Workers at technology start-ups are now able to sell their share in a company. Up until recently, start-up employees were disadvantaged: as employees of privately owned companies, they could not cash out privately-owned shares.
According to one New York Times article, several private start-up companies (including AirBnB, Pinterest, and SpaceX) are creating "controlled opportunities" for employees to sell their shares in response to this dilemma. In exchange, workers accept restrictions on how they manage the rest of their stocks. At AirBnB this past July, employees were given the chance to sell some of their stocks to investors. But they also needed to approve prohibitive policies restricting what they could do with their remaining stocks (eg. being unable to trade or sell those shares.) All in all, there has been a push towards clarifying restrictions on selling and trading company stocks, in face of employees' push towards increasing liquidity.
The rationale behind the new stock policies is simple. Companies that are self-aware of their developmental phase lure workers in with stocks by promising them large profits when the company eventually goes public, or is sold. The problem: not all companies go public or sell immediately.
Many start-up companies have chosen to create their own programs that allow employees to sell their stock shares. Nasdaq Private Market is used to facilitate private share transactions. Previously, unofficial third-party shortcuts allowing private company employees to sell their shares have always existed--to the nuisance of the companies themselves. Certain third parties are eager to own stakes in up-and-coming startups, but their interference increases disorder in the companies' shareholder base.
According to anonymous AirBnB employees interviewed by the New York Times, restrictions preventing workers from "selling or transferring shares" have always existed. But recently, companies have made these rules explicit.
In 2015, Pinterest workers could sell stocks for cash. In exchange for this privilege, they agreed to "explicit restrictions on selling, lending, or giving others the option to buy the stock" according to the same New York Times article. Employees required Pinterest's consent to transfer or sell their shares, as well as to agree to the company's "right of first refusal to buy back the shares." These prohibitions are new, and Pinterest has acknowledged making certain fundamental changes surrounding employee policy in recent times. Like Pinterest's, SpaceX's new restrictions also claimed that employees violating the new rules regarding stock management are obligated to forfeit their remaining shares.
The rise of explicit language in employee contracts could "eliminate the option of raising cash from a third party," thus allowing startups to more tightly control the flow of assets. Unfortunately for employees, few read their paperwork carefully--and the increasingly explicit restrictions surrounding stock prohibitions disadvantage company employees on the whole. Before, departing employees were usually offered the option of buying stock in the company at a special, low price. But under the new restrictions, employees with stocks whose shares have increased in value must also pay taxes determined by how much the stock's value has risen.
Non-start-up companies have addressed the question of employee ownership in several ways. The ESOP (Employee Stock Ownership Plan) is the most popular strategy. According to the National Center for Employee Ownership website, ESOPs are "a kind of employee benefit plan" akin to a profit-sharing plan. Companies set up trust funds and contribute new stock shares or money resources to purchase existing shares. Alternatively, the ESOP could borrow money to purchase shares while relying on the company's cash contributions to repay all loans. All contributions are tax-deductible. Most full-time employees over age 21 have individual accounts corresponding to the company's ESOP, and trust fund shares are allocated according to salary. "Vesting" refers to the process whereby seniority brings employees an increasing right to the shares in their individual account. 100% vesting must occur within 3-6 years for employees under most circumstances.
According to the policy page of the NCEO, if there is no public market for the shares, companies must buy back these stocks from their employees at fair market value. Private companies require the additional step of annually undergoing external valuation assessments to help them ascertain share prices. Employees of private companies are entitled to vote on major issues (like closing or relocating), due to their allocated shares. However, companies may choose not to engage with voters on other issues. In contrast, employees of public companies are entitled to vote on all issues.
Some examples of other, unlisted companies that employ ESOPs include Publix Super Markets, Lifetouch, Penmac, and CH2M Hill.
