Had my first few days at my new wfh job today. The company is private and lets employees buy stock in the company. Is the idea to buy a bunch of private stock in the company, and then hope that if/when the company goes through an IPO, your stock shares go through the moon? Or maybe you get a cut of the sale price of the company if it ever gets purchased by a bigger company? Cause, otherwise, who's gonna buy your private stock shares, irrelevant of what they're worth on paper -- other employees?
My company has been around since the 90's, so I thought of maybe investing a small % of my total portfolio since they're not a total startup, not sure if it would actually lead to anything. It would teach me how to analyze income statements, quarterly reports, etc., and know what's actually happening at the executive level. Most of the equity of startups is held by the owners -- and I think there's often a cap to % ownership by employees -- so I doubt one could become a millionaire with this "buying your company stock" strategy. Probably a higher chance by starting your own startup and being the owner of the 85%.
How does buying your company's stock work, and can you actually become rich off of the strategy?
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mathiverse
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Re: How does buying your company's stock work, and can you actually become rich off of the strategy?
Can you sell your shares on the private market? Check any contract related to stock compensation if there is one. There are websites to contact people interested in buying stock of private companies.
When you say "you can buy stock," are you referring to having stock options or are you directly buying the stock?
Yes, if a company is sold, stock holders will generally get a payout. I don't know the details there though.
Does the company have regular stock buybacks for employees (eg Cruise Automation's program)?
Does the company provide dividends to investors already? Will you even have access to the financial statements of the company given the fact it's not public? Is that information available to employees? Sometimes finance employees will let you take a look.
You can sell at after an IPO, but not every company plans to IPO. Some companies regularly update their valuation. If it goes up, you can get a higher price by selling them to other investors via the sites mentioned before. Some companies will buyback at a higher price than they sold it due to changes in valuation.
When you say "you can buy stock," are you referring to having stock options or are you directly buying the stock?
Yes, if a company is sold, stock holders will generally get a payout. I don't know the details there though.
Does the company have regular stock buybacks for employees (eg Cruise Automation's program)?
Does the company provide dividends to investors already? Will you even have access to the financial statements of the company given the fact it's not public? Is that information available to employees? Sometimes finance employees will let you take a look.
You can sell at after an IPO, but not every company plans to IPO. Some companies regularly update their valuation. If it goes up, you can get a higher price by selling them to other investors via the sites mentioned before. Some companies will buyback at a higher price than they sold it due to changes in valuation.
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jacob
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Re: How does buying your company's stock work, and can you actually become rich off of the strategy?
OP, this is a question for the HR department of your company.
It will probably have been described in your hiring package (all those papers you didn't read
).
The most likely way would be for the company to simply buy your private equity back. This may only be possible under certain very narrow conditions, e.g. after a certain period or only once a year or only when you quit.
It will probably have been described in your hiring package (all those papers you didn't read
).The most likely way would be for the company to simply buy your private equity back. This may only be possible under certain very narrow conditions, e.g. after a certain period or only once a year or only when you quit.
Re: How does buying your company's stock work, and can you actually become rich off of the strategy?
@jacob, I think only certain people are allowed to buy the private stock (maybe decided by a criteria like tenure, position title, etc.), decided by the CEO, so there doesn't seem to be official paperwork delivered by HR, aside from basic stuff like the 401K, life, health, dental, etc. :p
Re: How does buying your company's stock work, and can you actually become rich off of the strategy?
Important to note that most privately-held companies do not bother creating quarterly statements and are even unlikely to create semi-annual statements.
These two tend to be requirements from stock exchanges for different sectors of their listed equity -- as privately held companies are, well, privately held, they may not have the same regulatory burden to create them, and thus won't.
How many people work for the company? How does the cap table look like - can you get a list of all shareholders and their percentage? What's their dividend strategy? Are those dividends privileged and can be received at lower tax levels? Will your holdings qualify for any of the qualified small business stock exemptions for capital gains tax purposes?
Those questions are important from a tax/ownership perspective, but that's not even asking anything about the regular course of business.
Is the company profitable? What's the gross margin? What's the equity margin? How does the cashflow look like? How much capex is needed for growth, how much is for replacement/maintenance?
etc.
These two tend to be requirements from stock exchanges for different sectors of their listed equity -- as privately held companies are, well, privately held, they may not have the same regulatory burden to create them, and thus won't.
How many people work for the company? How does the cap table look like - can you get a list of all shareholders and their percentage? What's their dividend strategy? Are those dividends privileged and can be received at lower tax levels? Will your holdings qualify for any of the qualified small business stock exemptions for capital gains tax purposes?
Those questions are important from a tax/ownership perspective, but that's not even asking anything about the regular course of business.
Is the company profitable? What's the gross margin? What's the equity margin? How does the cashflow look like? How much capex is needed for growth, how much is for replacement/maintenance?
etc.
Re: How does buying your company's stock work, and can you actually become rich off of the strategy?
@xmj, good questions to research. Any idea where I might look to find that data, if there likely aren’t any reports?
Re: How does buying your company's stock work, and can you actually become rich off of the strategy?
From the (current owners of the) company
Re: How does buying your company's stock work, and can you actually become rich off of the strategy?
The small companies I've worked at, owners had wildly inflated ideas of valuation. I'm not sure you'd take the burden on otherwise. I wouldn't put too much weight in the numbers. Ignoring tech RSU tax games, it's a lottery ticket that shows your faith in the company.
Re: How does buying your company's stock work, and can you actually become rich off of the strategy?
My company has been around since 2002 and had issued shares at ₹10 face value which are trading on the unlisted exchanges at ₹430-₹450. There are 8 million shares outstanding but the lot sizes for buying are in multiples of 50 so I've floated the idea with my coworkers that I would buy a lot and then downsell them as many shares as they want in demat form. It is a leap of faith for the new joiners as a lot costs the basic pay component of their one month's salary.
Re: How does buying your company's stock work, and can you actually become rich off of the strategy?
From what you described it a) doesn’t sound like you can even do it; and b) doesn’t look like a great deal at face value.
The two companies I’ve worked for both had stock plans. The first was via an employee decision to purchase, and they had a matching program - 1 share for every 4 regardless, and 1 for 1 if your specific business unit outperformed. It was a guaranteed 25% return (all things being equal) and as a large publicly traded multi-national was a good deal. The program was done in 6 year stints - 3 years of contributing and then 3 years of matching so in the relevant year the match was 3 years later, only received if the employee still worked there. My business unit outperformed for about a 6-8 year stretch so it was quite a good 100% return for long term employees who bought in (was maximum 5% of your salary for the average employee so not life changing but definitely better than the average investment). I think it did a lot for retention and also getting the average employee bought into ensuring the company performed well.
My current company does not have a program to buy stock, but annual profit sharing (bonuses) are subject to partial retention which is vested over a certain time period and paid as company stock. It’s also a large multi-national publicly traded company. There is no matching, but the company does pay a nice dividend (usually 3-4%) and it’s been doing well so not a bad deal, but I imagine most would prefer to receive cash as opposed to vested stock (this is also apparent during the small windows employees can sell stock, where most offload their vested stock for cash immediately). It’s also really for retention purposes.
Your description doesn’t sound anything like the above. I personally would stay away from buying stock in a private company as the valuation is subject to what they state it is, and it’s extremely illiquid so you would be likely stuck until some kind of “event” (IPO, acquisition, etc). Privately held companies are generally good if you don’t want to see sharp swings in the market, or if you control the outcome / get a material upside when the event happens. From your journal you don’t seem 100% sure you’ll even be there for the foreseeable future so I would stay away.
If your goal is to learn about how to analyse / understand financial statements you’re better off following the suggested course load that @Jacob has put out and investing your money elsewhere. Keep in mind you’re already financially dependent on this company for your wages, so tying your capital to it is akin to putting too many eggs in one basket. If you’re the founder that barbell approach can pay off but if you’re just an employee who has to buy in (and not just given shares) at certain valuations without much insight or control over the outcome then you’re taking a lot of risk unnecessarily.
The two companies I’ve worked for both had stock plans. The first was via an employee decision to purchase, and they had a matching program - 1 share for every 4 regardless, and 1 for 1 if your specific business unit outperformed. It was a guaranteed 25% return (all things being equal) and as a large publicly traded multi-national was a good deal. The program was done in 6 year stints - 3 years of contributing and then 3 years of matching so in the relevant year the match was 3 years later, only received if the employee still worked there. My business unit outperformed for about a 6-8 year stretch so it was quite a good 100% return for long term employees who bought in (was maximum 5% of your salary for the average employee so not life changing but definitely better than the average investment). I think it did a lot for retention and also getting the average employee bought into ensuring the company performed well.
My current company does not have a program to buy stock, but annual profit sharing (bonuses) are subject to partial retention which is vested over a certain time period and paid as company stock. It’s also a large multi-national publicly traded company. There is no matching, but the company does pay a nice dividend (usually 3-4%) and it’s been doing well so not a bad deal, but I imagine most would prefer to receive cash as opposed to vested stock (this is also apparent during the small windows employees can sell stock, where most offload their vested stock for cash immediately). It’s also really for retention purposes.
Your description doesn’t sound anything like the above. I personally would stay away from buying stock in a private company as the valuation is subject to what they state it is, and it’s extremely illiquid so you would be likely stuck until some kind of “event” (IPO, acquisition, etc). Privately held companies are generally good if you don’t want to see sharp swings in the market, or if you control the outcome / get a material upside when the event happens. From your journal you don’t seem 100% sure you’ll even be there for the foreseeable future so I would stay away.
If your goal is to learn about how to analyse / understand financial statements you’re better off following the suggested course load that @Jacob has put out and investing your money elsewhere. Keep in mind you’re already financially dependent on this company for your wages, so tying your capital to it is akin to putting too many eggs in one basket. If you’re the founder that barbell approach can pay off but if you’re just an employee who has to buy in (and not just given shares) at certain valuations without much insight or control over the outcome then you’re taking a lot of risk unnecessarily.
Re: How does buying your company's stock work, and can you actually become rich off of the strategy?
I should add I am aware of another large American construction company which is actually private but c. 97% employee-owned. They have a model where after 3-5 years if you’re doing well you get offered the opportunity to buy-in at certain amounts. I believe they offer an interest-free loan to actually buy in if you don’t have / don’t want to use capital, and then the resulting dividends are used to pay back the loan until it’s been paid off.
It’s private so I don’t know for sure but from what some people I know who work there it’s an incredibly good deal if you decide to make a career out of working there. They are by far the most profitable large construction company in the US (likely the world) but as they’re private and employee owned none of that information is public.
People who join out of school are usually millionaires in company stock alone by the time they’ve done 15-20 years. Past performance not indicative of future results of course, but the employee-owned model is quite good as all long term employees are really committed to long term value creation.
I don’t know how they value it given it’s private, but I assume they use a combination of DCF and/or comparable industry metrics. When an employee leaves or retires they get bought out by the company at the current valuation so only actual employees own the business.
Again, nothing like what the OP has indicated but gives you a flavor of what’s out there.
It’s private so I don’t know for sure but from what some people I know who work there it’s an incredibly good deal if you decide to make a career out of working there. They are by far the most profitable large construction company in the US (likely the world) but as they’re private and employee owned none of that information is public.
People who join out of school are usually millionaires in company stock alone by the time they’ve done 15-20 years. Past performance not indicative of future results of course, but the employee-owned model is quite good as all long term employees are really committed to long term value creation.
I don’t know how they value it given it’s private, but I assume they use a combination of DCF and/or comparable industry metrics. When an employee leaves or retires they get bought out by the company at the current valuation so only actual employees own the business.
Again, nothing like what the OP has indicated but gives you a flavor of what’s out there.