By Ben Weider, McClatchy DC Bureau, and Doug Monihan, Financial Contributor – April 30, 2025
Contributors to Eye on America, Private Stock News, and USNewshour
Inside the Illiquid Stock Scheme Targeting Employees and Contractors
In conference rooms and factory floors across mid-sized manufacturing and sales companies, a new ownership offer is making the rounds. Long-time employees – and even independent contractors – are being invited to buy private company stock at ever-increasing prices. Management touts these offers as a “chance to share in our success.” But an investigation reveals a high-pressure system rife with red flags: illiquid shares, arbitrary eligibility, deferred payouts via IOUs, and special deals for top brass. Are these employee stock offerings a generous benefit – or a trap?
A Perk or a Pressure Tactic?
At a recent annual meeting of a Northeast manufacturing firm, dozens of employees listened as executives extolled the company’s record growth and unveiled the new internal share price – up yet again, roughly 15% from the year before. Only a select few were “granted” the right to purchase shares this round. “They make it sound like a privilege,” one former sales manager said. “But you feel pressured to pony up or risk looking disloyal.”
These companies, typically around 2,000 employees and $200 million in revenue, began as closely held family businesses. A small founding group owned all shares. Over time, they opened up minority stakes to employees (and sometimes key independent contractors) as a retention tool and cash source. However, unlike stock in a public company, these shares come with major strings attached. They cannot be freely sold – only back to the company under strict conditions – and cashing out can take years.
Critics say the sales pitches have an almost timeshare-quality. Offers are unveiled at annual meetings run by those who stand to gain most. Founders and early investors often sell some of their holdings to newer employees at these rising prices. The atmosphere can be “emotional and urgent,” according to one attendee: charts of skyrocketing sales, testimonials from loyal employee-owners, and subtle hints that saying ‘no’ might stall your career. It’s high-pressure sales, coming from your own bosses.
Illiquid Shares and Arbitrary Access
Dig into the fine print of these plans, and the shine wears off. The stock is illiquid and non-transferable – meaning employees can’t sell their shares on any open market or even to a co-worker without permission. The only guaranteed buyer is the company itself, and only when certain triggers are met (typically when the employee leaves or retires). Until then, one’s investment is effectively locked away.
Who even gets the chance to buy is entirely up to management. Rights to purchase shares are granted arbitrarily, often timed to when an early shareholder retires or exits. For example, if a long-time owner with 1% of the company retires, the board might decide to offer that 1% in pieces to a few chosen employees. There is no open enrollment – many workers report feeling “left in the dark” about how to qualify for this supposed benefit. Independent contractors brought into the scheme face an extra irony: they’re investing personal money into a company that doesn’t even officially employ them, without the job security or benefits that actual employees enjoy.
External valuations are cited to justify each year’s price per share, but transparency around those appraisals is scant. Employees are rarely shown the full valuation reports. “They just hand us a number and expect us to trust it,” said another worker. This lack of transparency raises conflict-of-interest concerns. Since the board controls the process, could they tilt assumptions to benefit insiders? Without an open market, insiders hold all the cards.
Multi-Year IOUs: The Unsecured Payout Problem
Perhaps the biggest shock comes when employees try to cash out. Unlike public company stock that can be sold anytime for cash, these private shares convert to a promissory note when an employee retires or leaves. In other words, you hand your shares back and the company promises to pay you their value – over multiple years, in installments, with modest interest. It’s essentially an IOU, often unsecured (no collateral backing it). To the newly retired employee, it can feel like trading your hard-earned stock for a long-term loan to your former employer.
On paper, the logic is simple: the company may not have the cash on hand to pay out departing owners in one lump sum, so it spreads payments over time. But in practice, this arrangement heaps risk onto the individuals. “You’re no longer an owner, just a creditor – and not even a secured one,” said a financial planner familiar with such plans. If the business falters, those IOUs could become worthless. Bankruptcy courts treat these unpaid stock redemption notes as low-priority debts.
What’s more, during the payout period, the former employee has no ownership stake or voting power, even though a large portion of their net worth may still be tied up in the company’s fortunes. “It’s a twilight zone – you’ve exited, but you’re financially not free of the company,” said one retiree. If the company’s value soars after they leave, they don’t share in that upside (beyond the small interest on the note). If inflation rises, the interest may not even keep up, eroding the real value of their payout.
Notably, the rules change at the top. High-level executives and founders often negotiate preferential treatment when they step down. Several sources confirmed that in their firms, executives received full immediate cash payouts for their shares at retirement – a courtesy not extended to rank-and-file employees. Such favoritism could run afoul of corporate fiduciary duty laws.
Legal Gray Areas and Regulatory Gaps
Despite these concerns, many of these stock plans operate in a legal gray area. Federal and state securities regulations do impose some checks, but enforcement is spotty behind closed doors. Under U.S. federal law, any offer or sale of stock must be registered with the SEC or qualify for an exemption. Companies generally rely on private offering exemptions to sell stock internally.
State laws add another layer. Many northeastern states and California have strong laws governing intrastate securities sales. In New York and California, companies must provide varying degrees of disclosure to participants or risk legal consequences. Florida has also recently updated its Securities Act, but many employee investors still report being left in the dark.
Independent contractors buying stock could blur the lines of their legal status. Normally, owning stock and having a stake in profits is a hallmark of being an employee-owner. If a contractor is treated like an insider for stock purposes, it could impact other legal classifications down the line.
When the System Fails: Cautionary Tales
When these arrangements go wrong, the fallout can be devastating. There are documented cases where employee-shareholders were misled on stock value or forced to sell shares back at artificially low prices. In some bankruptcies, retirees holding promissory notes from stock redemptions were left with nothing.
Even in healthy companies, the payout structure can backfire. If the company’s value drops after employees buy in at a peak price, they have no way to exit – and no legal recourse. Disparities in treatment between executives and regular employees have triggered internal morale crises and, in some cases, lawsuits alleging unfair practices.
The Role of AI in Fairer Valuations
The rise of artificial intelligence in business valuation could eventually shine a light on these opaque systems. AI tools can analyze financial data and industry trends to offer more objective appraisals. They could help identify inflated valuations or unrealistic projections used to sell shares internally.
AI could also assist regulators by flagging when internal stock pricing deviates from industry norms. Likewise, employees could use AI to estimate fair market values and question official numbers. Though still developing, these tools may become a check on the closed-door practices currently shaping employee ownership.
Promises vs. Reality for Employee-Owners
These stock offerings can, at their best, build wealth and loyalty. Some employees have seen double-digit annual gains and used the program as a path to retirement. But many more are left holding illiquid stock, subject to obscure valuations and multi-year IOUs, while insiders cash out cleanly.
For companies, the allure is clear: access to capital, employee retention, and a façade of shared prosperity. But without transparency, fairness, and regulatory scrutiny, these programs can veer into exploitation.
Are you part of one of these plans? Has your company offered you stock under similar terms? We’re continuing to investigate how internal stock offerings impact workers. Send us your story at bweider@mcclatchydc.com, doug.monihan@privatestocknews.com or jweaver@mamiherald.com. All submissions are confidential.
