What’s the Story?

Recently, Amazon announced that employees can use the capital value of vested Amazon stock as a deposit for a house purchase.

This new financial product allows stock to be used for a mortgage deposit by Better.com and is linked to approval of the regular mortgage needed for the balance of the acquisition cost. The product is available both for owner occupied and investment property.

Interestingly, the product does not work like a margin loan. Once the initial capital value for the house purchase is set, there will be no margin calls - even if the Amazon stock price goes down. This allows Amazon employees to use their capital more flexibly, without cash flow risk.

The new product is available only in 13 US states, but there are plans to expand that footprint considerably in the near future. Amazon itself does not get involved in the finance. Nonetheless, Amazon welcomes this flexibility for its employees and is happy to have its name linked to the mortgage product.

Up until now, apart from a margin loan, employees would have had to sell their Amazon shares to raise their house deposit cash. That has tax consequences when it involves withdrawing stock from long-term tax protected status. It also locks them out of future capital growth. What’s the chance that 30 years from now (2053), the Amazon share price will be down on today?

Why Does it Matter?

Equity compensation is an increasingly important part of total earnings for many employees

This is strongly true in some sectors like high-tech, but the multi-year capital value of employer equity can be very significant in many other cases too.

This offering by Better.com removes the margin loan risk from the Amazon employees. It is likely that the lender has entered into an equity hedge arrangement to facilitate the overall risk-return profile of the mortgage product. That hedge cost will be baked into other aspects of the overall product offering no doubt; there is no free lunch.

As equity compensation unfolds in future years, we can expect other providers and companies to offer similar arrangements. Connecting employee equity plans with life important capital value decisions, such as your house purchase demonstrates the ability of Share Plans to deliver long-term capital results if correctly managed.

Newspoint view

The launch of one employee equity linked mortgage product for only one company in a few US states might not feel particularly significant. However, viewed as a pathfinder product, we can expect rapid expansion between companies and geographies, and a ripple effect within the mortgage lender industry.

This kind of linkage between regular financial products and the specialist world of employee share ownership could be very significant. But not all products will be good value for money. Employers must therefore take care in linking the company brand to these arrangements, so that non-subsidised equity mortgage offerings are not too steeply priced.

The use of financial engineering, behind-the-scenes to allow risk abatement for employee share ownership is welcome, but rare.

Newspoint recently reported on the Cap Gemini ESOP arrangements, which similarly have a risk transfer mechanic invisible to employees. Cap Gemini employees now own about 8% of the total capital in issue, worth several billion Euros. In all about equal to the biggest institutional shareholder.

While employee share ownership is now widespread, the link to long-term capital value needs to be better explained by employers and better understood by employees.

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Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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