Peter is coming from the management perspective in an established company, typically public. In fact, he wrote a book, The SAIC Solution, with Robert Beyster, the founder, who has an entire foundation (the Foundation for Enterprise Development) devoted to employee ownership.  I, on the other hand,  am coming from a start-up perspective--the two are very different. In my mind, the issue is owning stock (equity) versus owning the company (taking risk).

 

Peter, and those supporting his comments, claim that If you want your employees to act like owners you should GIVE them real ownership (equity) in your company. Peter cited a bunch of research and examples to support the benefits of employee ownership. That's all well and good, but all of that research was done on existing companies, not start-ups. And most of the research on employee ownership (particularly ESOPs, the most common type, which are retirement plans in the form of trusts where the employees can actually end up owning the company as the founder retires) has been done by two people, Joseph Blasi and Douglas Kruse, on existing ESOPs. But here's the arguable part. Those endorsing ESOPs point to higher performance but they fail to account for the fact that ESOPs have imbedded tax incentives that give them an artificial advantage over other firms. In other words, ESOPs get what is essentially a subsidy from the taxpayers because of the 1974 ERISA law. It IS completely legal, but it is an advantage. Don Israel, president of Benefit Concepts Systems, says that "An ESOP gives employees a no-money-down freebie on company ownership."   Here's very simply how it works.

  

The company sets up a trust fund into which it places either new shares of its stock or cash to buy existing shares (it can also borrow money to do this). Contributions to the trust are tax deductible and shares are allocated to employees according to a formula the company sets up. When employees leave the company, the company must buy back the stock at fair market value. Employees get voting rights if the company is private (go to http://www.nceo.org/main/article.php/id/8/ for more details). 

 

Although they represent a miniscule portion of the millions of U.S. companies, ESOPs (the majority of big ones are public companies) have been a great way for founders of private companies to retire and have a relatively easy way to create a market for their equity shares. But retirement is a long way past start-up and that's my point.

 

Let's get back to the issue of the founder/entrepreneur. Unlike cooperatives (think farmers) or partnerships where everybody invests and risks their own money, ESOPs don't require employees to have skin in the game. And that to me is a huge difference. Stock is provided as an incentive or reward that may or may not have been earned.

 

So are we talking about incentives to ACT LIKE owners or are we talking about BEING owners. Being owners means taking risk and being liable for what the company does. At start-up you can't afford to bring people on board who aren't already devoted to the business and are not willing to work long hours to see that it succeeds. Any equity given at start-up is typically founders' equity based on what each of the founding team has contributed to the start-up. Equity that is given to non-founder employees at start-up needs to be enough to attract and motivate them (this will depend on the industry) but not so much that precious start-up resources are wasted. AND you don't want to give out fully vested stock to employees who have yet to earn it by what they accomplish for the start-up.

 

No one is saying that employee ownership is not a good thing. Let's just be clear about what we mean and what stage of a company we're talking about. Not all employees want or deserve to take on the liability and risk of real ownership. As a start-up grows, and if it's successful, the management team should look for ways to make sure that employees benefit from that success.  Employee ownership is just one of many ways to accomplish that.