Harbinger Partners is the latest Minnesota tech company to implement the ESOP method of ownership liquidity and transfer.
According to our article underwriter, Redpath & Company, the employee stock ownership plan (ESOP) is a qualified defined-contribution employee benefit plan designed to invest primarily in the stock of the sponsoring employer, ultimately providing employees with a beneficial ownership interest in the company.
Here’s what Harbinger’s founder and CEO Scott Grausnick has to say about it:
When was your first exposure to ESOP?
I started the company back in 1999, and at the onset carved out some stock for employees through a traditional ‘stock options’ program – which I’ve come to learn is surprisingly rare in our industry. So we already have a number of employee owners, though until this juncture I have retained the majority of the company stock.
About six months ago I started to explore what a fully employee-owned enterprise could look like in terms of the benefits for them and a retirement for myself. I’m sixty now and have been running this company for two decades, so the timing is right for them to take over and for me to liquidate. However, I’ll also continuing with my own financial stake over the long run by way of warrants following the culmination of our ESOP which is estimated to be a 3-5 year conversion process.
What compelled you to go full ESOP after 20 years?
It’s a matter of where things are at for me personally as much as broadly in terms of our industry. I’m very plugged in with the IT services community around the midwest and realized that we needed to continue to offer novel benefits to attract and retain the best people on our team.
What’s unique about Harbinger’s ESOP, as far as I can tell, is that we are offering this path not just to our full-time W-2 employees, but also offering ownership advantages to our independent W-2 hourly contractors. There are some great tax benefits associated with being an ESOP.
How many people work for the company?
We have two primary offices – in the Twin Cities and in Omaha. Overall, we have about 120 people on our ‘billable staff’ with about 15 full time in sales and marketing and three administrators who have been wish Harbinger since inception.
What was the process and cost like?
I interviewed about six different law and accounting firms which all offer ESOP practices. After sitting down face-to-face with them initially, I found a creative team that really resonated with me. I did my diligence and spoke with their references and feel that they were the right partner for us in this process, which has been about six months time from start to finish.
They were all within the same price range which is $200-$250k upfront and about $40k annually thereafter.
What do you anticipate as the benefits or ideal outcome?
Our people can become shareholders fully vested in 5 years time – that alone is a great reason to work with Harbinger; so my intention is that it will give us another great recruiting and retention tool going forward.
Having gone through the process as this finalizes next month and we evolve thereafter, it will open new doors for us to grow via acquisition in the future because we now have the structure in place to extend the model to other, perhaps smaller firms operating in our industry seeking to offer a similar incentive.
I know the team over at SDG operates in a similar space as us, and they became an ESOP already.though their model revolves around W-2 full time salaried staff instead of our contractor model. Honestly, I consulted with them about their experiences while in the midst of doing ours and they had some great firsthand feedback and advice to help navigate.
Stepping back, i t would be surprising if ESOP does not become an industry norm. I know the structure has been around for some time, but I kinda feel ahead of the curve right now in tech because as talent demands continue to be front and center, people deserve, and will come to expect, more skin in the own game.
It’s a big change and new to the team, how has this news been received?
Yes it is and we’ve appraised them of what’s happening and why. The transaction is ready to close on April 1 and we’re planning a series of parties and promotions to make sure all our current employees understand the benefits as well as those who have yet to work with us.
What about your own liquidity?
I certainly have been approached throughout the years and know that I could have sold the company outright to a 3rd party for at least 10-20% more. But I think you have to look at your own values and consider myself to be very fortunate to have all the people on board we do. Having said that, I just don’t think there would have been any suitor who could have acquired us and maintained the culture that we have built over the past twenty years of business.
And because we already had an employee stock purchase program in place since the beginning, going to full ESOP will actually provide those early minority shareholders with some nice paychecks in addition to further ownership options under the new structure.
What was your biggest learning experience in the ESOP process thus far?
It can be complicated…and I majored in accounting and economics. I do the accounting and financial operations for the business yet still learned a lot as it was a first for me. Also, since I am involved in both the buy and sell side of the transaction, I find it interesting to have both thought processes going simultaneously.
Is there anything else you would like to add?
I just wish I knew about ESOP earlier. More often than not, a traditional sale is disastrous to those outside of the management and view this transition as a happy medium for all those who helped Harbinger make it to this point. I can tell you we are all pretty excited about the future here.