In the late-90s, I committed half my net worth into an investment scheme sponsored by my employer. The scheme was effectively leveraged 20:1. The deal worked out and was part of how I doubled my net worth within 24 months.
Emboldened by my success, in the early 2000s, I ended up with 100% of my net worth in a startup that was effectively leveraged 30:1. Taking out a home-equity loan, to cover my living expenses, triggered a desire to sell down my exposure.
The second deal worked out OK but it was painful. My returns fluctuated between +100% and -65% per annum. The ride up was fantastic, my net worth swelled 1,500%. The ride down was far less fun. In four months, the company crashed, I was unemployed and I watched 50 years’ living expenses go up in smoke.
So my answer, about owning your employer, is, “it depends.”
Depends on what?
Age – How old are you? What’s the implication of losing everything in the company, including your job? How long will it take you to earn your capital back?
The first time that I “bet the farm” I was 28 years old and able to save five years living expenses for each year I worked.
The money that I lost with the second gamble is gone forever. I’m grateful that I restructured my life to sustain that sort of loss.
Total Net Worth – What is your exposure as a percentage of your net worth? What is your exposure in terms of years living expenses?
Annual Free Cash Generation – Put your exposure in context. Based on the cash that you can save this year, how many years savings are tied up?
ProTip: the free cash generation check is a good way to review personal debts as well as the capital that you have tied up in your home. As our earning/saving potential changes, many of us are more exposed than we realize.
The above is an important cross check. If you’re sixty years old and 10% of your net worth represents ten years worth of savings… then you’re in a very different position from a twenty year old where 30% of net worth might equal six months worth of savings.
Reserves & Undrawn Bank Lines – after you make the investment, what are your liquid reserves and undrawn bank lines? Look at these in terms of gross annual salary, core family cash needs and your family cash flow forecast. How long can you last if everything blows up?
In my case, 50 years of living expenses went up in smoke but I knew that I had five years to figure out what to do.
Not wanting to make my life too easy, I had three kids in that time, which tripled my core cost of living. I didn’t anticipate that shift, but you can.
Contingent Liabilities – Does the investment have the ability to make further cash calls? Housing Associations, home ownership, private equity funds, partially paid shares… all can make cash calls at short notice.
Finally, be ruthlessly honest when you estimate your true exposure:
- Vested Equity (Shares & Options)
- Unvested Equity (Shares & Options)
- Pension / Retirement Account Exposure
- Cash that you’ll spend if your employer disappears
The employees of Enron, Arthur Anderson, Lincoln Savings & Loan, and Lehman Brothers experienced a severe shift in less than six months. There are many more stories but it’s human nature to talk more about the boom, than the bust!