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I work for a medium sized business (approach $1B in revenue) and a few years ago I was invited to become a partner and so I purchased equity in the firm. The stock has done exceptionally well (valuation by third party auditors up over 350% in ~3 years). I bought in for additional shares last year and now in 2020 have the opportunity to invest even more (it would be a $60k investment). As it stands about a quarter of my net worth ($200k of $800k) is in the stock. I make a good income ($200k) and work in an incredibly in-demand field, so even if things went sideways, I think I'd be fine, just suffer a setback with savings. I am torn because the equity has done tremendously well and the business shows no sign of slowing, but I understand the risk that comes with investing in your employer. Historically I don't believe we've ever had a year less than 20% growth (even including the past recession) so part of me feels the increased risk may be justified by the higher returns.
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Aug 2, 2019 05:14
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| # ? May 9, 2024 05:50 |
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Past returns are not a guarantee of future performance. Diversify your portfolio so that 25% of your investments and 100% of your income aren't in the same bucket. You know this poo poo or else you wouldn't have posted this thread. Edit: Also, why would a $1B revenue company "invite" investments in the $10k range? That's pocket change.
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Aug 2, 2019 06:35
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Going through a similar situation myself. What's a normal acceptable portfolio % to invest in employer? https://money.usnews.com/investing/investing-101/articles/2017-10-10/3-golden-rules-for-investing-in-company-stock "Limiting that allocation to a set percentage reduces the risk of overweighting company stock. Rob Austin, director of research at Alight Solutions in Charlotte, North Carolina, says that when company stock is available as an investment option, plan participants invest an average of 10.5 percent of their portfolios in it. Allocating no more than 10 percent of your total portfolio to company stock is a good rule of thumb, says Mike Piershale, president of Piershale Financial Group based just outside Chicago. But he also suggests considering the size of your portfolio outside your company plan. “If your 401(k) is worth $20,000 but you’ve got an individual retirement account worth $500,000, it’s probably OK to go heavier than 10 percent in your employer’s plan,” Piershale says."
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Aug 2, 2019 07:14
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Guessing this is a professional services firm?
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Aug 2, 2019 11:52
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How liquid is your equity? Equity in privately held professional services firm tends to be fairly illiquid.
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Aug 2, 2019 13:55
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Dik Hz posted:
This. I work with a $20M revenue company that would consider a 60k investment to be chump change. $200k equity in a $1B (that's revenue, what's market cap?) company doesn't really make you a partner in any meaningful sense.
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Aug 3, 2019 23:46
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alreadybeen posted:The stock has done exceptionally well (valuation by third party auditors up over 350% in ~3 years). While I'm thinking about it, how are the additional buy-ins from employees being invested in the company? Or are they just buying out current equity partners?
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Aug 4, 2019 00:50
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If it’s a human capital / professional services firm there is usually a greater tendency to try to retain talent because that’s the entire source of your revenue. There tends to be a bit of a revolving door of equity partners because if someone wants to leave you usually force them to sell, and if someone gets high up enough in the company you want to tie them to the company so they don’t leave. Your questions are good ones to ask but (again assuming that it is Hc / professional services) this world works slightly differently from product based companies.
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Aug 4, 2019 18:08
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KYOON GRIFFEY JR posted:If it’s a human capital / professional services firm there is usually a greater tendency to try to retain talent because that’s the entire source of your revenue. There tends to be a bit of a revolving door of equity partners because if someone wants to leave you usually force them to sell, and if someone gets high up enough in the company you want to tie them to the company so they don’t leave. if its a professional services firm, it would have to be a really tiny one. All of the bigger ones are, at minimum, $1m+ buy-ins. Also, you receive dividends of the performance off those shares... its not valued by a third-party to make you paper money. A partner's income is literally the income earned off their shares - there is no salary. Also, the idea is you sell those shares back to the firm when you retire whereas I'm not sure what the market is for these private company shares.
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Aug 4, 2019 19:05
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Yes - professional services firm (small amount of product sales too but not our core business). I've reviewed the books and there is no need to raise capital, that ins't why they are doing this. Equity is primarily held by founders, the goal of the program is slowly divest the founding partners and create new owners. Every single owner is an employee and there is no outside capital so there is no VC firm in play. It is quite illiquid, and there is a massive discount to the valuation because of this. Of course the discount cuts both ways if I decide to sell in the future and it is still private. The stock doesn't pay dividends though we do receive income through the partnership. However because we are growing most of the profits go back into the business so this isn't material. This equity isn't 'lottery tickets' like a lot of the stock in tech start ups. There is sustained repeated demand for the services so its less risky in that sense. I believe any investment decision should measure risk against reward. The reward here seems quite large though the risk is too. Because of the general marketability of my personal skills, decent liquid assets in case I needed to cover living expenses due to being out of a job, and general fact that even if this private stock goes to zero I'll still be on OK shape, I feel the risk is manageable. The return is quite a premium over the market such that I'm thinking justifies the risk. I'm well familiar with the risk of investing in your company stock, but I think following the rules without actually considering the specific situation of the risk vs. the reward isn't wise.
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Aug 4, 2019 20:02
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What do you mean by "receive income through the partnership" - because that sound a lot like a dividend. Most PS firms are valued at pretty low multipliers of income, usually in the 1.x range where x is pretty low. I assume you are aware of this and your valuation is based on this type of multiplier. What percentage of the company's equity do you currently hold with your share, and are you coming up with that $200k based on a theoretical valuation or the price you paid for the stock?
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Aug 4, 2019 20:45
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alreadybeen posted:Yes - professional services firm (small amount of product sales too but not our core business). I've reviewed the books and there is no need to raise capital, that ins't why they are doing this. Equity is primarily held by founders, the goal of the program is slowly divest the founding partners and create new owners. Every single owner is an employee and there is no outside capital so there is no VC firm in play. It is quite illiquid, and there is a massive discount to the valuation because of this. Of course the discount cuts both ways if I decide to sell in the future and it is still private. The stock doesn't pay dividends though we do receive income through the partnership. However because we are growing most of the profits go back into the business so this isn't material. This equity isn't 'lottery tickets' like a lot of the stock in tech start ups. There is sustained repeated demand for the services so its less risky in that sense. are you also personally liable for losses if the company were to be sued and wiped out like a regular partnership? Or it is it structured as an S-corp? TBH, it doesn't sound like the same fake paper money that a lot of start-ups do, but I think there is more detail needed to see if it's truly a useful investment. Do you receive a known, documented percentage of income off each unit/share each year?
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Aug 4, 2019 23:43
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My comment "Receive income through the partnership" I meant it is an LLC so my share of the profits are received on a K1. It is not an S Corp. Any profit (or loss) is passed through to me based on my percentage of ownership which is a fraction of a percent. As our growth eventually slows, the net income should increase and result in cash payouts like a more mature partnership. I don't believe I am personally liable as I believe there is a threshold for being a 'material partner' or something to that effect though I am not certain. Given our financial standing and type of work we do I can't imagine any possible suit wouldn't be handled by the firm. The worst I could see would be if we somehow breached trust with a customer and it blew up our reputation which might decimate the stock. The valuation figure comes from a third party that is hired annually to do an independent analysis. You're spot on Kyoon, the multiple is right in the 1.2-1.3 range. I independently compared this to our closest public competitors and it's actually a fairly conservative multiple. alreadybeen fucked around with this message at 00:40 on Aug 5, 2019 |
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Aug 5, 2019 00:38
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KYOON GRIFFEY JR posted:If it’s a human capital / professional services firm there is usually a greater tendency to try to retain talent because that’s the entire source of your revenue. There tends to be a bit of a revolving door of equity partners because if someone wants to leave you usually force them to sell, and if someone gets high up enough in the company you want to tie them to the company so they don’t leave.
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Aug 5, 2019 00:53
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Dik Hz posted:Well, you can retain talent by making it cost them $100,000s to leave, or you can retain talent by actually paying them in cash money, homie. This opportunity smells like the former to me. But what do I know? i know this was meant as a clever sarcastic burn but you are absolutely right that you don't understand how HC firms work at the partner / director level. again, unlike in every other business your product is the people that work at the firm, so you need to get your important people to stay.since the product is the capacity of the people. their skills are extremely marketable on an individual level and grow more marketable and valuable over time. in order to keep these people you do both things to make them stay: you pay people a lot of money because the partnership pays out pretty much the entire earnings of the firm minus salaries and other costs (which are low). and you make it so it's harder for people to leave by tying them to firm through equity purchases. if you pay out a lot of money without the equity anchor, as soon as the business starts to slow your people will just leave and pull their clients and start their own competing HC firms. if you have the equity anchor without associated payouts, nobody will ever buy equity because it's not valuable, and you'll never be able to match the compensation of other firms. i am a little surprised by a) 1B company where partner salaries are fairly low at $200K and b) that at a 1B company, holding a fraction of a percent of the company is allowed. are you voting?
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Aug 5, 2019 03:14
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KYOON GRIFFEY JR posted:i know this was meant as a clever sarcastic burn but you are absolutely right that you don't understand how HC firms work at the partner / director level. I'm not going for clever sarcastic burns. I'm just an anonymous dude on the internet. Take it or leave it.
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Aug 5, 2019 03:30
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| # ? May 9, 2024 05:50 |
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This thread is terrible. None of the posts provide any info at all. All the tangents about personal liability for the company and what revenue multiplier is appropriate are all completely irrelevant, wrong, and useless to the question being asked. Clearly she's not voting and doesn't give a poo poo about voting, why does that matter at all even if she was? Who cares? Seems like a decent company to invest in, but you've already sunk a ton of money into it so I'd be wary of doing any more. Make sure you have at least the same amount invested in a regular brokerage account in an index fund (separate from retirement funds) before you start dumping more money in. Just too much concentrated risk.
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Aug 5, 2019 10:13
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