October 18, 2016
It’s holiday time and the gift giving has started early here at Jacobian. We celebrated our 10th year of business and 499% growth over the past year with a great weekend of wine and food. But parties turn into memories faster than we think and it was important to me to not only share our time together in celebration, but truly share what this team means to me and to Jacobian.
Jacobian is now an employee-owned business.
Throughout the United States, and particularly in Silicon Valley, new companies pop up and often hope one day to have some future upside earnings to share with employees above and beyond their base compensation. Employees might receive options, restricted stock, incentive units and all sorts of other instruments often purchased using the employee’s own cash. And, if you do this long enough, as I have, sometimes these incentives never turn into anything other than fading dreams as privately held companies fail to attract investors, profits or IPO. And even if companies manage to find a path to future liquidity, later-stage employees may have to cough up serious cash to exercise their options despite a much lower upside potential or face large tax payments for same-day exercised sales.
As an LLC, had we granted “stock” in the form of option units, employees would have been held hostage each year waiting for K-1’s for their tax returns and face the responsibility of paying taxes on their portion of the company’s earnings. Operating agreements for LLCs often restrict distribution to protect working capital, but due to “pass-through taxation”, employees are left holding the “tax bag” for earnings they may not have ever received. It becomes an annual nightmare for accountants, employees and owners.
No thanks. Been there. Done that.
Enter the Employee Stock Ownership Program or ESOP. Our partner, The Menke Group, can explain the mechanics in gory detail, so I’ll offer a few highlights:
Employees get to own the business without having to put in a dime of their money, just their loyalty, commitment and hard work.
As an owner, I want to ensure my employees enjoy the profits of the business without the downside of coughing up cash or worrying about taxation. I also want to be sure that if they do choose to leave Jacobian in the future, they get to take something with them. And finally, I want to be sure that if they retire from Jacobian, they never have to wait for some liquidation event that may or may not ever happen—they get their payout when they retire. ESOPs provide all of these benefits and more. If you want to learn more about ESOPs, there are a lot of great resources out there including The Menke Group and Wikipedia. I highlighted only a few.
It will take some time to reach our final goal of full employee ownership and we’re well on our way! The first steps have already begun:
It’s my goal that this will enable us to attract new talent, retain the awesome talent that we already have, excite our employees about our future potential by enabling each person to contribute to the success of the business and provide a path to retirement prosperity for everyone.
So does this mean that Jacobian will never take investment or go public?
NO!! ESOPs are simply employee trusts that administrate and hold stock and cash for the benefit of employees. If the business wishes to sell or go public in the future, that stock is simply purchased from the ownership, which now will include the ESOP trust. There’s no impact on future upside potential—in fact, one might argue that the increased success of the business will only increase the likelihood of a liquidity event in the future!
So why aren’t more companies doing this?
Great question. A few great companies are doing this already:
I can’t speak as to why other businesses in Silicon Valley don’t do this. I suspect it might be mainly due to a lack of knowledge or understanding. Prior to four months ago, I had never heard about ESOPs, yet they have been around since 1974! Here are some stats:
ESOP companies versus non-ESOP companies have:
I’m super proud of my team and the business we’ve built together. It’s only fair that everyone gets to participate in its success and growth as we continue together. I can’t think of a better way to share that with everyone and avoid many of the pitfalls faced by employees of non-ESOP companies. I won’t be around forever, but I hope that Jacobian will be and I trust my team. This is how I have chosen to show it—by letting them have a piece of what they have so rightfully earned.
This is for my Jacobians. And my friends.