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Comment by neilv | Hacker News Reader

> Despite the company’s explosive growth, Mr. Moore fended off numerous offers by food giants to buy Bob’s Red Mill. He opted instead for an employee stock ownership plan, instituted in 2010, on his 81st birthday; by April 2020, the plan had put 100 percent of the company in the hands of its more than 700 employees.

Sounds like Bob Moore had some values most of us could admire.

Anyone know some of the pitfalls of an employee-owned company like that, and proven ways to avoid them?

(For a tech industry example, a large chunk of CraigsList got sold by a former employee to an overlapping large company, eBay.)

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An ESOP is also a great way for a founder to exit the company in a tax-advantaged way. The stock that the employees receive also usually takes the place of alternative 401(k) investments they could be making. ESOPs are a very interesting tool but there are some real nightmare scenarios (owner liquidates via ESOP; company then fails; employees end up without jobs and without retirement savings.)

Another issue with ESOPs is that they are extremely expensive to administrate.

EDIT: this is a succinct and reasonable summary of some of the risks of an ESOP (primarily from an employee's perspective) https://pensionrights.org/resource/problems-with-esops/

Good point. At least in the US right now -- where an S&P index tends to grow over time, and is vastly less risky than all eggs in one basket -- I guess an employee-owned company should emphasize also doing ordinary Bogle total-market retirement investing.

If participating in employee-ownership ends up at the cost of a retiree having sufficient retirement savings -- such as if the employee can't or doesn't build a solid 401(k) or IRA -- that indeed seems risky.

I wonder if there’s an index for majority employee-owned companies. Wait, is that even possible?

There are a few thousand in the US, but most are so small that an index wouldn't be much. NCEO maintains lists but they're paid (and priced for consultants): https://www.nceo.org/employee-ownership-data/esop-company-li...

DOL posts Form 5500 filings but they lag by 2-3 years: https://www.dol.gov/agencies/ebsa/employers-and-advisers/pla...

As of 2021 they listed 6,533 ESOP filings at a combined asset cap of about $2T. For context Apple's market cap just passed $3T in December.

Another way to look at it would be the bottom of the S&P 500, which sits at around $12.5 billion. If there's 6533, their combined asset cap of $2 trillion puts them somewhere around $300 million or so per company, at least a factor of 30 below the S&P 500 bottom. There might be a few within the list that would be S&P 500, if they were public, since the list is likely to have a power law distribution.

I don't think that is possible. How would you own shares in multiple companies where the shares are owned (exclusively? mostly?) by employees?

Any mechanism which facilitates outside ownership erodes the effect of being ESOP.

GP did say "majority".

It's an interesting thought, though. Effectively, assuming that the index were restricted to employees of member companies, setting up such a system would be tantamount to a corporate merger. In the event, if the failure of one member caused its employees to become ineligible to participate and thus autosell their shares, it could have a domino effect on other members. And if an outsider could hold shares in such an index, well, it's not really employee-owned anymore.

>Anyone know some of the pitfalls of an employee-owned company like that, and proven ways to avoid them?

I'd argue that when you look at companies with longevity they tend to be held closely, either by a family or within a coop style model. They also don't have to be small companies - look at places like Kiewit. As someone working to energize a small town economy, there's a lot to be said by exploring these cooperative models, given that PE / VC ain't likely to come to rural America anytime soon.

Limited liquidity- if you can only sell shares to employees, you have to find other employees to buy your shares who have the money to do so, and you may have to accept a much lower price than some one on the open market might pay.

Decision making- depending on the companies governance model, it may be hard to get everyone onboard to make large investments in new areas.

If the company/employees do make bad decisions, it can result in employees not just losing their jobs, but also a substantial portion of their saving, which may be tied up in the company. This is the same reason why the common advice is to not tie up too much of your savings in your companies own stock (see Enron employees, for example).

I am sure there are many more- but there are also a lot of advantages, as such, I am a big fan of both worker owned businesses and consumers cooperatives. I wish both were far more common.

> if you can only sell shares to employees, you have to find other employees to buy your shares who have the money to do so, and you may have to accept a much lower price than some one on the open market might pay.

If you can only sell to fellow employees, that's priced in to the value of the stock. There is no open market price, so it can't really be higher or lower except hypothetically.

This isn't a nitpick, it means that the price you get for the stock is more based on the dividends it bears, since market speculation plays no role. I don't think it's legal to force people to sell stock when they're no longer associated with a company, so "employee and former employee owned" is probably more accurate.

Stocks have 3 values;

A) tradeable on a Stock exchange. (Capital value)

B) income from dividends (income value)

C) voting rights (direction value)

If the company is not publically traded, then Capital value more or less disappears (can be assumed to be 0).

Income value is almost always the primary use-case for this kind of share.

Usually "employee held shares" have limited or restricted voting rights. (An extreme short-term position might be "liquidate the business and divide the spoils", which might be popular if the majority is nearing retirement, but is clearly not good for business survival.)

These shares should in no way ever be considered as part of your retirement plan. Period.

> Anyone know some of the pitfalls of an employee-owned company like that, and proven ways to avoid them?

I guess I can't think of any. Mostly seems to have a lot of upside. I interviewed recently at an employee owned tech company - a very rare bird indeed. It sounded like they did a lot of decision making collaboratively. While the position itself wasn't that interesting, the company structure and culture seemed quite attractive.

dictatorships are inherently faster moving and more decisive than democracies.

I would much prefer to live in a democracy even given that potential "downside".

cool, no one suggested otherwise

"Break shit fast" isn't universally accepted as a beneficial mindset for an organization as large as a country, despite having worked well for a scrappy startup that one time. One idiot can quickly and decisively wreck your entire economy with the stroke of a pen. A more intelligent dictator may simply bend the economy to his personal profits.

Idk dont know what it is about hackernews commenters that just feel compelled to post complete nonsequiters. none of this relates to my comment in any way.

What happens if you want to leave? Are you forced to liquidate your stock, and to whom?

What happens if there is an underperforming worker? What happens with their ownership

What if you want to divest?

Not sure on any of the above, if anyone knows would love to hear the answers

The short answer is it depends on the company. Different companies have different governance models. Some allow former employees to retain interest, but then they can only sell to current employees, for example.

> Anyone know some of the pitfalls of an employee-owned company like that, and proven ways to avoid them?

The primary pitfall is that if you become successful, your investors don't get the returns they crave at the expense of those responsible for your success getting to live like serfs.

The pitfall is that in case of significant changes to the industry it may become politically impossible to make certain unpleasant decisions - e.g. if the industry gets a new option for automation which enables reducing costs through laying off half the employees, then it could be the case that the employee-owned company refuses to do that while their competitors do, and then some time goes out of business as it's costs are uncompetitive, and then have to lay off everyone because they could not make a timely decision to lay off half of them. But that's a hypothetical scenario which is not that common (but high stakes).

This is when a corporate raider comes in and disrupts the company culture. Some real old school “Wall Street” shit.

“Blue horseshoe likes annacott steel”

The Craiglist example seems impossible (barring collusion) if ownership is distributed among many employees, no?

There are lots of great, successful employee owned companies. But by their nature they don't really invest in growth.

"growth" isn't always a net positive

Sure, but if the question is "why are there not more of them" then that's your answer.

There was a study way back of a printing company, I think in MN, four characters like OCCP or something but can't find it.

But I did find this: https://www.mnceo.org

Which looks pretty impressive. I wonder how many states have something like this.

Wouldn't the pitfalls generally be the same as the risks that labor unions would have to hampering efficiency and slowing innovation ?

(Before I get downvoted, I'm not saying unions are evil, and that this always happens, just that it's a known risk)

I would love to see some citations on this subject that don't come from The Federalist Society.

There's evidence it could be regional. This would not surprise me given the differences in public social safety nets.

https://www.researchgate.net/publication/4840766_Unions_and_...

How about Richard D. Wolff, an economics professor with a relatively socialist area of study?

He has lots of material not just from his point of view but many guest interviews from many walks of life. Hosting his weekly 30-minute "current events" program, Economic Update, where all kinds of episodes are posted online, besides his lectures and books over the decades.

Here's a video lecture touching on worker coops and related theories that ended up being posted in a subreddit that is not specifically concerned with economics, socialism, nor coops:

Richard D. Wolff Lecture on Worker Coops; Theory and Practice of 21st Century Socialism:

https://www.reddit.com/r/lectures/comments/8ypnl3/richard_d_...

Turns out there's been only one "parent" comment but it does say quite a bit in a much shorter time than it takes to listen to the entire lecture:

>POGO_POGO_POGO_POGO • 6y ago • Edited 6y ago

"Two problems I see with worker cooperatives:

    If a capitalist enterprise were to be converted to a worker-owner enterprise, the workers would need to buy their "exploitation" up front (as that would be incorporated in the company price). This is a catch-22: they can either not buy the company and get exploited throughout their working life, or they can buy the present value of their exploitation up-front. This is much like telling a slave that they can buy their freedom, but the cost of their freedom is a full-life's worth of labour. (Obviously workers aren't "exploited" to the degree of a slave, but hopefully you get the picture.)

    Instead of converting a capitalist enterprise to a worker cooperative, the enterprise could be a worker cooperative from the start - a worker cooperative start-up. The problem I see here is how many start-ups actually succeed? Not many. This means that the risk of funding start-ups is huge, and a huge risk needs a huge payoff when successful. E.g. suppose you are in the business of funding start-ups. If only one in ten start-ups succeed, then that one successful startup needs to return a lot to compensate for the other failed nine. The easiest way to achieve this return is simply if the party funding the start-up takes part-ownership. But that's against the principles of a worker-owned enterprise!

So it's hard to convert to a worker cooperative, and hard to start a worker cooperative. I don't see worker cooperatives taking off without some sort of government incentives (or "coersion" as libertarians would like to put it)."

I can't say I fully agree with Wolff or his detractors, but there's opinions I wouldn't want to be without when it comes to understanding a fuller economic picture,

In fact it's not a "known risk". It's an active area of research, with at least some findings contradicting your assumptions, e.g.:

> Our findings suggest that the traditional hold-up view whereby unions discourage innovation does not necessarily survive. When the voice effect is neither too strong nor too low, the unionized sector outperforms the market in terms of process innovation, while the effect on product innovation is strictly increasing in the voice power.

https://docs.iza.org/dp14102.pdf

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