Business of Fintech

Carver Edison gives employees greater participation in stock programs without saddling them with more debt

  • Employees can't afford to fully participate in their employee stock purchase plans.
  • Carver Edison has developed a novel solution for them without saddling them with additional debt.

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Carver Edison gives employees greater participation in stock programs without saddling them with more debt

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Company: Carver Edison
: 2016
Who it's built for:
Companies and their employees to increase participation in employee stock purchase plans

Genesis Story: In 2014, founder Aaron Shapiro began working for Edgehill Endowment Partners, a discretionary investment company that worked on behalf of endowments. Beginning with $150 million from one client, he and the Edghill team eventually grew the firm to $4 billion. It was here that Shapiro gained experience investing across asset classes and geographies.

Around the same time, he was speaking to his mother who was a 30 year employee of United Healthcare. She wanted his advice on how to improve her finances. As Shapiro began looking at her financial life, she handed him a prospectus for her firm's employee stock purchase plan.

As a finance guy, what Shapiro read was very exciting. United Healthcare offered its employees a perk to periodically invest in the company's stock at a 15 percent discount with a lookback option, basically at the lower of the beginning or ending price of that period. This discount is pretty normal and Shapiro calculated that his mom left $1 million on the table by underutilizing her ESPP.

Shapiro's mom wasn't maxing out her ESPP. And when he asked her why, she explained that she didn't feel she had enough discretionary income to apportion more of her paycheck into the ESPP. Shapiro began researching this issue in the evenings, availing himself of the Bloomberg terminals at the Yale Business School. He found that is mother wasn't the exception.

Of the 25 million people in the US employed by 1200 public companies with ESPPs, the majority of people don't take full advantage of the discounted pricing on their company's shares. Nationally, the participation rate in ESPPs is 30 percent. But Shapiro believes that Silicon Valley, where ESPPs abound and participation is much higher, skews the numbers. "The numbers are low to mid 20 percent if you remove Silicon Valley," he said. "We're living with a problem and know it needs to be fixed -- there just hasn't been a good solution."

Shapiro eventually formulated a solution to help employees take full advantage of preferential pricing on their stock. "It took me 2 years to architect the core technology to solve the problem," he said.

The Big Idea: Carver Edison makes interest-free ESPP participation loans to employees to help them max out on their benefits. By working with the issuer, the fintech firm buys the remainder of the shares unpurchased by the employee and transfers them to the employee's investment account.

So, an employee gets more shares for the same monthly contribution. "A 15 percent discount on shares is equal to a 17.66 percent immediate gain," said Shapiro. "Every hedge fund would kill to have access this opportunity and it's sitting with rank and file employees."

The employee doesn't have to spend more and doesn't go in to debt. Instead, Carver Edison sells off some of the shares it purchases on behalf of the employee as its fee in the transaction. Because the shares are bought at a discount, there's enough money to repay the employee's loan principal. It all happens behind the scenes, instantaneously.

"With Carver Edison, an employee puts in the same amount of money she normally does," said Shapiro. "We built a financial product that gives people the ability to own more shares for same amount of money they would have invested anyway without saddling the employee with more debt."

Working with the issuer is important. Many firms like Coca Cola (which doesn't have an ESPP) have been working with a share plan administrator for decades. Carver Edison doesn't replace that relationship, choosing to work alongside existing ESPP infrastructure to execute its lending and trading operations.

Carver Edison is also a boon to employers who value the participation of their employees in their stock ownership. "Think of UPS," said Shapiro. "Delivery drivers are eligible to participate in an opportunity to own stock that people in finance world would love to own. They just can't afford to."

Growth Plans: Shapiro has aggressive goals for Carver Edison. He wants to deploy $1 billion in capital across 1 million employees over the next few years.

In April 2019, the company received a landmark private letter from the IRS, concluding that a public company can implement a Carver Edison ESPP Loan Program while retaining qualified tax status for its Employee Stock Purchase Plan. This letter is the first the IRS has issued related to ESPPs in 14 years.

The company raised an early round of investment lead by Betterment co-founder, Eli Broverman. Acorn's co-founder Jeff Cruttenden also participated.

And beyond ESPPs, there's an entire world of benefits that people have access to but can't afford.

"When you look at median wage growth, it's 2 -3 percent," Shapiro said. "An employee can give themselves a raise of 2 percent by fully participating in his ESPP by buying stock at a discount. If we can double median wage growth, we'll have accomplished something meaningful."

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