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By LegalEdge News

Employee ownership for growth companies?

The rise of Employee Ownership

Many companies that have ambitious, scalable plans for growth will include their key employees and service providers as co-owners. Often this will involve a share option scheme, such as EMI, with a percentage of the company’s shares (typically 10-15%) reserved for this purpose.

An increasing number of companies are extending their employees’ involvement in the ownership by creating a trust (an employee ownership trust or EOT) which acquires a significant stake to be held on behalf of everybody on the payroll. The last few years have seen unprecedented growth in the number of companies that are wholly or majority employee-owned, usually through an EOT. According to the Employee Ownership Association, by the end of 2021 some 800+ businesses were employee owned.  Evidence shows that businesses with wider employee ownership tend to outperform their peers in a number of ways, for example enjoying higher levels of staff engagement, improved productivity and greater resilience.

The financial benefit for employees takes the form of a share of any dividends (linked to the size of the trust’s holding) and, should there be a sale or flotation, a share in the proceeds when the trust sells its shares. There can also be non-financial benefits, for example a clear shared purpose built upon the foundation of everyone having an ownership stake.

Currently, most companies choosing this route are doing so after several years of profitable trading, and it tends to involve the trust buying a controlling interest and so giving the current shareholders an exit in a way that creates a platform for further growth and preserves independence. The government encourages this by giving a full exemption from capital gains tax for the selling shareholders, and permitting any owned by an employee ownership trust to pay its employees an annual bonus free of income tax. 

Should scaleups consider an EOT?

Consider an EOT as an exit

Postlethwaite have been helping companies transition to becoming employee owned for almost 20 years. They are specialists in this field and have helped some 90+ companies (as of 19th May 2022) adopt this model.

To find out more see their resources and video guides on Employee Ownership here.

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