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Ask Zolid AI AskWe Are the Ones We Have Been Waiting For By June Jordan
This quote, from our first email to friends of Zolidar, manifests the passion that drives me and Sonali to build the world we envision. We founded Zolidar with the mission of "increasing the wealth of everyday Americans" by virtue of "building the easy button for employee ownership". The name Zolidar is inspired by solidarity and the outcomes it can drive by aligning incentives of individuals towards a shared purpose.
Today we are proud to announce the launch of our first product offering that increases the ability of owners to successfully exit their business. Owners can start with building a complete understanding of their exit options, including employee ownership.
This is a timely occasion for us to share our broader narrative for Zolidar. So please continue reading.
The world you live in is a construct of your mind. By Morpheus in The Matrix
Tldr: A large part of the US economy is made of businesses that are either at the highest risk of shutting down or operate using models that are optimized for short-term financial gains. These macro trends will grow unemployment, lead to loss of money circulation in local communities, and put pressure on government programs that provide financial assistance.
Details: Many people are surprised to know that 44% of the US GDP and 46% of US employment comes from small and medium businesses. In fact, these businesses represent 98% of all the ~6 million US businesses. Half of them have owners above the age of 55, nearing retirement without any succession plans, and with their wealth locked into their business. A staggering 80% of these owners fail to sell their business to an outside buyer even after spending time & money on the sale process. So these businesses are at the highest risk of shutting down. Moreover, these businesses have the highest overlap with those that are financially stable, making them even more important for the economy. (US Census data on revenues from businesses that are 4+ years old: 78% are profitable, 15% are breakeven, 7% are loss-making). Despite being profitable, these businesses are unattractive acquisition targets to outside buyers who need to achieve a high Internal Rate of Return (IRR). Deals often reach an impasse, many failing due to a valuation gap of less than 30% between the buyer and seller. The situation is only getting worse with a large number of these retiring owners expected to need liquidity in just the next decade.
The covid pandemic exposed the fragility of businesses when misaligned owner-labor incentives led to large scale shutdowns. Even today, businesses continue to struggle with employee retention because they fail to fully acknowledge the inherent challenges of misaligned incentives and lack the urgency to solve it unless they see an immediate benefit. On the other hand, the labor market is in a constant dilemma on topics such as setting minimum wages at livable levels without increasing businesses’ fiscal risk. While upskilling programs offer valuable opportunities for some, they can sometimes shift workforce from one industry to another, intensifying oversupply and shortages across industry sectors. Moreover they fail to improve the working conditions of those who do not participate.
The Private Equity (PE) industry is under increasing scrutiny for using models that are extractive. They are going through a reckoning between operating responsibly in the communities they operate vs optimizing financial returns as lawful fiduciaries for their investors.
None of these problems are trivial.
Tldr: Employee Ownership (EO) can solve the above crisis by offering liquidity at fair market price to retiring owners and wealth creation opportunities to employees. EO aligns incentives of employees with the fiscal performance of the business. This strikes the perfect balance for the goals of the Private Equity industry as well as the overall health of the labor markets. Ultimately, EO secures continuity of businesses through regenerative ownership, making them more resilient.
Details: EO predates the founding of the US, when Ben Franklin used this model to set up print shops, and later, after the Revolutionary war, when the Founding Fathers rebuilt businesses by requiring that "employees shared in the profits". More recently in 1956, Louis Kelso invented the financial instrument called Leveraged Buyouts for Employee Ownership. This was followed by regulatory updates and tax benefits that led to the creation of many employee-owned businesses in the US. Even today, several bills to enable EO funding and benefits are continuing to progress with bipartisan support from Democratic and Republican lawmakers at the federal as well as state level.
The concept of EO is not untested. There is strong existence proof of EO being successful at businesses from across industry verticals, sizes, and time periods (see below).
Business transitions to EO are typically enabled through a leveraged buyout (LBO) without relying on having an outside buyer. The LBO is structured using cash flow based, asset based, and seller financing. Such transactions typically qualify for local, state, and federal tax benefits. Moreover, employees do not typically provide out-of-pocket cash or take on any personal liability. The below video shows the flow of financing and wealth through the life of business’ transition to EO.
EO transitions benefit all key constituents: sellers obtain liquidity at fair market prices while establishing legacy, employees build wealth with no cash out of pocket, businesses become resilient, and financiers generate returns. The below chart shows all the synergistic gives and gets across key constituents
There are multiple EO structures that allow customizing how economics and control are shared across sellers, employees, and financiers (see below image). The most common of these structures are: Worker Cooperatives, Employee Stock Ownership Plan (ESOP), Employee Ownership Trust (EOT), and broad based profit-sharing plans.
The PE industry is adopting the broad-based profit sharing version of EO which has long existed at only typical silicon valley startups. This version of EO enables employees to gain from the success of the business through equity linked compensation plans.
You might ask, if EO is so good, then why aren’t there more EO businesses? We think that EO needs a solution that brings together the disconnected and fragmented ecosystem to eliminate friction at critical stages of the EO journey. So let’s first start by understanding the ecosystem as it exists today.
The problem with capitalism is that there aren't enough capitalists. By Louis Kelso (apocryphal)
Currently, the entirety of the exit market for private businesses is dependent on enabling MnA transactions between sellers and outside buyers. However, the pool of MnA buyers in the market is limited. And all these buyers have very similar post-acquisition IRR thresholds and deal constraints. Only 20% of all sellers actually end up meeting the criteria of these buyers even when a large majority of the other 80% sellers have good businesses. This leads to this limited pool of buyers chasing the same 20% of sellers.
Despite this market size constraint, there are numerous online and offline players enabling MnA transactions between these disconnected sellers and buyers. More venture-backed players continue to emerge even when a better method of enabling MnA will not result in growing the size of the overall market.
The end result is that 80% of good businesses remain under-served. Even worse, some MnA offerings extract value from these 80% without offering any value in return, only further exacerbating the precarity of SMBs. EO can bring these other 80% of good businesses into the fold, quintupling the size of this entire pie.
Crypto Bros: Blockchain technology, in all its iterations from cryptocurrency to DAO, have long promised the advent of stakeholder capitalism at scale. It has succeeded in attracting a lot of attention, VC dollars, and trading-oriented products. However, the long-promised applications of this technology remain an exception rather than the norm. On the other hand, EO already has time-tested and well-established regulatory frameworks that can be productized using a combination of web 2.0 and LLM technology. Employee Ownership can be the much needed prequel for stakeholder capitalism, a version 1.0 if you will, of the DAO which has already been proclaimed to be version 3.0. The time will come for applying web 3.0 to EO, but that time isn’t now.
Equity Sharing and Rewards Programs: A few players are building products anchored on aligning incentives between the owners and employees (and even other constituents such as customers or suppliers) without facilitating any kind of exit for the current owners. While we are big believers in the power of aligning incentives for the collective good, this value proposition does not have a strong hook for today’s decision makers (i.e. business owners) to adopt shared-ownership. The product positioning of sharing equity today for a plausible future benefit fails to convince business owners who are more focused on solving problems they are facing today.
The EO space has several niche categories led by savvy early-adopters shaping this generation-defining trend. While we are inspired by their work, we believe many encounter a glass ceiling when it comes to scaling EO. The good news is that their pioneering efforts have created an ecosystem primed for growth, awaiting the right catalyst to unlock its full potential.
EO-focused Acquirers and Financiers: This category has three archetypes that follow an operationally intensive, high-touch, and asset-heavy model to grow broad-based employee-ownership.
Expert Practitioners and EO Consultants: Trusted advisors like CPAs, lawyers, RIAs, and business coaches are often the first people business owners turn to when considering an exit. While these practitioners excel in their respective fields, they typically do not have prior experience with MnA, let alone EO. On the other hand, EO consultants, who are uniquely suited to guide owners through this specific transition, face a different challenge. They often invest significant unpaid time and effort upfront in educating business owners, which means their client engagement models have evolved into high-margin, low-volume consulting practices. As a result, EO consultants tend to focus on larger businesses, despite the fact that 4.7 million out of 6 million US businesses have fewer than 20 employees.
Advocacy Orgs, Nonprofits, and Governmental Agencies: These orgs drive EO-focused thought leadership, policy and awareness. The EO ecosystem cannot survive or grow without their revolutionary efforts. Some of these orgs also support individual businesses that may lack the resources to hire a paid consultant. It is important that we enable these orgs to focus on thought leadership rather than get inundated by supporting individual businesses.
This leads us to what Zolidar is doing to trigger the catalyst that pushes the EO ecosystem towards attaining escape velocity. Please read our follow-on blog post that covers the Zolidar product map.
Life is a dance. Sometimes you need a partner. By Sandra Bloom in The Big Fish
You can directly reach out to us: Ashish Agrawal (ashish@zolidar.com) or Sonali Kothari (sonali@zolidar.com). We are always looking to have more supporters by our side.
At this time, we’d appreciate help with the following:
At the very least, we’d love your help in spreading the word across your social channels. You can like and share our launch announcement. Also please follow us on LinkedIn, Twitter/X, Youtube, Facebook, and Instagram.
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