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The Real Deal Los Angeles

With IPO ahead, Compass lures agents
with stock options

An ownership stake "may further incentivize you to recruit additional agents," the company told employees
By Alexei Barrionuevo and E.B. Solomont | October 16, 2018 05:30PM

Compass CEO Robert Reffkin

After raising $400 million last month in its latest funding round, Compass appears heading toward an IPO within 24 months.

And now, it’s offering agents stock options. For every dollar the agent invests, for example, Compass said it will add a 30-cent bonus.

Through it’s so-called Agent Equity Program, the venture-backed firm — valued at $4.4 billion after its recent haul — allows agents to invest a portion of their commission into options. Details of the program were laid out in documents sent to agents at Pacific Union International, the San Francisco firm that generated $14 billion in business and which Compass acquired this summer.

Amid a potential exodus of agents following the merger, Pacific Union CEO Mark McLaughlin touted the program (and other company perks) as being “impressive” and “unique in our industry,” according to an email McLaughlin sent to agents, which was obtained by The Real Deal.

Compass declined to comment.

Executives of three Beverly Hills-based brokerages disagreed, saying that the program is a risky opportunity designed to increase commission income from agents to fuel Compass stock growth.

“They are trying to collect money from the agents now in the event they go public,” said Stephen Shapiro, the co-founder of Westside Estate Agency. “They are selling sizzle.”

Under Compass’ stock option plan — described in a company document — an agent who invests $20,000 out of $100,000 in commissions would receive $26,000 in stock options, including the bonus.

“It is in Compass’ best interest for our agents to be equity holders so they have a sense of ownership in the company and make decisions accordingly,” according to the document. “Having an opportunity to purchase an ownership stake may further incentivize you to recruit additional agents to join us, for example.”

“It’s golden handcuffs,” said one New York brokerage executive. “It keeps you locked in so they can accomplish their goals. That’s the No. 1 thing it does.”

Last year, Compass laid out ambitious plans to claim 20 percent market share in the top 20 U.S. markets. It’s done so by acquiring firms across the U.S., including Paragon Real Estate and Pacific Union International.

The program is also the clearest signal yet that the New York firm intends to go public — a move some say is rapidly approaching, particularly in the wake of last month’s investment by SoftBank and Qatar Investment Authority last month.

The document lays out a hypothetical scenario in which the six-year-old company is valued at five times its current valuation of $4.4 billion. In that setup, an agent who invests $20,000 walks away with a $99,050 profit.

As a point of reference, residential brokerage stocks are trading at a fraction of Compass’ current valuation.

Shares of Realogy — which operates the Corcoran Group and Coldwell Banker — closed at $19.43 on Tuesday, giving the company a market cap of $2.41 billion. Redfin shares closed at $17.08, with a market cap of $1.51 billion, while RE/MAX closed at $41.54 per share, with a market cap of $1.26 billion.

Compass does not limit the amount of stock options that agents can purchase, according to the document, but it does require them to invest a minimum of $10,000 if they participate in the program. If the agent leaves Compass before the end of 2020, they forfeit any commissions they’ve already contributed.

Though Compass is already flush with capital, the stock option plan also enables the firm to essentially borrow cash from agents who invest in the program. “This is cheap money for Compass,” the New York brokerage executive said.

Shapiro also called it “a risk that I don’t think most agents are going to understand.” The company, he added, is “asking them to invest in a stock that doesn’t even exist.”

McLaughlin’s internal note comes as Los Angeles brokerages are scrambling to poach agents from both companies. Coldwell Banker has been particularly active in urging managers to sign agents from the merging firms, according to Steve Lewis, the president of CORE Real Estate Group in Beverly Hills (which is not affiliated with New York-based CORE). Douglas Elliman is also pursuing agents, said Stephen Kotler, who heads the firm’s Western Region.

Shapiro said he has hired three Pacific Union agents since the deal was announced. “There are a lot of people out there looking for alternatives,” he said.