I purchased.  At the end of 5 years if any debt is still owed on the bank loan, they will sell some of the shares from the "block" they gave me to cover the loan.  In the past they have sold 1-3% of the block to pay off the loan, so very minimal.

I now have the option to sell these "blocks" at the new marked value or hold onto them and collect dividends.

This company is privately owned, and is not traded on the market.  They average a 17.5% increase in their shares over the past 15 years.

In this specific scenario I cannot purchase any of these "blocks" inside any type of tax brake accounts.

If I quit / Fired / Laid off I am still locked in for the 5 years.

I have the cash to participate just rotting in the bank doing nothing.  Ignore the fact that I have the money - Does this sound like a good plan?

And again the company is a very solid company this is not a start up company in a high risk market.  This is something that is going to be around for along long time

I look forward to your suggestions

plog

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #1 on: June 03, 2016, 09:40:07 AM »
I'm a cynical prick who hates organizations, especially those who exist to make money.  So, just know this isn't non-objective, but I think I have some good advice you should consider anyway.  First, let me show my non-objectiveness:

I'm morally against stock in a private company that allows you no say in that  organization. It all just seems super shady and ripe for manipulation. Who's to say the stock price is an accurate reflection of what the stock is worth?  The company itself usually sets the price.  Often in these schemes there are limits on who/when/where you can sell shares.  Not only do they control the price, they control the (for lack of a better word) market .  The worst is when they actually require money to change hands (employee to company) to buy the stock and/or cause real tax implications.  At its nature, privately owned stock plans like these seem like a ponzi scheme. Finally, if private company's really wanted to enrich their employees for the company doing well they could implement a profit sharing plan, something that doesn't require risk on the part of the employee.

With that said, you never posted a downside.  My guess is you are ready to pull the trigger, but just want to see if there's something super obvious you're missing.  Other than my moral disgust for these plans, I don't think you are. I'm sure its a good plan and you seem happy with the company and industry and think this is a good investment.  So my advice is go ahead and do it, but just be certain you understand this is in fact an investment and does have risk attached to it. 

nereo

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #2 on: June 03, 2016, 09:54:46 AM »
Quote
This company is privately owned, and is not traded on the market.  They average a 17.5% increase in their shares over the past 15 years.

To be clear the value of these shares have increased 17.5% total over the last 15 years? (... 1.16%/yr, not even outpacing inflation)
Or 17.5% per year for 15 years?

The former seems horrible, especially given the 5.34% return per year of the SP500 over the same time period (+64% total).  The latter seems like a ponzi scheme.

I'm also not 100% clear on what your investment cost vs returns will be... you pay $21,000 per 'block' and then owe an additional $800/year to pay for the loan, and your hopes are that the shares will increase in value + once the loan is paid off you'll get dividends.... somehow...?  I'm not how this is attractive, though it could be i"m just not understanding it.

vivophoenix

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #3 on: June 03, 2016, 10:05:35 AM »
i am not that savvy about investments, but did you say:

I buy some shares,  Ipay taxes on them, the company then uses MY shares to take out THEIR loan, and use MY Dividends to pay THEIR loan?

after that I am given 100% more stock minus anything thing the company owes on the loan still.

and then i can sell these stock at their current price.


its sounds like this works only if the stock stays the same or goes up.

this sounds like a fund raising scheme.

if they are doing that well, why can they not take out a more traditional loan , or even use the cash they raise by you purchasing stock in the first place?  isn't the last thing exactly what stock is for?

would all of this stock issuing lower the value?  i guess i am confused cause they are promising in five years to literally give you 100% more stock, from where?

« Last Edit: June 03, 2016, 10:13:58 AM by vivophoenix »

Playing with Fire UK

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #4 on: June 03, 2016, 10:15:28 AM »
I wouldn't because if the company were to go through a bad spell (not totally collapsing, but unfavourable economics, a recall scandal, big fire, whatever), you'd expose both your wages and your investment. All your eggs would be in one basket.

Also, privately owned companies don't need to publish nearly as much information as publicly owned companies; I don't know how much your one publishes, but I'd guess that the person who has made the decision to allow you to buy these blocks has access to better information than you do. This will also be the same person/position that will set the stock price and dividends at the end of five years? This kind of information asymmetry would be too much for me.

If you have cash sitting in the bank you should do something with it, but I'd be looking for a global index fund rather than this.

Dmy0013

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #5 on: June 03, 2016, 10:26:37 AM »
The company averages 17.5% increase per year.
How does a private company determine that?  I am not sure...

A large percentage of the company is employee owned.

The company does use MY dividends for the first five years to pay back the loan, and then yes they will offer me a 100% match - again if any debt is still owing they will take it from what they owe me.  which averages under 3%

The stocks will be worth the current value at the end of the 5 years - the stocks have never gone down in value, and the company is growing rapidly

I understand this is like any other investment, I could go big, I could go broke, I could stay the same...

I do believe the company is a good company with good intentions.
« Last Edit: June 03, 2016, 10:36:04 AM by Dmy0013 »

vivophoenix

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #6 on: June 03, 2016, 10:41:01 AM »
so the real question is:

are you willing to lose $21k and your job or gain maybe more than $21k minus mysterious leftover loan amount,  minus $4500 in taxes, in five years?

-OR-

are you okay with losing $4.2K  ( let's assume the S&P tanks 20%) and maybe your job, or gaining $9k( assuming 9% return for five years, and maybe losing your job?

MidWestLove

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #7 on: June 03, 2016, 10:41:49 AM »
My take on this would be slightly different - how and when can you get the money out  if you go in, will it impact your career , and only last looking at potential rewards.

specifics
-  what does your liquidity rights look right ? when can you sell shares if you need cash? how often?
- what does the company culture say about 'sell-outs' (people who sell their shares)  , is this damaging to career/reputation to go short on a company aka 'no longer believe in its prospects' . will you be branded the 'traitor' for doing so?

Before you start letting excitement (greed) take over, remember Enron as great example people losing much more than they could because culture encouraged all in commitments, discouraged divestments, and ultimately locked them up. Yes, Enron also had plans to be forever, so did Bear Sterns , and so did Lehman Brothers (who were a company before Canada was a country and when US was a third world developing nation).

Now, hopefully with some perspective on risk, lets talk rewards
- was this scheme used before? are there current employees who participated previously and what was their experience?
- have you received and read the actual offering documents and reviewed them with qualified help (counsel, etc) as needed? what would your true rights be? what are your obligations (if any)?  what would allow the company to change its mind (subject to discretion of the management language)? what is truly committed to?

"other investment, I could go big, I could go broke, I could stay the same..."

that is more akin to  gambling to me vs investment...

so the answer to your question from me would be - "may be, but I will look much harder into it including review with professional help CPA/legal/etc". These are not peanuts you are talking about.





chesebert

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #8 on: June 03, 2016, 10:42:02 AM »
I'm a cynical prick who hates organizations, especially those who exist to make money.  So, just know this isn't non-objective, but I think I have some good advice you should consider anyway.  First, let me show my non-objectiveness:

I'm morally against stock in a private company that allows you no say in that  organization. It all just seems super shady and ripe for manipulation. Who's to say the stock price is an accurate reflection of what the stock is worth?  The company itself usually sets the price.  Often in these schemes there are limits on who/when/where you can sell shares.  Not only do they control the price, they control the (for lack of a better word) market .  The worst is when they actually require money to change hands (employee to company) to buy the stock and/or cause real tax implications.  At its nature, privately owned stock plans like these seem like a ponzi scheme. Finally, if private company's really wanted to enrich their employees for the company doing well they could implement a profit sharing plan, something that doesn't require risk on the part of the employee.

With that said, you never posted a downside.  My guess is you are ready to pull the trigger, but just want to see if there's something super obvious you're missing.  Other than my moral disgust for these plans, I don't think you are. I'm sure its a good plan and you seem happy with the company and industry and think this is a good investment.  So my advice is go ahead and do it, but just be certain you understand this is in fact an investment and does have risk attached to it.
+1

Agreed on private ownership without additional investor rights (e.g., preference shares, veto rights, convertible note, exchangeable shares (changes into preference shares in the event of liquidation, for example)) and "down-round" protection. The one exception to ownership without additional rights is when you know for sure (i.e., ideally immediately before IPO pricing) that the company is going public.
« Last Edit: June 03, 2016, 10:44:20 AM by chesebert »

AlwaysLearningToSave

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #9 on: June 03, 2016, 11:02:28 AM »
This seems sketchy.  I'm not familiar with Canadian taxes so maybe I'm off base, but this appears to be an elaborate scheme to get others to pay a portion of their income taxes.

Here is how it appears to me:
1)  You give the company your money in exchange for stock. 
2)  You pledge the stock you now own as collateral for the company's debt obligation (while you presumably have no control over whether that debt is paid). 
3)  Instead of paying profits as dividends to you, the company will use any excess profits to pay down the debt.
4)  Meanwhile, you pay a share of the company's taxes.
5)  If the company goes south and you lose your job, you cannot cash out. 
6)  After five years, the company will issue you the same number of shares you purchased (presumably diluting the shares you previously purchased but resulting in a higher ownership percentage in the company).
7)  If debt is still owed after five years, they will sell some of the shares you are otherwise entitled to receive to pay the debt. 
8)  After five years, you can sell the stock or wait for dividends.  But being a privately held company, there is probably no market for the stock other than the market the company creates and no guarantee the company will ever issue dividends.

Seems like a lot of potential downsides.  You have not given us much information with which we can evaluate the upside.  We don't know the name of the company, its industry, or how much control you personally have over the company's operations.  We also don't know the details of the arrangement whereby you would be able to sell the stock you own.  Do you have the right to compel someone to purchase the stock? 

You seem to believe in this company and it very well may be a stand-up company.  Your comment also suggests the company has done this before and presumably no one got burned (at least not yet or that you know of).  But a lot of employees believed in Enron and we all know how that ended. 

We also don't know your financial state.  If you are FI and you can afford to never see this money again, it might be worth the risk.  If not, you probably are throwing too many eggs in one basket with this one. 
« Last Edit: June 03, 2016, 11:05:05 AM by AlwaysLearningToSave »

MustacheAndaHalf

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #10 on: June 03, 2016, 11:23:42 AM »
What percentage of your assets are being risked on this company stock purchase?

Someone who wants to sell you stock is telling you a number.  Now if someone tells me about Vanguard Total Stock Market, I can lookup the stock ticker on another website and verify it's past performance.  But you can't - it's a private company, and they can tell you whatever number they like.  If you can't verify it, that's a problem.

Second problem is using averages to describe dramatic changes in growth.  Companies that survive being start ups and turn into medium companies may go through an explosive period of growth with very high returns.  But that represents a transition to a more stable company, where those same returns are not expected going forward.  For example, a company could go 5 years each at +30%/year, +20%/year, and +5%/year.  That pattern gives a slightly higher than 17.5%/year return, but it could very well represent a +5%/year return going forward.  If they could provide each year's performance instead of all 15 years averaged together, that would be better information.  But just know this is not a start up anymore, and you should expect the performance of a typical medium-sized company going forward.  This is probably a worse deal than you expect, and you can't even verify their numbers.

Heckler

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #11 on: June 03, 2016, 01:33:36 PM »
I personally know at least three people who's fortunes have been lost on individual stocks.  Not for me.

chasesfish

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #12 on: June 04, 2016, 07:06:03 AM »
How transparent are the financials?   I'd say do it, but keep the % of your net worth in the company to some cap you're comfortable with.  I work for a public company and get issued restricted stock.  I keep what I hold down below 5% of my total net worth.  10-15% may be reasonable, but its really up to you.

Indexer

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #13 on: June 04, 2016, 07:48:22 AM »
In the US there are systems similar to what you are describing which are used as non-qualified executive deferred compensation plans. Basically 18k a year in a 401k or even the max benefit with a pension plan is only so enticing to someone already making 500k a year. Its true in the US. I would assume it is also true in Canada. Companies will throw in extras similar to the above. The idea is that you put away a little money today, and the company guarantees a greater future benefit... like doubling the number of shares you have.

They serve a few purposes. One is the tax advantage. Sure you can't put it in a tax advantaged account because it is non-qualified, but you are deferring the 'taxable income' into future years. You can see the benefit today, you know there is a high likelihood it is there, but you are only paying taxes on roughly $800 it sounds like. If you can't contribute another dollar to a tax deferred account this is as close to tax deferral as you are going to get. The big benefit will be when they double everything. Then, depending on Canada taxes, you are probably paying the most in taxes when you go to sell all those shares, many of which will have no cost basis(they were given to you). For an executive who wants extra retirement money this is perfect. They pay taxes when they sell the blocks in retirement, and in retirement they will likely be a much lower tax bracket than they were when they were making 500k/yr.

Another purpose is to reward loyalty and tie your interests to theirs. If you own a lot of these blocks your retirement success is now linked with the company's success. You have an incentive to stick with the company and try to make sure they are successful.

The upside to this sort of thing is that if the company does well you do well. The downside is obviously the opposite. Someone who threw their fortunes in with Google are multi millionaires or billionaires now. Lehman Brothers is the other side of that story.

I don't think it is sketchy, especially since it sounds like a very large company. Companies offer programs like these to act as an incentive beyond the normal tax deferred accounts. Just note it is high risk and you are marrying your fortunes to the success of the company.

I'm not going to tell you whether to do it. Just be well informed. I would also ask people who have been there longer. A company I use to work at had something similar, and guys who had been there 20 years loved it. However, now I'm glad I didn't buy any. I feel the industry is moving in a way that completely disrupts their entire business model. Think digital cameras and Kodak. They have done fine the past couple years, but I wouldn't want a long term investment in them. 
« Last Edit: June 04, 2016, 07:51:11 AM by Indexer »

Bumperpuff

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #14 on: June 06, 2016, 03:59:30 PM »
You give your company money
They use your money pay off a loan
As they further pay off loans you get to pay taxes on  "dividends" you don't receive.
After 5 years they pay you double their "stock" price minus fees.

This sounds more like an un-collatoralized loan/ junk bond than it does stock.  At least with corporate bonds you only pay taxes on dividends you received.  With corporate bonds you also know that you'll be able to write off any incurred losses and that it's an open market if you should want to sell your holdings.

If you have a big enough stash, and you don't mind losing $21K, I say go for it.  Otherwise, buy real stocks or bonds.

Scandium

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #15 on: June 07, 2016, 08:49:33 AM »
This seems sketchy.

8)  After five years, you can sell the stock or wait for dividends.  But being a privately held company, there is probably no market for the stock other than the market the company creates and no guarantee the company will ever issue dividends.

I wondered about this too. Great, at year 5 you get $40k+ of share. But who could you sell it too? Only other people in the company? But why would they buy if they can also do this doubling scheme instead? Or would you have to wait for an IPO?

There are some rumors at my employer we'd be able to buy shares at a discount. I asked the (very excited) person who told me this who would I be able to sell the shares to afterwards since we're privately owned. He did not have an answer. I think I'd decline

Kaspian

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #16 on: June 07, 2016, 09:14:54 AM »
I bougght into a Canadian investment which was "locked" for 5 years.  That was 19 years ago and my money is still "locked".  Beware of locks--they can change the terms pretty much anytime they damn well please.

With This Herring

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Re: Golden Opportunity!!?!?!? Or am I missing something???
« Reply #17 on: June 07, 2016, 01:27:56 PM »
I don't think this sounds like a situation that we can evaluate with the info we have so far.  Whatever you do, don't invest a huge portion of your NW.  If a surprise new technology, form of transport, competitor, natural disaster, or what have you causes the company to take a nosedive, you don't want to lose both your job and most of your savings.  These things can happen to good, trustworthy companies in stable industries that see a lot of growth right now.

Some questions to consider:
  • Which accounting firm audits the company's financial statements?
  • As an owner, will you have access to the annual/quarterly financial statements as well as possibly back years' statements?
  • As an owner, would your shares have voting rights?  Or are the voting shares a different class of stock?
  • What portion of the company is currently owned by non-director employees? (Middle management and below)  What is this number broken down by share class, if multiple classes exist?
  • If there is another class of stock, can the dividends be cut for your class of stock while the dividends of other class are kept high?
  • Is this part of an official ESOP (Employee Stock Ownership Plan)?  This (in the US, at least) would make the stock ownership and dividends go through a separate audit from the rest of the company, would ensure that there is only one class of stock for dividend purposes, and might provide you more security.
  • When they are telling you that share price is rising on average 17.5% per year, how are they determining that?  Do they actually mean that the company's equity (total assets less total liabilities) is increasing like that?
  • "...they will sell some of the shares from the "block" they gave me to cover the loan."  Sell those shares to whom?  This implies there is some (non-public) market, even if it is just current and former employees.  Can you find out how those shares are offered and see what they go for?  How easy would it be for you to sell your shares, and what price would you get for them?
  • How much is the bank loan that they take for each block?  How much in dividends does each block generate each year?  If you pay $21,000 up front and then also pay off a bank loan in place of dividends, it seems that you are really the one purchasing all the shares, and nothing is given to you.  If you can give us numbers (or even fake numbers, if you keep everything proportionate), we can help you determine what real price you are paying for the shares and what sort of return you would be getting.

As a point of comparison:
A portion of my family has invested money in a private business that has been consistently profitable over the years.  There is no special buy-in plan.  Dividends are dependent on profits.  Shareholders have:
  • The right to receive dividends, without any other class of stock taking preference (one class of stock)
  • The right to vote on important matters, elect directors
  • The right to view the audited financial statements
  • The right to sit in on every meeting of the directors
  • The right to know that no new shares will be issued to dilute our ownership and dividends unless the majority of us agree with it
  • The right to sell your shares if you want, at any time (you may have to offer to other holders first, I don't recall)
The stock is not publicly traded, and is not often available (it might be offered via the estate of a late stockholder).  People usually determine what they are willing to pay based on the annual dividends or the business's net worth.  If some becomes available, the business contacts the current shareholders to offer them first go.  Everything is very transparent.  I believe this is a good and trustworthy business with a good and stable future, but I still do not have a large portion of my personal NW invested in it.