Stock Options for Employees
Blackstone is offering equity to 18,000 employees of climate-technology company Copeland Corporation, in which Blackstone acquired a controlling interest in 2023 from Emerson Electric Co. The plan seems to include all of Copeland’s employees. Blackstone expects to expand equity sharing by offering equity-linked bonuses at more of their U.S. private equity control investments.
According to Joe Baratta, private equity head for Blackstone, one of their key goals is to attract the best employees. This becomes even more critical as the global economy heats up and the hunt for the best talent intensifies.
This commendable strategy – to offer equity participation and incentives for growth – gives more employees a shot at the American dream. Equity sharing, especially via tools such as ESOPs (employee stock option plans) that offer tax benefits have been used by many companies since they were first started by Louis Kelso in 1956. It is capitalism for the masses – encouraged by the government.
Should entrepreneurs setup an ESOP?
If you want to emulate Blackstone, consider the following issues when implementing the program.
#1. Exits. When employees own shares, at some point, they will want to cash in. So, how can they do so? Will an external secondary market exist, as in some VC-backed companies? Does the company have IPO potential? Will employees get a good and fair price if there is no public market? In one company where I was chair, we set a price at the start of the year so shareholders could buy and sell at that price.
#2. Financial education. Not all employees know the value of the stock. When Bob Kierlin was building Fastenal, and just before he took the company public, he offered shares to all employees at a discounted price. Some smart employees went around and acquired the shares from other employees and made a killing as the company grew, went public, and the stock took off (Bootstrap to Billions in www.dileeprao.com). Companies using equity plans should consider financial education for their employees.
#3. The Silicon Valley model. Many Silicon Valley companies offer stock to their employees to attract and keep the highly qualified talent they need. In fact, this is a key component of the Silicon Valley ecosystem. Some employees keep the stock until the companies have an IPO. Others sell in secondary markets if the IPO takes too long for them. Billion-dollar entrepreneurs from Bill Gates have used the employee stock option model. The model has been updated to accurately account for the cost of the stock options.
#4. Customized incentive plans. One way to overcome some of these limitations is to offer attractive incentive plans, as was done by Glen Taylor, owner of Taylor Corporation and shareholder in the Minnesota Timberwolves (Bootstrap to Billion in www.dileeprao.com). His strategy included:
· Attractive productivity-based incentive plans for nearly all employees so they can see immediate benefits from their hard work.
· Attractive profit-sharing incentive plans for the managers of his dozens of companies where he offered up to 90% of the growth in profits each year. The managers had to grow each year to get continued profits.
MY TAKE: People work for themselves and their families first. The best rule for entrepreneurs is to remember this fact. The question is how to motivate employees to increase your net worth.