Becoming a Shareholder in a Private Company

[LifeIsAPoissonProcess]

Wifeisapoissonprocess has moved up the ranks in her company rather quickly, and now she is at a point where one of the conditions of her next promotion would be becoming a shareholder in her mid-size private firm. Minimum investment is $50k, minimum annual dividend is 3%, and becoming a shareholder allows you to purchase stock at a discount. The company pays all taxes on your behalf.

Those are all the details I have, and I have absolutely no experience in what a typical program looks like in terms of how different it is from investing in a publicly traded company. $50k would be a sizeable investment, although we could move around some money to do it without a personal loan (which I hear is pretty common). The salary jump at the next step would more than make it worth it to invest - but just a bit weary of such a large chunk of money in one place.

Anyone have experience doing this?

[redprinceton]

No experience with such a situation, but a few questions.

Do you guys believe in the direction of the company? Leadership?

Is your wife privy to the books? And does she have confidence that they faithfully reflect the financial standing of the company?

I'm a little suspicious of this:

Originally Posted by LifeIsAPoissonProcess

The salary jump at the next step would more than make it worth it to invest

If this is the case, why not a smaller pay increase in favor of granting her stake in the company? Does this seem like a firm that is that hard up for a $50K cash infusion?

Again, no experience with this. Maybe it's par for the course for smaller firms to want literally buy-in from their top people.

[Westley]

Originally Posted by redprinceton

Maybe it's par for the course for smaller firms to want literally buy-in from their top people.

I think this is the case. Nothing in the OP makes me weary, or even wary. But only worthwhile if you believe in the direction of the firm, and plan to be there longer term.

"Becoming a shareholder allows you to purchase stock at a discount" - relative to what? Because pretty much everybody that purchases stock is a shareholder. So that's confusing and if that's part of how they're selling you on it, maybe a red flag.

Also, make sure you understand how she sells her shares - if she leaves, if she stays and wants to sell, if the company is acquired or mergers, etc.

[NormalDan]

I'd be pretty nervy about needing to invest 50K in a private firm, you're already pretty tied to company performance by working there. And I think it must be tough to get an objective view on the company's situation from internal.. amazing how biased people are at public companies, let alone private ones.

[LifeIsAPoissonProcess]

I don't know much about the firm, but I generally like the direction it's going. It's risky since it's healthcare related, so there's always risk there based on politics.

Also don't know about the books. She currently gets bonus and commission incentives which have increased at a good pace each year - but not sure how much to read into that.

That is a good point about the stock purchase discount. You must be a shareholder to buy stock at all, so prescribing a 'discount' label seems misleading unless I'm missing something.

NormalDan - that's my biggest fear, we are already relying on her job for most of our income. Bonuses can fluctuate a good amount, which is enough to get us anxious around bonus times. If we had a 7 figure net worth I wouldn't worry about it, but we're pretty far from that at this point.

[Westley]

Originally Posted by LifeIsAPoissonProcess

That is a good point about the stock purchase discount. You must be a shareholder to buy stock at all, so prescribing a 'discount' label seems misleading unless I'm missing something.

If there's a PE firm or something that owns a lot and then they're letting the ees buy in cheaper than the valuation that the PE firm bought at, that's something, but those valuations get stale pretty quickly. If a PE firm bought shares in the last six months and you're buying at a better valuation, then that's good IMO.

If it's all ee-owned, then I'm still confused.

[Colonel Smoothie]

is she hiring

[Colonel Smoothie]

Can't help you here. According to Exam 9, you're supposed to decide on an allocation between the market portfolio and the risk free portfolio, based on the point tangent between the efficient frontier and your utility curve. I'm not sure where an individual stake like this would fit in.

[yoyo]

lol CS

[Klaymen]

Which ETF is the market portfolio again? There are so many it's hard to remember...