Imagining a framework for the 21st-century economy

Issue

The employee-ownership model has proven successful at accelerating the pace of innovation. It also gives equity-earning employees the ability to participate in the profits they help create. In addition, employee-ownership at private companies provides meaningful exposure to private assets, which can help employees build more robust and diversified investment portfolios. However, equity compensation remains underutilized outside the venture capital sector.

To build a stronger and more productive economy, employee ownership should be a standard part of employee compensation and business strategy across sectors and industries—from the largest public companies to the corner bakery.

Background

At Carta, we believe the U.S. economy is on the verge of something great: the shift to an ownership economy—one where it’s commonplace for employees to earn ownership stakes in the companies they help build. 

The transition to an ownership economy isn’t just a dream. It’s a logical step forward, one based on the well-known success of employee-ownership models in the venture capital ecosystem.  

Employee ownership in the venture sector

The innovation and wealth generated by the venture-backed startup ecosystem is one of the greatest success stories in American economic history. By aligning incentives among investors, entrepreneurs, and workers in the innovation economy, the venture funding model transformed the global economy and gave the U.S. a competitive edge in high-growth sectors that have become vital to global economic growth.

The companies that emerged from the first decades of venture-backed innovation included generation-defining businesses that created new industries and generated billions in market capitalization. This part of the story is well known. But for the lives of many workers in the startup ecosystem, the venture sector affected an even more transformational change. 

By earning ownership stakes in the companies that employed them, no matter their role at the company, many startup employees gained exposure to private assets with significant potential upside. When those companies prospered, those employee-owners prospered. And when those companies successfully exited the private markets, were acquired, or facilitated stock sales, those employees often received a meaningful financial windfall. These equity earnings enabled thousands of employees to buy a house, pay down debt, or send their kids to college. As a result of their ability to earn equity stakes in the companies they helped build, tech employees have been able to overcome the stagnating wages and limited investment opportunities of their peers in other industries. 

Equity ownership also generated an innovation and economic flywheel: Some employees used their earnings to invest in private companies or to start companies of their own. In this way, the prosperity generated by one successful company can lead to a crop of new innovative businesses as employees go on to reinvest their equity earnings in new ventures. 

Expanding the ownership paradigm

The success of the equity ownership model should not be restricted to the tech sector. The same ownership paradigm can bring meaningful wealth to businesses and employees across the public and private markets.

More business leaders are coming to realize that employee ownership offers novel benefits to their companies. 

Equity compensation aligns incentives

Equity aligns employee compensation with company outcomes in a way that salary and benefits simply cannot do. An employee’s salary and benefits end when they leave a company. But equity compensation has an upside that can last well beyond the employee’s association with the company. This long-term incentive alignment encourages employees to make decisions that are in the long-term best interest of the company. Research shows that aligned incentives are responsible for positive business outcomes, such as improving financial reporting quality.

Equity compensation leads to lower turnover

Numerous studies have demonstrated that equity ownership programs boost employee retention. Lower turnover benefits companies by reducing hiring costs and increasing operational efficiencies associated with institutional memory and training. 

Studies have also acknowledged the existence of an “ownership culture”: When employees are part owners of the company, they take greater responsibility not just over financial outcomes, but also over the culture of the organization. This ownership mindset leads employees to behave more ethically and fosters feelings of greater inclusivity. The ownership culture generated by broad-based employee ownership contributes to reducing turnover and the costs associated with it.

Employee ownership leads to higher productivity and profitability

Employee ownership can benefit a company’s bottom line. Academics acknowledge the difficulty of attributing financial outcomes directly to the creation of an employee stock ownership program, or ESOP. But a comprehensive study showed that compared to peers (paired by market cap and industry), public companies offering ESOPs showed:

• Higher return on assets in most years

• Higher betas in all years

• Higher sales growth rate in all years 

These results suggest that the incentive alignment, lower turnover, and culture of ownership at companies with ESOPs combine to create conditions more conducive to profitability and growth. Employee ownership is not just about virtue, but value.

Employee ownership leads to higher stability and greater company longevity 

When a family-owned business or sole proprietor wants to sell a company and exit their ownership position, they don’t always find an acceptable buyer. Transitioning to employee ownership offers a way forward: Owners can reduce or cash out their stakes by selling the business to its employees. Existing tax laws meant to encourage employee ownership allow the owners of closely-held C corporations to defer and possibly avoid taxes on gains when they sell their stakes to an ESOP with at least a 30% ownership of the company.  

In addition to offering a tax-advantaged way to transition a closely held business away from sole proprietorship, employee ownership extends a company’s lifespan. Research shows that private firms offering ESOPs are far less likely to close or go bankrupt than peers that don’t offer employee ownership. 

Giving employees ownership is the right thing to do

Employee ownership can help address wealth inequality. 

Over the past 30 years in the U.S., assets have concentrated in the hands of the wealthiest segments of the population. In 1990, the top 10% of households owned 55% of all American household assets. By 2022, their share had climbed to nearly 62%. The wealthiest tenth made significant gains in their holdings of private companies during the venture capital boom of the past decade—especially the top 1%.

*Includes the top 1%. Data from the Federal Reserve of the United States.

Why did this happen? 

One reason is an unfair structural advantage. Globally, the private markets have grown to nearly $10 trillion in value across asset classes, nearly five times their size in 2007, according to Preqin. But in the U.S., investment in private market assets is restricted to a select few. These restrictions are meant to protect investors. But in effect, they’ve excluded the vast majority of Americans from some of the most high-growth assets.

Broadening access

Building more robust employee equity programs across the economy is one way to address this problem: Research suggests that if private firms shifted to 30% employee ownership, the bottom 90% of the population would see significant gains in wealth, while only the top 1% would see their share shrink. Although a 30% employee ownership target isn’t realistic for venture-backed companies at the earliest stages of development, it’s a reasonable goal for other types of mature private businesses.

How Carta is building the ownership economy

A platform for expanding equity ownership 

Carta is building a platform to help companies join the shift to an ownership economy. Our cap table software and compensation tools make it easier for the founders and owners of small companies to issue equity and remain competitive with total compensation. Our fund administration platform makes it easier for new and diverse populations of investors to start, manage, and grow their own venture funds, which helps bring venture-backed, employee-owned companies to new geographies. 

Equity education

It’s not just about products and platforms. To make ownership empowering, we also provide equity education that teaches employees, entrepreneurs, and investors how to get the most out of their participation in the private markets. This includes a series of educational curricula aimed at educating employees, emerging managers, and company founders about how equity ownership and private market investment works. In addition, our Equity Blueprints help private company leaders understand the different types of employee ownership so they can select and create a program that works for their business.

Engaging with policymakers to foster employee ownership

Carta engages with policymakers at the federal and state levels to shape a more inclusive private market framework that can deliver meaningful wealth to more people, as well as continue to accelerate American innovation. Learn more at the Carta Policy Desk. 

Get involved

Building an ownership economy will not be easy, and it won’t be done overnight. 

Be the first to know about changes to the Policy Team’s initiatives by subscribing to Carta’s Policy Weekly newsletter. 

To learn more about how to get involved in Carta’s work to create public policy for tomorrow’s innovation economy, write us here.

Our destination is an ownership economy. Come build it with us.