Reshma Fernandes, Senior Account Manager, 8 years

"Having a stake in the agency’s success gives you a deeper sense of ownership. I think it will pay off in spades."

Danielle Mancano, Account Director, 9 years

"Through the years, we’ve watched SHIFT take extra steps to give its employees a little extra ‘something.’ From office Beer Gardens to Ejector Seat Fridays, the agency has gone out of its way to create a unique culture that attracts the best of the best. When we found out all employees would be owners as well, it added even more pride in who we are and what we do as an agency."

Turan Apakay, Account Manager, 1 year

"This is a company that’s constantly surprising me in how much it cares about its employees. We didn’t ask for an ESOP. I’m sure most of us didn’t even consider the idea of an ESOP. But here we are today having been gifted with a direct stake in the company and it’s made us become more conscious about what we’re doing every day to drive SHIFT forward."

Emily Suchomel, Account Executive, 1 year

"Growing up, my dad worked for an employee-owned company so I know firsthand the benefits of an ESOP. SHIFT’s announcement was made my first week on the job confirming that I’d just joined a supportive, team-oriented company!"

Karly Bolton, Account Executive, 2 years

"To me, the ESOP represents so much of what we value about SHIFT culture as whole. It further enforces that our success as an agency is so much more important than our individual successes and that everyone’s contribution is equally important and valued."

Madeline Willman, Account Executive, 3 years

"Knowing that our CEO has provided us with the opportunity to own this company helps me stay motivated and dedicated. It’s awesome to be able to say at 25 that I have ownership in the firm I work for."

Jen Hirsch, Account Manager, 5 months

"Because of the ESOP I’m enthusiastic about and invested in the work of the entire company--not just my own clients or team. It fosters true team spirit and positivity across the board."

Natalie Guillemette, Account Coordinator, 1 year

"It’s about the people, and the investment the company is making in each one of us. We are all in this together."

Joel Richman, Vice President, 2 years

"I feel like I’ve found a home at SHIFT."

Derek Lyons, Vice President, 10 years

"To me the ESOP is an extension of what SHIFT has always been about--the marriage of a great culture and great talent that equals a unique experience for both staff and clients alike."

Why You Should Give (Part Of) Your Company To Your Employees

When faced with a tough call, Todd Defren of Shift Communications started an Employee Stock Ownership Plan. Now he believes it will make his company more valuable.

Todd Defren and Jim Joyal had built a company together.

Shift Communications had grown from a small PR startup to a company of 110 employees, with offices in Boston, New York, and San Francisco. They’d won a suite of awards, were doing strong revenue, and were beginning to receive overtures from larger companies about a possible acquisition. The only problem was that Defren and Joyal had “asymmetrical motivations,” as Defren puts it. Joyal was over a decade older and ready to start thinking about estate planning. Defren felt he had years of work ahead of him. So Defren and Joyal began to strategize about possible ways Joyal could convert most of his ownership into cash.

There were a few mechanisms by which Defren could buy Joyal out. Some of these stood to leave Defren owning almost the entire company, which would strongly position Defren should the agency be acquired down the road. But Joyal suggested one mechanism in particular: an ESOP, or Employee Stock Ownership Plan. Because the truth was, Defren and Joyal hadn’t built the company alone, both knew. There were those 110 employees that helped build it, too.

The PR world, says Defren, is made up of a few Goliaths, plus a few hundred little agencies around them. The goal, if you own a small agency, is to get big enough to attract one of the Goliaths. “Most guys like me just sell out to a larger holding company,” says Defren. An agency will start doing 10-15 million dollars worth of business, and then a giant will swallow it up. “The one or two or three principals who founded it walk away with millions, and the employees keep their jobs,” he says. Defren was nearing that point, so the decision he made now about how to buy out Joyal would likely have a direct and lasting effect on his finances in the near future.

The ESOP stood to make Defren less money in the end, since it yielded some ownership to his employees. Such arrangements have become “vanishingly rare” in the agency world, he says. But Defren talked it over with his wife, Sian. They’d been together since they were 19, and had been on welfare in the earliest part of their relationship. “She is my first and best counsel,” Defren says. “As I was struggling with the different options--I could do this on my own, I could do the ESOP, I could do other financing options--for her it was a no-brainer. She said, ‘You love these people. They work as hard as you. If the ESOP is a realistic option, why would you do anything else?’” It was, he recalls, as if “an angel on my shoulder was yelling at me.”

Defren chose the ESOP. He’s quick to admit that he’s still the majority shareholder, by far, and the ESOP also carried with it certain tax benefits. Still, when I ask him to put under a cold, hard light the real motivations for his decision, he’s unequivocal: “the huge majority was, ‘Is there a way to give back to the employees?’” His company had grown enormously. “I didn’t do that. A bunch of people did that, many of whom have been with us ten years or more.” The prospect of being able to tell many of them that a sale of the agency could someday mean they could pay for their kids’ college education? “That was a huge motivator for me,” more important than the financial nuances of Defren being able to pay down debt with pre-tax dollars.

“I could have had 95 of our 100 marbles, and instead I gave away 20 or so of the marbles I could have had, just to reward people who have been so loyal for all these years. And they deserve it. I would do it again in a heartbeat,” he says. The ESOP deal was finalized in mid-2012; Joyal remains at the company, too, as a minority equity holder.

How did his staff react? First, with confusion. “We’re talking about a bunch of creative types, not financial types,” he says. After they began to realize what this meant--that they had a real stake in the company--Defren began to see his employees’ behavior change in subtle ways. “I’m having 24-year-olds come up to me and say, ‘I’m at some level an owner in the business. I never use this service we spend thousands of dollars a year on--is there a reason we’re using this?' I’m like, ‘What? Really? That’s awesome they’re thinking that way. They’re thinking like owners!’” Now when a discussion comes up about whether to buy a big-screen TV for the San Francisco office, it’s put to a careful vote. “In an agency environment, it tends to be, ‘What else can you do for us?’ Now it’s more, ‘What else can we do for the business?’”

I ask if Defren sometimes feels that he’s pulled the wool over his employees eyes, getting them to fret over company finances when he’s only tossed them a small fraction of ownership. He says a few days ago, he might have hemmed and hawed in his answer, but that last week he saw the first ESOP statement. Even the most junior staffer with less than a year at the company has shares worth about $3,000, and a typical VP has shares worth $20,000 or more--and the shares aren’t fully vested yet. “I can only imagine, if they stick around five years, that could turn into some very significant money,” he says.

Defren says he’s baffled that ESOPs are so rare in the PR world. He says that all service companies ought to do this, since they sell the time and talent of the people they employee. “We hear these trends about a mobile workforce and a freelance nation. We need to give people a reason to stick around.” And when your company is doing as well as Shift Communications is, with as few owners, it's hardly a great sacrifice to be generous. Going another financing route might have made Defren even richer down the line, it's true. “But how much money do you need? I already have a nice house, a nice car, my kids’ college is paid for. It doesn’t take a bajillion dollars to be happy.”

If the company continues to grow and he sells in a few years, he stands to do very well. “I will have plenty of money, no financial worries for the rest of my life. That’s a good feeling, but it’s an even better feeling to reward the people who helped you get there,” he says. “They helped me fulfill my dreams, and I want to help them fulfill their dreams.”

He pauses. “When you’re a PR guy, you’re constantly on guard about being perceived as a bullshit artist,” he admits. “But where the decision came from was a genuine feeling of gratitude and altruism for these people.”

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3 Comments

  • Corey Rosen

    Great story. ESOPs are more common in PR than the article implies -- there are probably a couple dozen firms with these plans -- and there are 11,000 ESOPs nationwide covering about 13 million participants. For most business owners, selling to an ESOP does yield a fair price (n an ESOP, that is set by an outside appraisal), and when the tax benefits owners get are figured in (ESOPs have substantial tax benefits to the seller, employees, and the company), most end up doing as well or better than by selling to others. Moreover, if part of the business is sold to an ESOP, and the owner(s) retain the rest, then if the employees do start acting more like owners, the company will grow faster and the owner will make more in the end.

    There are details in how ESOPs work on the Web site of the nonprofit National Center for Employee Ownership at www.nceo.org.

    In brief, by the way, the way an ESOP works is that the company sets up an employee benefit trust. The company contributes to the trust to buy shares form the owner, or the trust borrow money to buy shares (from a bank or a seller note) and the company pays the loan back by making contributions to the trust. All the contributions are tax-deductible. Sellers can get a tax deferral on the gains they make by reinvesting in other companies. Shares are allocated to employees based on relative pay or a more level formula and vest over time. Employees get them and sell them back to the company at appraised fair market value.

  • TomDeans

    Give your employees cash not stock.  Stock is ownership and there is only one authentic way to become an owner -- risk your capital.  An interesting exercise would have been to give the employees cash and then ask who is interested in returning the cash for stock. If they couldn't afford to give cash then the stock is without value -- employees can smell a pitch and switch and resent breeds  contempt.
    www.EveryFamilysBusiness.com