3 ms·

An ESOP is also a great way for a founder to exit the company in a tax-advantaged way. The stock that the employees receive also usually takes the place of alte

An ESOP is also a great way for a founder to exit the company in a tax-advantaged way. The stock that the employees receive also usually takes the place of alternative 401(k) investments they could be making. ESOPs are a very interesting tool but there are some real nightmare scenarios (owner liquidates via ESOP; company then fails; employees end up without jobs and without retirement savings.) Another issue with ESOPs is that they are extremely expensive to administrate. EDIT: this is a succinct and reasonable summary of some of the risks of an ESOP (primarily from an employee's perspective) https://pensionrights.org/resource/problems-with-esops/ https://pensionrights.org/resource/problems-with-esops/

neilv 3y ago
Good point. At least in the US right now -- where an S&P index tends to grow over time, and is vastly less risky than all eggs in one basket -- I guess an employee-owned company should emphasize also doing ordinary Bogle total-market retirement investing. If participating in employee-ownership ends up at the cost of a retiree having sufficient retirement savings -- such as if the employee can't or doesn't build a solid 401(k) or IRA -- that indeed seems risky.
- bee_rider 3y ago
  I wonder if there’s an index for majority employee-owned companies. Wait, is that even possible?
  - starkparker 3y ago
    There are a few thousand in the US, but most are so small that an index wouldn't be much. NCEO maintains lists but they're paid (and priced for consultants): https://www.nceo.org/employee-ownership-data/esop-company-lists https://www.nceo.org/employee-ownership-data/esop-company-li... DOL posts Form 5500 filings but they lag by 2-3 years: https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500 https://www.dol.gov/agencies/ebsa/employers-and-advisers/pla... As of 2021 they listed 6,533 ESOP filings at a combined asset cap of about $2T. For context Apple's market cap just passed $3T in December.
    - araes 3y ago
      Another way to look at it would be the bottom of the S&P 500, which sits at around $12.5 billion. If there's 6533, their combined asset cap of $2 trillion puts them somewhere around $300 million or so per company, at least a factor of 30 below the S&P 500 bottom. There might be a few within the list that would be S&P 500, if they were public, since the list is likely to have a power law distribution.
  - aaronax 3y ago
    I don't think that is possible. How would you own shares in multiple companies where the shares are owned (exclusively? mostly?) by employees? Any mechanism which facilitates outside ownership erodes the effect of being ESOP.
    - paledot 3y ago
      GP did say "majority". It's an interesting thought, though. Effectively, assuming that the index were restricted to employees of member companies, setting up such a system would be tantamount to a corporate merger. In the event, if the failure of one member caused its employees to become ineligible to participate and thus autosell their shares, it could have a domino effect on other members. And if an outsider could hold shares in such an index, well, it's not really employee-owned anymore.

neilv 3y ago

Good point. At least in the US right now -- where an S&P index tends to grow over time, and is vastly less risky than all eggs in one basket -- I guess an employee-owned company should emphasize also doing ordinary Bogle total-market retirement investing. If participating in employee-ownership ends up at the cost of a retiree having sufficient retirement savings -- such as if the employee can't or doesn't build a solid 401(k) or IRA -- that indeed seems risky.

bee_rider 3y ago
I wonder if there’s an index for majority employee-owned companies. Wait, is that even possible?
- starkparker 3y ago
  There are a few thousand in the US, but most are so small that an index wouldn't be much. NCEO maintains lists but they're paid (and priced for consultants): https://www.nceo.org/employee-ownership-data/esop-company-lists https://www.nceo.org/employee-ownership-data/esop-company-li... DOL posts Form 5500 filings but they lag by 2-3 years: https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-5500 https://www.dol.gov/agencies/ebsa/employers-and-advisers/pla... As of 2021 they listed 6,533 ESOP filings at a combined asset cap of about $2T. For context Apple's market cap just passed $3T in December.
  - araes 3y ago
    Another way to look at it would be the bottom of the S&P 500, which sits at around $12.5 billion. If there's 6533, their combined asset cap of $2 trillion puts them somewhere around $300 million or so per company, at least a factor of 30 below the S&P 500 bottom. There might be a few within the list that would be S&P 500, if they were public, since the list is likely to have a power law distribution.
- aaronax 3y ago
  I don't think that is possible. How would you own shares in multiple companies where the shares are owned (exclusively? mostly?) by employees? Any mechanism which facilitates outside ownership erodes the effect of being ESOP.
  - paledot 3y ago
    GP did say "majority". It's an interesting thought, though. Effectively, assuming that the index were restricted to employees of member companies, setting up such a system would be tantamount to a corporate merger. In the event, if the failure of one member caused its employees to become ineligible to participate and thus autosell their shares, it could have a domino effect on other members. And if an outsider could hold shares in such an index, well, it's not really employee-owned anymore.