So these are types of employee ownership models that we’ll discuss today. Um, there is an employee stock ownership plan, known an ESOP. There are stock grants. Um, and when I say stock grants, you’ll see that can also be membership interest. So if you don’t have stock, you’re not a corporation, it could be that you’re an LLC and you’re granting LLC membership interest grants, you can still do that. There’s synthetic equity, which is extremely complicated. I have like a video, if we have time, I have an article that you can read if we have time. Um, it’s very, there’s worker, there’s Worker Cooperative, um, which is a type of co-op, a worker co-op, also called an employee co-op. Um, it’s a type of co-op and we’ll talk about that and then we’ll talk about employee ownership trust.
Atty Michael Jonas (14:14):
So the first one, employee stock ownership plan or, so this is an employee benefit plan. So it’s gonna give workers ownership in the form of shares of stock. Um, basically the business sets up a trust and either adds newly issued shares or buys existing shares or money to buy shares. Basically we we’re, we’re putting money into a trust and then we’re seeing how well the company does and if their distribution, if the people who are part of this have vest have vested. So you may get ownership when you start working there, but you may not vest yet. You may have, you may vest after a certain number of years, like if you worked there five years or 10 years, that’s called a cliff. Or you may, um, vest, you know, over time they call it graded. So basically you, you start working and you’re an employee and you get a benefit that gives you ownership in the form of stock and it’s part of a trust that the, the, uh, the company has made.
Atty Michael Jonas (15:40):
And the idea is if the company does really well, then you’re invested, not just the company does really well, then you’ll get distribution. So in addition to the money that you make, you’ll get distribution from that trust. Um, this runs just like a trust. The company has to hire a trustee to, to, to, you know, evaluate the trust fund to tell people who has vested or not vested based on the rules that have been set forward for the vesting. And then the, the trust has to look at how the company did and figure out who gets money because the company did well, and then whoever’s vested will get that money as a payout. Um, this is also complicated because it requires the company making a trust. It requires, um, having a fiduciary act as a trustee. And because it’s related to share, it has FCC and treasury rules.
Atty Michael Jonas (16:50):
So, um, and I know, I know that, I know that we don’t have, we have limited time, so it’s hard to like get really deep into the complications. But essentially this is, um, what an employee stock ownership plan is. It is a company makes the trust managed by a third party trustee. When people are hired, they’re given shares of stock and they’re told that if you work at the company for a particular amount of time, then if the company does well, you’ll be receiving a percentage from that trust paid out to you by the trustee.
Atty Michael Jonas (17:30):
The next one is a little bit less complicated and probably pop, you know, pretty popular with, with our clients. So the next one is giving out stock or giving out membership interest as a grant. So you get hired and you’re told, you know, we’re not doing the the trust thing and the trustee and we’re not doing any of that. This is, you are hired and you’re given ownership percentages, whether stock or membership interest. And you, if the company, um, however, whether it’s in the company, say it’s a corporation or say it’s an LLC. So the company will determine when dividends or when owner distributions, if you’re an LLC, when they’re given out. So after the company pays its overhead after the company, maybe there’s a rule that says when the company has made $10,000 or has a certain amount of the bank account, we will do an ownership distribution.
Atty Michael Jonas (18:36):
So what this does is it treats the employee as an owner getting distribution or getting dividends when the business does well. So if you, and this could be an investor, this could be an employee, but we’re talking about it in terms of employees now. So if you’re gonna get, we’re not worried, like in the other one, we’re worried about the trustee, we’re worried about investing, we’re worried about all those things. And this one is you own a percentage of the company, whether you own a percentage of stock or you own a percentage of membership interest. When a dividend, when dividends are given out or when ownership distributions are given out, you as the employee are getting part of that. Say you own 5%, you’re getting 5%. The other owners, like the main owner, maybe they own, they owe more. Um, so the, the question that someone might have in this situation is, well, what is the difference between this and having a partner and a business?
Atty Michael Jonas (19:39):
If we’re giving out ownership distribution or stock dividend, what would be the difference between its employee being an owner or a, a partner owner? The difference is in a partnership, the partner is usually fiduciary liable to the other people, the other partners also, the partner usually has a managerial role. Um, in this you could just have your employee role and that’s it. You don’t have another operational role like a partner would, right? So that’s the difference. You also don’t have the same liability for the company that a partner with. So you would have your role as an employee and you would have your percentage of ownership, but unlike a partner, you’re not gonna be liable for other things that happens to the business. Like the partners in the business would be, could you make an employee also a partner? Sure, you could, you could have an employee who has a membership interest and you also make them a partner by giving them liability that they have to face or making it that the decisions that they make are managerial in nature. Um, and, and, and that can happen. So we have some clients where they have five people in their company and everyone of the partner, but then a couple of the partners are also employees. The employee would be paid a salary or paid hourly and then they would be getting ownership distribution.
Atty Michael Jonas (21:17):
Are there questions so far on either of these two plans? So in the ESOP or ESOP we have the company creates a trust fund, we have a trustee, we have vesting. After certain period of time in this, you immediately get, uh, you’re, you’ve immediately vested and you are given a percentage. And after overhead is paid, you get that percentage. Questions about either of those two?
Speaker 2 (21:51):
Um, this is Philip, I have a quick one about the, the, uh, membership grant idea. Is there a way to structure that, um, so that it, that ownership is tied to employment so that if someone leaves that ownership reverts to the company automatically or in a, some kind of structured way?
Atty Michael Jonas (22:13):
Yeah, yeah, absolutely. So what we would do is in a, there’s a couple ways to do this. One is to have a separate agreement, um, you know, maybe an employment agreement upon hire where you mentioned this. Another way to do this is to put all of the owners on a partnership operating agreement. And what we would do is we would call the, the, we would call those other, um, employee owners. We would just call ’em limited partners. And then on one partnership operating agreement, we would mention all of the people and what their roles and responsibilities are. And we would put that, what you just said, that um, should they leave employment, their ownership interest goes reverts back to the company. Um, we could also put, we could also do what’s called a reserve. So like say you haven’t hired people yet, or you have more people coming on and you have a business partner, you can make it so like, cause you can only have a hundred percent of a hundred percent, right?
Atty Michael Jonas (23:16):
So you could say that you and your business partner are 40 and 40, that’s 80%. And you could say that we’re gonna reserve 20% for a future employee who will also have an ownership, um, in the company. And you could do a reserve now or you could do it, you know, later on. And that way if you want to end up giving out employee ownership, you don’t have to then dilute the people who are already there. You reserving a percentage for those folks. So if you have 20% less and you hire for and you give them all 5%, you still have your percent, your partner still has your, so we can, in a partnership operating agreement earlier on, we can reserve for future, um, limited partners or for future employees who maybe you don’t wanna have a partnership title or a partnership responsibility. I hope that answers your question.
Atty Michael Jonas (24:17):
Yeah, thanks. Okay. Um, so the next one, this is the one that’s extremely complicated. Um, I’m gonna try to do my best. So the, the one of the reasons why it’s extremely complicated is I’ve heard this used the term used for two different things. I’ve heard synthetic, synthetic means fake, right? You know, like synthetic fabric, synthetic. So I’ve heard synthetic equity used as people who say to someone when they hire them, work for my company or sweat equity. Have you heard that Same kinda thing like if you work. So I’ve heard it described in that way of giving out equity to people who the company doesn’t necessarily have, um, enough money to pay or enough interest to that or isn’t, uh, uh, isn’t ready for an appraisal. Like we don’t know how much the company is worth, there’s not really a lot of money coming in. So I’ve heard it in that way, in that term. I’ve also heard it in this more complicated thing. So in a, in a synthetic equity program, the employee gets something that feels and looks like shares, but they’re not shares, they’re called synthetic. Um, so I actually have this really short video. Hopefully this works. I have this really short video for you to watch cause they explain it better than I can and I want to make sure that you understand. Let me make sure that this works.
Speaker 3 (25:47):
Perhaps you’ve heard of a synthetic stock before but don’t know what it means. It’s basically just an asset formed through other assets. It’s designed to be sort of like an exact copy of stock. But why do people go through so much trouble to make one? Why not just buy real stocks instead? Well of course there’s a lot of different reasons depending on each individual investor, but mostly it’s for leverage. Moreover, there’s also the question of how they’re made . It’s a bit of a complicated process, which can be tricky if you have no background in finance whatsoever. If you’re a beginner investor, it might even be more confusing to do, but don’t worry, we’ll try to explain them to you in the simplest way possible so that you can acquainted with this process also. And with enough preparation soon, you might be able to pull this too if you want. The topic of synthetic stocks is rarely discussed anywhere and there are very few explanations on how it is made and why people go through all the trouble in making so.
Speaker 3 (26:34):
And that’s probably because it a pretty difficult strategy which mostly only experienced investors are able to successfully make. But it’s a fun topic to learn once you get into it. Hey, welcome to stock market mate. Today we’ll talk about the makings of a synthetic stock. Before we get into it, subscribe to the channel and hit that notification bell to help us beat the YouTube algorithm. If you’re done with that, then let’s get right into it. What is a synthetic stock and how is it different from a stock? First of all, a synthetic stock is different from a stock simply because well, it’s made outta other forms of assets while a stock wouldn’t normally be. The term Synthetic is easy to use financial instruments engineered to simulate other instruments but with alterations key characteristics such as duration and cash flow. Investors often customize synthetics with different cashflow patterns, maturities, risk profiles and so on. Ultimately, it synthetic products are tailored to the needs of investors and so we can define synthetic stocks as an artificially made asset, using the other assets in order to fit an investor’s needs.
Speaker 3 (27:31):
In contrast to conventional stocks, synthetic stocks are derivatives, which are valued by smart contracts. In this way one can create the movement of price and value of traditional assets, but why do people make synthetic stocks just to mimic traditional ones? In most cases, investors create synthetic stocks when they believe the stock options are mispriced. Investors will take advantage of the arbitrage opportunity to increase their returns. An investor uses the arbitrage opportunity to gain profit by simultaneously buying and selling an asset in different markets to take advantage of a price difference. However, for the average investor, this information isn’t very useful. The process of making a synthetic stock: The making of a synthetic stock is pretty complicated since we all know that it is derived from other forms of assets, which one combined creates the likeness in the stock. This means, to achieve the synthetic stock, we’ll have to devise securities that can mimick a stock’s graph in which we can provide a dollar return for every dollar the price increases.
Speaker 3 (28:23):
Investors typically utilize European options, which are options only consummated on their expiration date to make up the security needed. Furthermore, an investor needs to graph the return characteristics in order to know if a synthetic stock successfully replicates stock’s return. It is our goal attempt to make the graphs closer to the stock’s straight line relationship. Usually the entire process involves more technical terms and concepts. And what we’ve basically discussed so far is sort of just like a summary of the whole complex technique. This strategy definitely requires a lot of knowledge in finance to be able to pull off. Pros and cons of synthetic stocks: Pros and advantages. There are a number of advantages in making synthetic stocks. Less requirements: for one, synthetic assets could provide exposure to stocks, commodities and currencies regardless of place or jurisdiction. Now normally the stock market needs no citizenship requirements for investors to participate.
Speaker 3 (29:12):
However, there are a few requirements investors must meet. In order to protect US interests, non-US citizens must produce identification documents ,pass Know Your Customer screening, comply with the number of laws. But with synthetic stocks, investors wouldn’t need any of their requirements to enter the US equity market. This is why synthetic stocks are a favorable alternative for investors, especially foreign investors who face entry barriers. Synthetic stocks are easier to trade: Synthetic stocks are easier to trade as well as transferable. This means they can be sent and received by anyone using only crypto wallet and such. We just need wifi access and a little bit of knowledge in technology and bam, you’re in. Thanks to DeFi, synthetic tokens can be traded at any time as it is always available. This is very different from traditional markets where trading is limited to specific hours and days. Cons and disadvantages: Most of the time something good often comes with disadvantages that are fairly subtle, but can still have a big impact depending on how cautious an investor is. synthetic stock is no exception. The Cons of making a synthetic include:
Speaker 3 (30:10):
It doesn’t provide ownership grant. Probably the biggest downside of synthetic stocks is that it doesn’t grant ownership to the traders of the underlying assets. Although a trader can earn profit and gain exposure to an asset’s price, the asset itself is only represented on the screen. Consequently, synthetic assets holders do not have shareholder rights, vote rights, or dividend rights. Furthermore, as DeFi is largely an experimental project, scalability may also be an issue at time. Hence, its important that users choose the most appropriate blockchain when minting synthetic assets. Vulnerability: It is a well-known fact Defi is very vulnerable to hacks and exploits since its blockchain is permanent. Despite its reputation, decentralized finance is still in the preliminary stages, which means no matter how carefully protected the project might be, a single breach can lead to the loss of possibly all funds. For instance, there was one recent hacker who stole more than 600 million dollars in digital assets. Fortunately, they were safely returned later on by the hacker.
Speaker 3 (31:04):
A quick recap, finally, let’s do a little recap and recall what we’ve learned so far about synthetic stocks. First synthetic stocks are a decentralized formed through the combination of a number of different assets. The purpose of the synthetic stock is to effectively recreate a stock and generate profits the same as stocks. Keep in mind, the synthetic stocks can get a little tricky to make, which is why In order to tell if it’s achieving the same characteristics as traditional stocks, one must accurately gragh and record it until it shows the similarity to the straight line relationship that a stock has. Furthermore, in order to create synthetic stocks, most investors usually use the European style of options to make up securities needed. Furthermore, there are pros and cons to investing in a synthetic stock, which advantages include the synthetic stocks require less requirements when comes to foregin investors. Which makes trading a lot easier.
Speaker 3 (31:49):
Another thing that makes trading easier is DeFi which synthetic stocks are a big part of. Through DeFi, trad and transfer any time or any place due to the fact is always on 24 7. On the other hand, we learn that the cause of the synthetic stock includes ownership rights as well as vulnerability. While it does come with great advantages, synthetic stocks also hold risks and drawbacks. For the investors who do not really struggle with such barriers to entry, it’ll most likely take quite a while before the benefits outweigh the risks synthetic stock holds, which are rarely present in the traditional market. In conclusion, making synthetic stocks comes with a lot of complications, although it gives impressive benefits, the cons are still something to carefully consider. Generally, investors don’t make synthetic stocks, especially beginner’s. But it’s still interesting to learn about them. However, what we discussed in this video is really just the tip of the iceberg.
Atty Michael Jonas (32:38):
Does Your your head hurt yet? No. Um, it’s, as you see, it’s extremely complicated, um, and often relies on crypto. And, um, it’s, it’s just such a massive, not very tangible thing where, um, and I’m, that’s me, that’s me saying that, that’s my opinion. But if you’re, if you’re a business that is tech savvy and you have employees who, um, like things like this and buy into this, this is just another option. You, there’s a really good article that I posted on here as well. Um, actually we’ll have to email that out. The art, the article I posted is really good. It Explains this in a more tangible way. Um, and again, I’m not an expert on synthetic equity, but I wanted to present it cause it’s an option that’s developing as technology changes. And you see, especially now the, uh, the interesting thing with Bitcoin and um, some people think it’s BS, some people swear by it.
Atty Michael Jonas (33:42):
So building an employee ownership model around something with such high viability er variability, um, may not be the best thing for you to do. Unless, unless that’s the business that you have, you have a tech business, um, that understands those things. Okay, so the next thing we’re gonna talk about is worker cooperatives. Um, I would say of the ones we’ve talked about so far, the granting shares for, uh, membership interests and this worker cooperatives, those are probably the most common. And for the clients that we have and the most tangible for the people on this call, right? Um, so worker cooperative, we probably have heard of cooperative before. Um, they’re, they’re community driven, right? Their, their, their work is the purpose and the purpose of the work. They’re all related to one another. So, um, the idea would be that you are an employee of a business that you also own.
Atty Michael Jonas (34:44):
A co-op has democratic ownership. So everybody that’s an employee would own the same amount. Um, same percentage. So if you have five people, you take a hundred percent, you divide it by five, you have 30 people, you take a hundred percent, you divide divided by 30, everybody owns the same amount in a co-op. Um, and what you do is you have rules about existence and purpose. You have rules about, um, ownership distributions. You have rules about hiring and labor practices. For example, there’s a co-op — there’s a really great, um, that’s probably a year or two old, I don how old they’re, but uh, SymbiOp is a plant shop. They’re on southeast Powell. And that plant shop and landscaping company. They’re actually a worker’s co-op and essentially everybody that works there owns the same percentage. Some of the people work regularly, like in, well they all work regularly. Some of the people work like, uh, managerial jobs, some people work, um, graphic design, some people.
Atty Michael Jonas (35:55):
So basically everybody does a different job and has a different contribution. Some of the people work more or less hours and some, so basically the, in order to do this, all of the people who are part of this, they have to be okay with what the other people who are involved are doing. There will be drama. I mean, someone might say, well, I ended up working 20 hours this week. This other person worked 10 and did graphic design. But you’re saying that those equate to the same work and that we have the same percentage. And the answer to that is yes. If those are the rules that the co-op decides that one person can do, um, a certain type of skill or a certain type of offering that could replace, um, a certain amount of hours, then that’s what the co-op decided. Or if the co-op decided that every single person has to work 10 hours a week, then that’s what you have to do is you have to work 10 hours a week.
Atty Michael Jonas (36:53):
So, um, they run off of membership. So the the way that it is, is the people who are the members are the owners. Um, and they’re the ones who are voting on the governance and the policies and the processes. So it’s kinda interesting cause it’s kinda a for-profit, and then it kinda takes on kinda a nonprofit or community organization platform. Um, the idea is that you have ownership in the company that you’re working at. And because you and everybody else have a vote, you can get, um, you can get good wages, but then if you pay yourself too much and everybody votes for good wages, the business may not do well. And, um, so every literally everything is directly related in that kinda democracy type of community. So is this good for certain kinds of businesses? Sure. You can also do it where there’s multiple businesses that exist under one house.
Atty Michael Jonas (37:54):
So the co-op is like, you know, a collective of, uh, flower shops or a collective of, um, restaurants. It could be, for example, a restaurant co-op. And then, um, that may be beneficial from a resource hub or a resource perspective. Cause everybody who wants to have their own, um, business or corporate structure can do so as part of the co-op. They would be giving their, their skill or their thing to the co-op. Um, you could also do your own business and then you could be part of the co-op. So you could have your own private business on your, on the side. And then all of those people who are in that business could be in one co-op together where there’s certain things that they have to do in order to be in that other co-op. Um, what questions do you have about the co-op model? Um, I, I wish I could answer questions about the synthetic equity model, but as you see, that’s really complicated.
Speaker 4 (38:59):
So, uh, just a question. So, so there could be different, uh, compensation packages for, uh, you know, say a manager might earn three times as much as the lowest worker in a co-op.
Atty Michael Jonas (39:11):
Yeah, that’s right. So you can still, you would still get your pay, but then your ownership is the percentage that has to be equal. So your, your pay, your pay can still be the rate of a manager or the rate of a, of a retail worker. So it would be that everybody there, all the employees would have, um, their job that would get paid hourly or salary. And then as an employee and a member of the co-op, they would have the same percentage. So, so people like this, cause you see, even though you’re getting paid higher as manager owner, someone who’s working retail owns the same percentage who is the manager or the owner. So the ownership is kept as the same for everybody. Uh, drew,
Speaker 5 (40:03):
How does it work with voting?
Atty Michael Jonas (40:07):
So everyone has the same voting, right? The voting rights don’t change cause the percentage of ownership is the same for everybody. The percentage of, uh, voting poll is also the same. So what this does in, in addition to democratizing, um, that your manager owner gets the same ownership, not the same salary, same ownership, um, it also gives them an equal vote. So like if there’s decisions about the company or the co-op that need to be made, um, five retail workers have just as much play as five managers. So they become part of the comp. Everybody’s making decisions based on, um, the company and everyone has the same percentage. So when you add people to co-op can say we’re only gonna have 30 or we’re only gonna have you know, hundred people or whatever. But it’s always the amount of people who are in the co-op that are members. It’s always percent, uh, interest divided by how many people there are. And then that’s the reserve thing that talked about. Like if you are, um, if you wanna have a hundred people in your co-op and you’re still building and you have 80, we could give everybody equal percentages, but then we could reserve some for people who have not yet been there, you know, people who are gonna be joining. Um, and then when they join that way, the people who are already there are not diluting their ownership.
Atty Michael Jonas (42:00):
Um, what other questions do you have for this? Um, you’ll see here that, so you can co-op and, and this is what’s really kind of scattered is, and these are all new models that are argued about they changing, states are figuring out how to do them. In Oregon, when you file, um, you can select co-op, but you also could, I mean, so in all states, Washington, Oregon, California can select co-op, but you could be a worker co-op by just being one of these other things. So in all of America, whether you select co-op or not, you could still have co-op models. So like if you’re an LLC and you give all of your partners equal votes and equal ownership, so like your employees would all have the same, I mean, that’s still a worker co-op. Does that make sense? So there’s, there’s, does your state make it a formal co-op process? Um, so the, the America’s still kinda figuring this out. Like is it that there are states that don’t stay as an entity choice. This is a co-op, you just have to pick of the, and then you make it co-op, that governance document that reflect that it is a co-op that everyone has, um, equal ownership, um, and equal votes.
Atty Michael Jonas (43:33):
So again, you can have a co-op that’s one business, like your business could become a co-op or you could have several businesses where the business owners, um, are all members of that new co-op that you’re creating. So those are both options. Any, any questions about this? I see it’s four, so lemme move, lemme move forward. Um, the other one is, this is relatively new for the but England, um, kind of similar to the other, uh, the, the ESOP where we’ve created a company trust, kinda similar to that. Um, but in this particular one, the employees don’t own the shares directly. So it is, it’s more of that the employees own the truck. And, um, I, I’m not explaining this very well, but basically there’s some sort of profit sharing scheme that has to occur to figure out, um, how the money that’s in the trust gets categorized, which is different from the other because the other one is more about regular dividends or distributions.
Atty Michael Jonas (44:54):
This is more of there’s money in a pot and we’re figuring out, um, how it gets directed or used. Um, and sometimes it’s not, sometimes it’s a long term thing. It’s, whereas the, the ESOP is something that every day we’re working on. This one could be that there’s an employee owned trust that doesn’t get tapped into until the company is 20 years old or 15 years old. Um, so it’s similar to that, to the, to the other one in the sense that there’s a trust, but it’s not similar in the sense of it’s a little more indirect, it’s a little more far away. And then the rules are kind of different in, in the sense of it’s not like every year you have a trustee who is, um, giving the money out. This one’s very much, what are we doing with the money that’s here?
Atty Michael Jonas (45:47):
Let’s figure out what to do in the future.