Equity Is Key to Wealth
A medium-sized business in Vermont recently sold to a private equity firm for about $1 billion. I heard about this through a friend who worked at the business.
The interesting part of the story isn’t the sale itself. It’s the life-changing fortunes that many of the employees will receive as a part of the deal. As it turns out, the business—Vermont Information Processing, a payroll and data services company based in Colchester—offered an employee stock ownership plan, or ESOP. Many of its long-time employees, even those who weren’t highly compensated, found themselves with small stakes in the company through this plan.
Well, a small stake of $1 billion means an enormous payday for my friend and many other employees. It is estimated that more than 300 employees will receive a windfall of more than $1 million. Some long-tenured workers are reportedly set to receive far more than that. This didn’t happen because they were the highest earners in the building. It happened because they owned a piece of the business.
This story just confirms my strongly-held belief that the key to building wealth is to own equity. In other words, it’s not necessarily the income you earn but how you build equity with that income.
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Most people think of equity in terms of home equity. Homeownership is the most typical wealth builder for everyday people. It’s also the easiest to understand. You borrow money from a bank as a mortgage, buy a home, and gradually pay off the mortgage. As the home appreciates in value and the mortgage gets paid down, your home equity grows. It’s not as easy as it used to be, with current mortgage rates and high home prices, but most people understand the idea of building wealth through home equity.
Owning a business is another way to build wealth through equity. In the case of my friend in Vermont, he owned shares in the business through the ESOP. Some business owners grow wealth by building their businesses with the intention of eventually selling them. An ESOP essentially extends that opportunity to the broader workforce—the receptionist, the warehouse worker, the mid-level manager—people who might never have otherwise had access to that kind of wealth-building mechanism.
Or consider the case of companies like SpaceX, which is due to become a publicly traded stock in the near future. It is estimated that about 4,000 employees at SpaceX will become millionaires as a result of the IPO. This includes welders, engineers, and everyone in between. Again, these are small ownership stakes in what has become a massively valuable company. The pattern is the same whether it’s a payroll firm in Vermont or a rocket company in Texas: the people who come out ahead are the ones who own equity.
There is another way to own equity that is much easier than buying real estate or starting your own business. Equity is another word for stock. The stock market is an equity market. It represents ownership stakes in companies. You can own equity in companies from Apple to Walmart and everything in between.
For most people, the most accessible entry point is through a 401(k) or IRA. And if your employer offers matching contributions, that’s free equity. Even modest, consistent contributions to a diversified portfolio of stocks can compound into something meaningful over time. This is how ordinary people build extraordinary wealth. Not by earning more than their neighbors, but by owning more.
The Vermont story is a good one, and it deserves to be celebrated. But the bigger lesson isn’t about one lucky company or one fortunate group of employees. It’s about a principle that holds true at every income level and in every market cycle. Income pays the bills, but equity builds wealth. The sooner you start owning a piece of something—a home, a business, or a broad index fund—the sooner that principle starts working in your favor.
This article was originally published in The Berkshire Eagle.