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Securities lawyer here. And... I kind of agree. With respect to insider trading at least. The laws are both complicated and unclear. Recent cases are taking

Securities lawyer here. And... I kind of agree. With respect to insider trading at least. The laws are both complicated and unclear. Recent cases are taking things to the point where it might soon be difficult for senior executives to own stock without a blind trust. Historically insider trading has required some sort of affirmative _action_ (buying or selling) but there's been a trend recently (as alleged here) of alleging insider trading for inaction. You didn't sell as planned, you didn't disclose in time, etc. It could really put management in a difficult spot. Other than the insider trading conundrum though it might seem like everything is securities fraud because we're too used to executives putting their own interests ahead of (or at least in line with) their shareholders*. That's a problem because their fiduciary duty says that company/shareholder interests have to come above all else. Edit: Meant "shareholders" interests not "own" interests.

vec 8y ago
Just playing devil's advocate a bit, but what would be the downside of just drawing a bright line that owning stock in your employer is inherently a conflict of interest?
- chucksmash 8y ago
  Owning stock in your employer can better align your interests with those of the shareholders to whom you answer. If you believe that mechanism is sound, then I guess the downside would be that you have fewer incentives to maximize shareholder value.
  - JohnFen 8y ago
    > If you believe that mechanism is sound I don't really believe that mechanism is sound. I mean, it likely has some sort of affect in that direction, but I don't really think that it's a strong one.
    - ryan_j_naughton 8y ago
      It is absolutely a strong one and one that startup's function as a result of. If an employee couldn't get stock options in a startup, then there would be significantly fewer cases where they would choose to join a startup over a more stable, mature company. Sharing in the upside potential is critical. Sure, that isn't a public company but it still demonstrates the mechanism is sound.
      - JohnFen 8y ago
        > If an employee couldn't get stock options in a startup, then there would be significantly fewer cases where they would choose to join a startup over a more stable, mature company That's possible, of course. I haven't seen any data to support it. In my own experience (which is not statistically meaningful), this is a weak effect. I strongly prefer working for startups and very small companies, and most of the engineers I've worked with have stated that things like stock options aren't important to them (that's part of why options are so widely referred to as "wallpaper"). The attraction to working for startups, for both myself and most of the people I've worked with, is that startups offer better working conditions and more interesting projects. However, I do feel the need to underline that this is just my subjective experience and it may not representative overall.
      - dsr_ 8y ago
        Imagine a new scenario: Every company in YC Winter 2019 issues half its ownership to a pool. Every company receives, in return, shares of the YCW19 fund. Employee stock options are 100% issued from the YCW19 fund. Is this better or worse for non-founding employees? More or less attractive than receiving stock options that only apply to the member company that they actually work for?
        wang_li 8y ago
        >Every company in YC Winter 2019 issues half its ownership to a pool. Every company receives, in return, shares of the YCW19 fund. Employee stock options are 100% issued from the YCW19 fund. And thus CDOs were invented...
  - asdff 8y ago
    It would be refreshing if business didn't have any incentive to maximize shareholder value. Lots of great things are killed or diluted for a handful of people to get a return. Exponential growth isn't sustainable, yet it's expected to keep shareholders rich and satiated at the cost of the quality of product that the end customer receives. What's wrong with just making a good product and running a business well enough to cover your overhead and pay your employees well? Why do we never hear of these stories in Bloomberg or Forbes?
    - greendestiny_re 8y ago
      I believe it's a fundamental lack of faith in one's product or service that results in untenable corporate growth maximization schemes.
    - SeanAppleby 8y ago
      There's nothing barring this. Just don't sell any control of your company to anyone who won't agree with this strategy indefinitely, and run a consistently cash flow positive business so you will never be in a position to need to bend that rule to make payroll. It's definitely harder, especially if you don't have your own capital to start with, or hit a temporary bump in the road that bleeds the war chest, but people do it. If you take outside capital to accelerate your business on the assumption that the investors will make money as it grows, you're choosing to join that system, no one forces you to participate. Although I suppose you could end up in a zero sum competition with another business for market share, and there might be an unstable nash equilibrium where you both might want to not raise money, but if the other raises significant capital they could crush you, so you are kind of systematically pushed to play the game to keep your vision alive.
  - wjnc 8y ago
    It's somewhat more stronger than that even. For US investors and parties servicing (like Dow Jones) those Not owning stocks in your own firm is a red flag. So even though post crisis bonusses, stocks and options are to different measures frowned upon in, say, some EU countries, you would underperform in some US benchmark and reach less investors.
- elliekelly 8y ago
  It is an inherent conflict of interest but the question is whether that conflict can be mitigated and, after mitigation, whether the potential risk/"cost" of that conflict to the shareholders outweighs the benefit to the shareholders. There would be at least a few downsides to prohibiting employee stock ownership: significantly higher salary expenses and (in theory) less employee motivation/incentive to stay at a company. Historically we've said the pros outweigh the cons but I'm really not sure we can accurately assess the risk of insider trading anymore because the definition of it is constantly changing.
- jonas21 8y ago
  Startups would be next to impossible if employees (which includes the founders) couldn't own stock. Maybe you could limit the rule to publicly traded companies, but then people would have to decide whether to sell all of their stock or leave a company when it went public, which doesn't seem fair to the employees or good for the company.
  - deleted 8y ago
    [deleted]
- artursapek 8y ago
  https://avc.com/2010/04/no-conflict-no-interest/ https://avc.com/2010/04/no-conflict-no-interest/
ska 8y ago
Recent cases are taking things to the point where it might soon be difficult for senior executives to own stock without a blind trust. Superficially this doesn't seem like a crazy idea - or at least it seems plausible to set it up well. I get the thinking that execs holding equity gives them more skin in the game, but it also seems to often lead to poorly matched incentives, and a reward structure that is only loosely coupled to real performance.

vec 8y ago

Just playing devil's advocate a bit, but what would be the downside of just drawing a bright line that owning stock in your employer is inherently a conflict of interest?

chucksmash 8y ago
Owning stock in your employer can better align your interests with those of the shareholders to whom you answer. If you believe that mechanism is sound, then I guess the downside would be that you have fewer incentives to maximize shareholder value.
- JohnFen 8y ago
  > If you believe that mechanism is sound I don't really believe that mechanism is sound. I mean, it likely has some sort of affect in that direction, but I don't really think that it's a strong one.
  - ryan_j_naughton 8y ago
    It is absolutely a strong one and one that startup's function as a result of. If an employee couldn't get stock options in a startup, then there would be significantly fewer cases where they would choose to join a startup over a more stable, mature company. Sharing in the upside potential is critical. Sure, that isn't a public company but it still demonstrates the mechanism is sound.
    - JohnFen 8y ago
      > If an employee couldn't get stock options in a startup, then there would be significantly fewer cases where they would choose to join a startup over a more stable, mature company That's possible, of course. I haven't seen any data to support it. In my own experience (which is not statistically meaningful), this is a weak effect. I strongly prefer working for startups and very small companies, and most of the engineers I've worked with have stated that things like stock options aren't important to them (that's part of why options are so widely referred to as "wallpaper"). The attraction to working for startups, for both myself and most of the people I've worked with, is that startups offer better working conditions and more interesting projects. However, I do feel the need to underline that this is just my subjective experience and it may not representative overall.
    - dsr_ 8y ago
      Imagine a new scenario: Every company in YC Winter 2019 issues half its ownership to a pool. Every company receives, in return, shares of the YCW19 fund. Employee stock options are 100% issued from the YCW19 fund. Is this better or worse for non-founding employees? More or less attractive than receiving stock options that only apply to the member company that they actually work for?
      - wang_li 8y ago
        >Every company in YC Winter 2019 issues half its ownership to a pool. Every company receives, in return, shares of the YCW19 fund. Employee stock options are 100% issued from the YCW19 fund. And thus CDOs were invented...
- asdff 8y ago
  It would be refreshing if business didn't have any incentive to maximize shareholder value. Lots of great things are killed or diluted for a handful of people to get a return. Exponential growth isn't sustainable, yet it's expected to keep shareholders rich and satiated at the cost of the quality of product that the end customer receives. What's wrong with just making a good product and running a business well enough to cover your overhead and pay your employees well? Why do we never hear of these stories in Bloomberg or Forbes?
  - greendestiny_re 8y ago
    I believe it's a fundamental lack of faith in one's product or service that results in untenable corporate growth maximization schemes.
  - SeanAppleby 8y ago
    There's nothing barring this. Just don't sell any control of your company to anyone who won't agree with this strategy indefinitely, and run a consistently cash flow positive business so you will never be in a position to need to bend that rule to make payroll. It's definitely harder, especially if you don't have your own capital to start with, or hit a temporary bump in the road that bleeds the war chest, but people do it. If you take outside capital to accelerate your business on the assumption that the investors will make money as it grows, you're choosing to join that system, no one forces you to participate. Although I suppose you could end up in a zero sum competition with another business for market share, and there might be an unstable nash equilibrium where you both might want to not raise money, but if the other raises significant capital they could crush you, so you are kind of systematically pushed to play the game to keep your vision alive.
- wjnc 8y ago
  It's somewhat more stronger than that even. For US investors and parties servicing (like Dow Jones) those Not owning stocks in your own firm is a red flag. So even though post crisis bonusses, stocks and options are to different measures frowned upon in, say, some EU countries, you would underperform in some US benchmark and reach less investors.
elliekelly 8y ago
It is an inherent conflict of interest but the question is whether that conflict can be mitigated and, after mitigation, whether the potential risk/"cost" of that conflict to the shareholders outweighs the benefit to the shareholders. There would be at least a few downsides to prohibiting employee stock ownership: significantly higher salary expenses and (in theory) less employee motivation/incentive to stay at a company. Historically we've said the pros outweigh the cons but I'm really not sure we can accurately assess the risk of insider trading anymore because the definition of it is constantly changing.
jonas21 8y ago
Startups would be next to impossible if employees (which includes the founders) couldn't own stock. Maybe you could limit the rule to publicly traded companies, but then people would have to decide whether to sell all of their stock or leave a company when it went public, which doesn't seem fair to the employees or good for the company.
- deleted 8y ago
  [deleted]
artursapek 8y ago
https://avc.com/2010/04/no-conflict-no-interest/ https://avc.com/2010/04/no-conflict-no-interest/

ska 8y ago

Recent cases are taking things to the point where it might soon be difficult for senior executives to own stock without a blind trust. Superficially this doesn't seem like a crazy idea - or at least it seems plausible to set it up well. I get the thinking that execs holding equity gives them more skin in the game, but it also seems to often lead to poorly matched incentives, and a reward structure that is only loosely coupled to real performance.