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Buying Shares in My Company

Should or should you not buy equity of a company your work for? What are the pros and cons? How would you go about buying equity in your company? This piece will hopefully give you some initial guidance and answers to these questions.

How do you buy shares in your own company?

You have two scenarios; your company is either

  • Listed, or
  • Private

The first case is the easier scenario of the two, and we thus start with this one.

If your company is a listed one, the first step is of course to find out where the company is listed and which acronym (i.e. its ticker symbol) is used for it in these listings. An example would be Associated British Foods Inc, a UK based firm that trades under the symbol ABF on the London Stock Exchange (LSE). You can easily get ahold of such equity by buying the stock directly via an online broker.

Buying into a private firm is however a much more difficult task, and the solution is most often an indirect investment into proxy assets. It is not impossible to directly invest in the company if it is a small one and you have the means and trust from the main owners to do so; this is however a very expensive, impractical and risky way of owning capital in the firm. An equity stake of say 5% of a firm can cost you millions, which you probably would need to lend money to afford. Having both a debt and equity stake in a firm is a risky endeavor; should the firm go bankrupt you risk losing your job, income and in this case: you would owe money to the bank for the sum you borrowed to invest in the equity stake to begin with.

So instead of buying directly into the company, what can you do in the case it is privately owned? There are as mentioned above proxy investments you could choose. Proxy in this situation means the closest substitute we can find. Examples can be:

  • Proxy investment into a similar, listed firm
  • Proxy investment into listed companies working with products, services etc. vital to the ongoing business of your company
  • Proxy investment into indexes or ETFs comprised of the above-mentioned service/raw material providers or firms with similar business to your company

Why and when would you want to buy shares in your own firm?

Continuing the example above, if you worked for ABF and wanted to further invest in the firm, you would need to evaluate whether the current price and estimated future return is worth the double investment in this company. The important factor to take into consideration here is a proper due diligence and an over average risk appetite; if you are risk averse, this would probably not be a sound investment for you.

If you are in a situation where you really do wish to capitalize on the growth prospects of your firm, it would be a good situation to invest in its stock if the value is right. It is difficult to say how and when you know if the “price is right” (we would win the Nobel prize if we knew), but given your calculations and knowledge, if the stock is being traded at a discount due to reasons you find to be unfounded, it might be the right moment to invest. If you diversify in conjunction to such an investment, this investment plan might be a sound one.

Pros and Cons

Of course, there are risks involved in buying equity in a firm where you work. Besides the stake you already have invested by working for the company, you add an additional dimension of an equity purchase. As mentioned earlier in the text, if the firm where you work performs badly, you risk not only your job and thus your income, you also risk losing the money invested via an equity investment.

This is not an improbable scenario; we only need to consider the not so distant past and the Lehman case to see a good example of such a situation. Had you been employed at Lehmans and, besides your income, had an option plan and/or stock tied into to the firm all of this would have been lost the moment the firm went bust.

There are pros. Should you, as mentioned above, have very strong reasons to believe that the firm is heading for a strong growth rate period and

  • The stock is traded at a discount
  • The firm has stable finances
  • The management is stable and trustworthy
  • You have the means to invest without putting your personal finances at risk – e.g. this cannot be your main and only investment, and it should not be large part of your portfolio

If your risk appetite is above average, it means you have the stamina to endure temporary setbacks tied to such an investment and the possibility that it might not actually go your way.

Summary

Whether or not to invest in your company would depend on:

  • Your risk appetite
  • The price at which the stock is being traded (e.g. invest if it is traded at a discount)
  • The firm has stable finances
  • The management is stable and trustworthy

You have the means to invest without putting your personal finances at risk – e.g. this cannot be your main and only investment, and it should not be large part of your portfolio

How and where to buy into your company depends on if it is

  • Listed, or
  • Private

For a listed firm, you can buy into the company by buying the stock at an Exchange (e.g. LSE). Should the firm be a private one, there are both direct and indirect ways with which to by equity:

  • Direct ownership
  • Proxy investment into a similar, listed firm
  • Proxy investment into listed companies working with products, services etc. vital to the ongoing business of your company
  • Proxy investment into indexes or ETFs comprised of the above mentioned service/raw material providers or firms with similar business to your company

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