Employee Ownership Can Solve the TikTok Problem
The US government has declared TikTok’s owner a menace to society. There’s a budget-neutral way to get better owners
In April 2024, Congress passed a law requiring TikTok’s parent company, ByteDance, to divest. If ByteDance doesn’t sell its privately held shares in TikTok within a year, the app will be banned in the US. The purpose of this post isn’t to debate the wisdom of the new law, but rather to offer a simple strategy for avoiding the ban1. I call the strategy public capitalism.
Who might buy TikTok
Facebook might wish to purchase TikTok for the purpose of snuffing out a competitor, but such a purchase would undoubtedly run afoul of antitrust law. A list of other potential buyers includes a who’s who of feral political extremists. We could be headed for a scenario where TikTok gets flipped out of the communist frying pan and into the fascist fire2.
A simple option nobody seems to be considering would be for TikTok employees to buy ByteDance’s shares and convert to an Employee Stock Ownership Plan (ESOP). ESOPs are a well-established business model with a good track record. My husband,
, works for a defense contractor that recently bought out all of its own privately held shares using a series of commercial bank loans. An explicitly stated motivation for the leveraged ESOP conversion was to remove the yoke of investors who were too heavily focused on quarterly earnings reports and not focused enough on the long-term sustainability of the company and the wellbeing of its employees. Around the house, we sometimes repeat a famous quote from a pre-ESOP board meeting: “The Mob doesn’t get the kinds of quarterly returns you’re asking for!” The fully employee-owned company is a great place to work and my husband’s ESOP shares have already grown into a sizeable nestegg. I like ESOPs.Because TikTok is privately held, it’s hard to know what its valuation might be. At the low end, it might be worth $20 billion3. The company has about 38,000 employees, so it’s flatly inconceivable that every employee would have half a million dollars on hand to buy shares. It’s not clear to me whether any commercial banks would be willing to issue a $20b loan for the buyout. The option I’m proposing is that the government could directly offer TikTok a low-interest loan earmarked for buying out ByteDance. In essence, TikTok employees would be taking out a mortgage to purchase the house they’re currently renting from ByteDance.
Since we’re not privy to TikTok’s financial statements, it’s hard to know exactly how the loan would need to be structured. I can imagine there might have to be a grace period before repayments begin, giving the new TikTok ESOP some time to reorganize. I also imagine the government could solicit bids for something analogous to mortgage insurance. Competitive bids for the insurance policy would serve as a private-sector second opinion about whether the “appraisal value” and “credit score” of House TikTok are really what the government thinks they are. It would also guarantee that the loan would be, at worst, budget-neutral.
Temporary layoffs are a known hazard of leveraged buyouts. On the other hand, TikTok’s advertising and streaming revenue in 2023 has been estimated at about $22 billion, so the repayment plan realistically might not have to be slow and/or painful. It took my husband’s company less than seven years to pay off the commercial bank loans and there weren’t any layoffs. One thing I know with mathematical certainty is that paying off an appropriately structured low-interest loan would be easier than paying out the type of high-flying oligopoly rents private buyers would be hoping for.
The idea of government-backed loans isn’t revolutionary - we’re already doing it in key sectors of the economy. The Energy Loan Program (ELP) is famous for losing half a billion dollars in the collapse of Solyndra, but what’s less widely appreciated is that a half-billion dollar ELP loan rescued Tesla from bankruptcy in its early days. In the aggregate, the ELP earned a +2% return on investment. Beyond the positive dollar value of its returns, the ELP can also be credited with effectively accelerating America’s journey to sustainable energy independence and helping to slow the pace of climate change. The lesson is that low-interest loans can have important payoffs far beyond their basic dollar value.
A counter-argument against public capitalism is that the government shouldn’t be in the business of picking winners. In the specific case of TikTok, the new law has essentially already declared TikTok a winner that private investors must consider buying. Either that or the government is picking Facebook as a winner by eradicating one of its only competitors. It’s a perfect test case for exploring the option of using public loans to enable ESOP conversion.
Empowered to choose better governance
My father is a management strategist who developed a form of corporate governance called BOSSA nova. It’s a form of so-called “bottom-up” corporate governance that gives employees a seat at the table in the top leadership circle. Other forms of bottom-up governance include the lattice approach pioneered by W.L. Gore and the democratic approach of the Spanish manufacturing company Mondragón.
A barrier to bottom-up governance is that private investors are rarely eager to share power. As Mondragón marketing manager Edorta Mendieta puts it, “We can’t incorporate external capital into the co-operative’s share capital because we are governed by the principle of ‘one person, one vote’, which no capitalist investor would accept.” Mendieta isn’t thinking broadly enough. Governments that are constitutionally bound to the principle of one person one vote can easily solve this problem using ordinary loan-based capitalism.
In a counterfactual thought experiment where Tesla’s lifesaving ELP loan came with the condition that the company had to implement bottom-up governance, it seems likely that the Tesla engineers who correctly predicted that visual-only self-driving isn’t safe would have been empowered to implement the lidar sensors everybody now agrees are required for full self-driving. If the federal bailout of GM had implemented bottom-up governance during the time when US taxpayers owned a majority of GM’s shares, it seems likely that the longer-term perspective of employees would have helped put GM on a track where it wouldn’t currently be getting its ass kicked by Chinese EV manufacturers. If Boeing used bottom-up governance, it’s hard to imagine the central leadership circle choosing stock buybacks over proper quality control on the factory floor.
Bottom-up governance is an interesting experiment. Loan-based ESOP conversion would enable the experiment on much larger scales.
Crowdsourced lending
Muhammad Yunus, known as “the banker to the poor,” was awarded the 2006 Nobel Peace Prize for his efforts to develop microlending. Soon thereafter, I invested a couple thousand dollars in a nonprofit called Kiva, which extends microloans to people in low- and middle-income countries. Two decades later, my investment has serially snowballed into a cumulative total of about $20,000 worth of loans. Over the years, a few borrowers have defaulted - typically for understandable reasons such as the outbreak of civil war. My principal is now down by about half, making Kiva the single worst investment I’ve ever made4. But that’s a silly way of looking at things because financial returns were obviously never the main point. My primary goal was to renewably empower fellow human beings to work to help reduce the amount of misery in the world. From that perspective, the investment is up by 1,000%.
My grandfather was a nuclear physicist who served on the Nuclear Regulatory Commission’s Atomic Safety and Licensing Board. Like Granddad, I’m a lifelong proponent of nuclear energy5. A recent article about a small modular reactor company called Blykalla got me wondering: if I can easily help a guy in Kazakhstan buy a goat, why can’t I easily give a microloan to a company that looks like it could help avert climate doom? I don’t need the promise of windfall monopoly rents or a seat on the board of directors to want to put my money to work in areas where the fate of human civilization hangs in the balance. I really like civilization.
Implementing crowdsourced microlending proposals that could help startup ESOPs access capital would require major reforms at the Securities and Exchange Commission. But none of the needed reforms strike me as particularly controversial. Unless you’re some type of lobbyist.
What does any of this have to do with Viruses Must Die
I’ve been horrified to see that Merck’s years-long series of decisions to skimp on investments in manufacturing capacity continue to cause shortfalls of millions of doses of HPV vaccines intended for girls in Africa. The current shortfall has set in motion the preventable deaths of tens of thousands of Africans from HPV-induced cancers. The disaster is numerically bigger than the infamous 1984 Union Carbide incident in Bhopal, but nobody seems to have noticed because it’s happening in slow motion. I wasn’t in Merck’s boardroom6 when these horrifying decisions were being made, but I can imagine company leaders honestly believed the extra manufacturing capacity would be far in excess of demand and would therefore be a waste of company resources. I can also imagine that the lure of billion-dollar stock buybacks might have put a thumb on the risk/benefit scale in board members’ subconsciouses.
In my experience, employees are typically less interested in quarterly earnings reports than they are in the long-term stability of the company as a place where they feel proud to work. At a counterfactual employee-owned Merck, I believe the board of directors would have assigned appropriate weight to the risk of killing thousands of African girls.
My lab is currently helping to develop a vaccine against polyomaviruses, which cause deadly kidney, bladder, and brain diseases. We hold patents on some of the underlying technologies and our research data support a solid prediction that the vaccine is likely to work. My calculations suggest the initial market could bear a 30x ROI. My pitches for the vaccine didn’t convince any American companies to draw a license7. After one pitch, I was told the company had “more lucrative investments to pursue.”
One need look no farther than the insulin market to see what was meant by “lucrative.” A better word might be “extortive.” The anti-competitive pricing of insulin has gotten so bad that California recently announced a $50m contract with a nonprofit generic drugmaker to produce insulin under the state’s own label, CalRx. Although the announcement of California’s plan immediately forced the insulin cartel to lower its prices, I’d argue that a better long-term solution would have been for California to offer low-interest loans to establish employee-owned insulin-manufacturing startups8. An advantage of this approach is that the startups could compete with each other to sell insulin outside of California. The new companies could then recycle the initial revenues from free market insulin sales into efforts to branch into other areas. Vaccines, for instance!
Using the special case of TikTok to demonstrate the tractability of public-option ESOP conversion could ultimately be a major game-changer in the Viruses Must Die department.
OK, I can’t resist debating the wisdom of the new law a little bit down here in the footnotes. From my personal perspective, the world would become a nicer place if TikTok, Xitter, and Facebook were to all suddenly disappear tomorrow. This post rests on the separate premise that only banning one of the current social media oligopolists would be a disaster. It’ll be especially disastrous if the ban is ultimately struck down in court. I agree with the bipartisan majority view that ByteDance is a dangerously shady owner.
Song of the day: “All You Fascists Bound to Lose” by Woody Guthrie/The New Students.
A lot of the uncertainty over TikTok’s valuation revolves around the algorithm that personalizes video recommendations. ByteDance owns the algorithm and the Chinese government has banned its sale. I envision a scenario in which the sale of TikTok doesn’t include the algorithm but after the transaction TikTok offers to hire the ByteDance engineers who originally developed the algorithm so they can build a better version of it. The importance of the FTC’s new ban on noncompete agreements cannot be overstated. Saint Lina be praised, amen.
I invested in Substack’s current community round, in full awareness of the small chance that it might someday replace Kiva as my worst investment. The point of the Substack investment is to counterbalance the fact that I’m uncomfortable with the idea of supporting Substack via charging subscription fees for my writing. The point of the investment is to feel good about helping nurture a social good. I hope the Substack investment succeeds, but if it doesn’t I’m not gonna spend a lot of time crying about opportunity costs.
Granddad’s early work building the world’s second cyclotron landed him among the unhappy ranks of humankind’s first few victims of radiation sickness. This all happened some years prior to the time when Granddad conceived my father. Maybe I want to invest in nuclear energy for the same reason as Godzilla?
Disclosure: I have previously received licensing royalties from Merck for inventions related to HPV vaccines. Also, good friends of mine currently work there. I can promise you these facts don’t buy any love for Merck’s board of directors.
Disclosure: Under the 1980 Bayh-Dole Act (which I’m in favor of repealing) a fraction of the licensing royalties for the polyomavirus vaccine project go directly into my personal bank account.
As a rule of thumb, I’d say that if the government can realistically accomplish a goal using loans that will promote market competition, we should prefer loans over contracts. Similarly, if contracts are feasible then the government should prefer contracts over grants. In some cases, grants are preferable to directly hiring gray government slugs. My basic science research exists way down at the bottom of this barrel. Insulin, which is obviously going to be profitable, is at the other end of the spectrum. The best available path is to use startup loans to empower scrappy new market competitors to stand up and challenge the cartels. Saint Adam Smith be praised, amen.