RE: The Chicago meeting & a (late) answer to Per Aahlstrom's questions

[Steven Etkind <setkind@sglawyers.com>]

John,

I don't think that goverment intervention is the solution, but I do agree
that there is a large element of gambling involved. My concern is that the
"unaccredited" (a securities law term) employees have generally unrealistic
perceptions as to the odds of winning, and for most, they have incurred
risks that they are not aware of. I would advocate a legal requirement of
fair disclosure to the employees, along the lines that they would receive
outside of their employment context, if they were to buy any other security.
They are giving up real value in most cases, and making an investment of a
very large portion of their net worth if they stay with a company for
several years.

This is a situation where they receive less much less rights as employees
than they would have as investors in the same company. In that type of
environment, there will be lots of abuses, and even more cases of regrets
where no deception was intended, but the employee was never made aware of
the risks involved.

One last analogy to ESOPs - Union leadership are generally not very
embracing of them where they are used for wage concessions. I suspect that
they would object even more to options having less rights protection, and
disclosure. 

I think the lack of protection for the ordinary worker in options is a real
problem that won't be addressed until many more have been burned, and it
becomes a political issue. We are in the begining of this experiment, and in
10 or 15 years from now, the results will be much clearer. I hope these
thoughts of mine turn out to be dead wrong.

Steven Etkind

-----Original Message-----
From: John Logue [mailto:jlogue@kent.edu]
Sent: Tuesday, April 25, 2000 9:13 PM
To: EOsubnat@cog.kent.edu
Subject: RE: The Chicago meeting & a (late) answer to Per Aahlstrom's
questions


Steven, 

To the option issue:

If your analysis and numbers are right, broad based options in many cases
have quasi-fraudulent characteristics precisely because ordinary people
WANT to believe.  Besides, how else are they ever going to get rich?? Day
trading?  The lottery?

It's a little bit like Ponzi schemes:  they work because people want to
believe.

Is there some way to make broad based stock options pay off better for more
people?  Should there be some regulation?  What would you suggest??

John


At 08:33 AM 4/25/00 -0400, you wrote:
>John,
>
>Introduction: I am an attorney and a CPA. I am currently the lead
consultant
>on ESOPs to the State of New York's Ownership Transition Program, which
>subsidies studies for the formation of ESOPs as a job retention tool. I am
>also the author of a 350 page training manual for the AICPA which CPAs
>accross the country use to understand ESOPs.
>
>With regard to the options, it is not limited to cynical owners, but to
>starry eyed employees who have no realistic understanding of the riskiness
>of the options they are receiving. In New York City, where I practice,
>within the past year, there has been an incredible growth in the so called
>Silicon Alley, where almost every person employed, from software engineer
to
>administrative assistants, hopes their stock options in tiny companies will
>make them worth substantial amounts of money. The media will have stories
>about the winners, but I suspect that 90 percent of those who took a 1/3 to
>1/2 cut in their salary, and worked much longer than 40 hours a week, will
>have nothing to show for it. I also think it is a fair statement that the
>owners of these businesses have a much better handle on the risks and
>likihood of success than the workers who are taking wage cuts. The
>disappointment will be real, widespread, and in the shadows of the success
>stories.
>
>It is extremely difficult and costly for a deceived worker to receive a
>remedy under existing laws, and it is a huge gap in a tremendous amount of
>employment and securities laws which otherwise protects workers and
>investors. Incredibly, a misled investor has much better rights than a
>mislead employee in most of these situations, as there are exemptions in
the
>securities disclosure laws for stock option plans, in order to make them
>less costly to offer - but the tradeoff means that investors are required
to
>get more and better diclosure of the risks involved. 
>
>Compare ESOPs to stock options: employees receive an annual update, by an
>independent appraiser; with options, no updates are given, and no
>independent appraiser evaluates them. How, then, do employees guage the
>merits of continuing to work for less, in exchange for options? Unlike an
>ESOP, there are no trustees held responsible for making a prudent
investment
>in options.
>Unlike an ESOP, where the equity must be vested on a schedule prescribed by
>law; virtually all options that I see require complete forfeiture if the
>employee quits before an IPO, etc. The ordinary worker who sacraficies
>substantial wages looses all if they quit, even after 10 or 15 years - and
>they have no legal recourse - none! Is this a better compensation model
than
>wages? The owner gets the advice of acountants and lawyers, and the
ordinary
>worker generally gets no advice from any professional before agreeing to
>wage concessions.
>
>Until a few years ago, the only ones who generally received options were
>company insiders or key employees who had a better handle than any outsider
>as to the growth potential and value of the company.  Now that options are
>exchanged for wage demands to the more unsophisiticated and "lower"
workers,
>there is a real gap in the protection of the workers' interests - which in
>the past was not needed, because the only ones who got options were capable
>of evaluating their merits. 
>
>Steven Etkind



John Logue
Ohio Employee Ownership Center
Kent State University
Kent, OH 44242
(330) 672-3028
(330) 672-4063 fax
jlogue@kent.edu
http://www.kent.edu/oeoc/