Question

Does it make sense to give employees in a recently privatized firm an equity share in the new private entity?

Answer 1

Privatization is associated with concentration of ownership and often occurs in countries with weak property rights protection. Therefore, confilcts of interests between the large shareholder and the minority shareholders are likely to influence the success of privatization. It is the purchase of all outstanding shares of a publicly traded company by private investors, or the sale of a state-owned enterprise to private investors. There are five main methods of privatization, such as share issue privatization, asset sale privatization, voucher privatization, privatization from below, management buyout or employee buyout. A public company may choose to go private for a number of reasons. An acquisition can create significant financial gain for shareholders and CEOs. Being private frees up management's time and effort to concentrate on running and growing a business. Management typically shares its business plan with the prospective shareholders and agrees on a go-forward plan. This covers the company's outlook and sets forth a plan showing how the company will provide returns to its investors. Many smaller companies want to share ownership with employees but its costs and complexities are intimidating. Companies share ownership with employees for a variety of reasons. For some people, the reason may be simply "it's the right thing to do." For most others, however, there are purely practical reasons to share ownership. Employee ownership can have benefits for owners of businesses, employees, and their companies. Among these are: To attract and retain good employees, to buy out an owner, for shred entrepreneurship, to raise capital, to make the business perform better, for tax benefits, etc.

Stock Option Plans are an extremely popular method of attracting, motivating, and retaining employees, especially when the company is unable to pay high salaries. A Stock Option Plan gives the company the flexibility to award stock options to employees, directors, advisors, and consultants, allowing these people to buy stock in the company when they exercise the option. For employees, the main disadvantage of stock options in a private company compared to cash bonuses or compensation is the lack of liquidity. Until the company creates a public market for its stock or is acquired, the options will not be equivalent of cash benefits. And, if the company does not grow bigger and its stock does not become more valuable, the options may ultimately prove worthless.