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Commerce · V.03 · MMXXVI · daylight

La Bourse  /  Volume V  /  Nº V.03  /  Workbook — the student

WORKBOOK — THE STUDENT

Chapter V.03 · Ownership and the Worker

For the person studying this alone, or in a seminar, with no shares in anything yet. You are not too early. The first equity offer you receive will arrive with a number on it and no instructions, and the instructions are in this chapter.

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WHY THIS WORKBOOK IS DIFFERENT

The chapter was written for a person holding a benefit statement. You may hold nothing but a student card and a part-time job.

That is fine, and it hides an advantage: you are already carrying the risk the chapter is about, and yours is more concentrated than hers. Your human capital — the discounted value of everything you will ever earn — is close to the whole of your net worth, and it is invested in exactly one thing: the field you are training for. Nobody has ever shown you that position on a page.

So this workbook does two things. It teaches you to compute a concentration and what it costs, using arithmetic you will use for thirty years. And it aims that instrument at the only portfolio you currently control, which is you.

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PART ONE — DISCOVERY

Weeks 1–4: find the concentration you already have

Exercise 1.1 — Your own balance sheet, honestly (90 minutes)

Write down, in pounds or dollars:

The third row will dwarf the others, which is the finding. A graduate expecting £30,000 a year is carrying about £600,000 of human capital and perhaps £2,000 of everything else. Ninety-nine-point-seven percent of your net worth is a single undiversified position in one industry.

Now answer three questions in writing.

1. What single event would cut that position by half? Name it specifically — an automation, a regulation, a geography, a firm.
2. What is correlated with it? If your field contracts, what else that you own or expect contracts at the same moment?
3. What would diversifying it even look like? (Second skill? Second geography? Second income? Deliberately unrelated network?)

Exercise 1.2 — Find five people who hold a stake (one week)

Ask five working people whether they own any part of where they work, and if so, exactly what. You are collecting structures, not opinions. For each, record:

• What form — shares, options, a trust, a plan, a profit share?
• Who paid for it? This is the question that matters. Employer-funded, or bought from salary, or given in place of a raise?
• Do they know what it is worth? Do they know what they could sell?

You will find that most cannot answer the second and third questions. That is not ignorance; nobody ever told them. It is also the single best argument for learning to do this yourself.

Exercise 1.3 — The appreciative interview (45 minutes)

Find someone who has worked somewhere employee-owned and ask exactly this:

"Tell me about a time there when something went unusually well — not the biggest success, the one that surprised you. What were the conditions? What did people do that they would not normally do?"

Take notes on conditions, not outcomes. Then ask one follow-up: did people there have a say in how the work was done, or only a share of the result? The chapter's evidence says the first matters more than the second, and you are testing a published finding against a person.

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PART TWO — THE ARITHMETIC

Weeks 5–8: learn to compute before you argue

Exercise 2.1 — Reproduce the chapter's figures (2 hours)

Do not take these on trust. Open lib/verify/V_03.py, read it, then compute these independently — by hand, in a spreadsheet, in whatever language you use.

1. The variance decomposition. From σ_c = 0.40 and σ_m = 0.17 with beta 1, confirm σ_ε² = 0.1311 and σ_ε = 36.2 percent.
2. The median participant's balance sheet: 15 years of $4,800 at 8 percent should give $130,330; 15 years of $3,000 at 7 percent should give $75,387; the concentration should be 63.4 percent.
3. The swap value at that concentration over ten years at γ = 2. Confirm 35.4 cents.
4. The hurdle rate at the same point. Confirm 8.31 points a year.
5. The ceiling at a 1.5-point premium. Confirm 11.4 percent.

Then do the thing that matters most: find one figure in this chapter you can check against an outside source, and check it. The Meulbroek result, the GAO conclusion, the Italian survival rate, the PBGC claim. If you find a discrepancy, write it down and bring it to your seminar. This edition wants to be checked; that is the difference between a text and a doctrine.

Exercise 2.2 — Your own swap value (45 minutes)

Take a real or hypothetical job offer with equity: a salary of X and a grant worth Y a year.

1. Compute w, the stake as a share of your financial wealth after three years.
2. Compute the swap value: 1 − (1 − exp(−γ w² σ_ε² T / 2)) / w, at γ = 2 and T = 5.
3. Compute the hurdle: γ w σ_ε² / 2.

Now write one sentence: the equity in this offer is worth ___ cents on the dollar to me, and the company would have to beat the market by ___ points a year for it to make sense.

Most students find, the first time they run it, that a headline equity number they were excited about is worth roughly half what the letter said. That is not a reason to refuse the job. It is a reason to negotiate the salary.

Exercise 2.3 — Find the honest negative (30 minutes)

The chapter contains two: United Airlines and Enron. Write, in your own words, why each is included and what distinguishes them from Publix.

Then practise the move yourself. Take a position you personally hold about how work should be organised, and write the strongest honest negative against it — not a straw version, the version that troubles you. If you cannot write it, you do not yet understand your own position well enough to defend it.

Exercise 2.4 — Interrogate a denominator (1 hour)

Find an advocacy page for employee ownership — there are many, and most are sincere. Take one statistic from it and answer:

1. What is the denominator?
2. What population is the comparison group, and was it selected the same way?
3. What vintage is the data?
4. Does the figure count everyone, or only the active?

You will usually be unable to answer at least two of the four. Write to whoever published it and ask. Some will answer, and that correspondence is worth more than the statistic.

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PART THREE — DREAM AND DESIGN

Weeks 9–12: build the apparatus

Exercise 3.1 — The present-tense description (60 minutes)

Write 500 words describing your working life eight years from now, in the present tense, as description rather than aspiration.

Constraints, and they are the exercise:

• Describe an ordinary Tuesday, not a triumph.
• Include the mechanism by which the value you create reaches you — a formula, on a page you could show somebody.
• State what proportion of your wealth is tied to your employer, and why that proportion.
• Include one thing that is difficult and stays difficult.

The third constraint defeats almost everybody, and that is the finding.

Exercise 3.2 — The concentration policy you will keep (90 minutes)

Write yourself a one-page policy now, before you have anything to apply it to. It will be worth money in ten years.

1. The ceiling. The maximum share of your financial wealth you will hold in any single employer. Justify it with w* = 2λ / (γ σ_ε²) and name the λ you believe.
2. The rule on buying. Under what circumstances, if any, will you buy employer stock with your own money? (The chapter's answer is: none. State yours and defend it.)
3. The rule on wages. Will you ever accept equity in place of cash pay? At what discount would it be worth it, and how would you compute that?
4. The review. When, each year, do you check the ceiling?

Sign it. Date it. Put it where you will find it.

Exercise 3.3 — The one-page case (45 minutes)

Practise the artifact the chapter ends on. One page: the position, its concentration, the swap value, the hurdle, the ceiling, and the single action that follows. Write it about a real person who will let you — a parent with a company pension, a friend with share options.

Then give it to them and ask one question: what would you want to know that isn't here?

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PART FOUR — DESTINY AND DELIGHT

Making it hold, and enjoying it

Exercise 4.1 — The second reader (this month)

Find one person who will check your arithmetic and disagree with it. Not encourage you — disagree. Give them Exercise 2.2 and ask them to find the error. There usually is one the first three times.

Exercise 4.2 — The rights inventory (ongoing)

Every financial arrangement you enter has rights in it that nobody will explain. The ESOP diversification election is worth $41,867 to the chapter's participant and almost nobody takes it. Start a list: for every account, plan or contract you hold, write the one right you have never exercised. Review it annually.

Exercise 4.3 — Delight, on purpose (ongoing)

The pleasure in this subject is specific and it is not moral. It is the pleasure of being able to put a number on something everybody else argues about with adjectives. You will notice it the first time someone says equity is always worth having and you can say at what concentration and watch the conversation change level.

Write one sentence: the part of this I look forward to is ___. If you cannot complete it, redesign the practice until you can.

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THE TERM PROJECT

One position, priced properly

Choose one real ownership position you can get documents for — a family member's company pension with employer stock, a friend's share options, a local employee-owned business that will talk to you, or a published ESOP company's Form 5500.

Deliverables.

1. The structure memo (700 words). What the arrangement is, who funded it, what rights it carries, and what happens on leaving, retiring and dying.
2. The concentration ledger (1 page plus workings). w, the swap value, the hurdle, the ceiling, and the gap between the position and the ceiling. Every assumption printed with its value.
3. The sensitivity (400 words). Move γ, σ_c and T. Say where the conclusion changes sign and where it does not.
4. The honest negative (300 words). The strongest case against your own conclusion, and why you did not find it persuasive — or did.
5. The one page, delivered to the person whose position it is, with one named action.
6. The reflection (500 words). What you expected, what you found, and what the gap tells you.

How it is assessed. Not on whether the position turned out to be good or bad. On whether a reader could reproduce your numbers, whether every assumption is visible, and whether you reported a result that did not flatter your prior.

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SELF-ASSESSMENT

The two that matter most are the third and the fourth. The rest is technique; those two are habits, and habits take a term.

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CARRYING IT FORWARD

You will not have a benefit statement for some years. What you will have, if you do this properly, is:

• A concentration policy, signed and dated, written before you had anything at stake and therefore written honestly.
• The ability to price an equity offer in five minutes, which almost nobody in any room can do on request.
• Five structures collected from real people, which is a better education in how ownership actually reaches workers than any reading list.
• The habit of asking who funded a stake, which will save you, at some point, more money than everything else in this volume combined.

The person who can put a number on "equity is always worth having" changes what a negotiation is able to decide. You can be that person before you have any leverage at all, and it is the fastest route to acquiring some.

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APPRECIATIVE QUESTIONS FOR YOUR SEMINAR

1. When has one of you been given a share in something, and what did it actually change about how you behaved? What were the conditions that made it change anything?
2. Which is scarcer among people we know — a say in the work, or a share of the result? What would it take to have more of the scarcer one?
3. What is already working about how this group checks each other's arithmetic, and how would we get more of that?
4. If everyone here left with a signed concentration policy, what would this group's financial lives look like in fifteen years?