The definition of a company being “Employee Owned” is:

More than 50% of the company’s shares & voting rights are held directly or indirectly by employees.​

Hence staff (collectively) control the company.

What Employee Ownership options are there?

Direct Employee Ownership

Each employee can own shares in their own name. The company has many independent minority shareholders.

Benefits

Disadvantages

Indirect Employee Ownership

An entity owns shares on behalf of employees. Most commonly this is a trust, an Employee Ownership Trust (EOT).

Benefits

Disadvantages

Does it have to be one or the other?

No, you can have a bit of both. E.g. an EOT could own 60% of the company’s shares (indirect employee ownership), with the other 40% being owned by individual employees (direct employee ownership).

Some suggest this works well, as you get a combination of:

Normally if an EOT is involved, it will control the company (ie have >50% in its own right).

This is due to the tax perks available for EOTs, that only apply when it gets control.

Introduction to Employee Ownership Trusts​

Here at Go EO, we focus on EOTs. There’s a bit of hassle doing the transition (which we help with). It may also take founders/staff time to get their heads around how it works.

However, that’s a one-off. You then have a stable structure that can last for many decades.

It will look after all employees, current and future. When staff join/leave, there’s no share related transactions.

Guide to succession planning

What actually is a Trust/EOT?

Trusts are an unusual concept. They’re not physical things you can see or touch.

Most people have negligible experience of them. They may have heard about some people having “a trust fund” (especially our rich American friends), but know little beyond that.

A trust is an entity controlled by one group of people, for the benefit of another

This is why they’re useful in inheritance planning. Grandma wants to leave £millions to little Johnny, but doesn’t have faith he’ll use it sensibly yet! The wealth can be held “in trust”. A mature relative or solicitor/accountant is trustee. They control it. But little Johnny is the beneficiary, so should receive the wealth from it as/when appropriate.

For an Employee Ownership Trust:

What will the EOT do?

The EOT will ensure its financial obligations are met (payments to founder for purchase of shares).

Any remaining profits may be used for:

The first benefits current employees now.

The others help ensure future profitability of the company. Hence benefiting employees too, albeit in the future.

Who controls the trust?

The trustees control it.

“Ok…but who/what are the trustees?”

There are a few options here.

From a practical perspective, the most common way of dealing with this is most EOTs legally have just one trustee, which will be a limited company.

Typically if your trading company is called Bloggs Ltd, the trustee company will be called Bloggs EOT Ltd, or similar.

Hence from a strict legal perspective most EOTs just have one trustee. We realise this contradicts much of what we’ve said elsewhere on this page! Read on…

“So…my company is controlled by another company?”

Legally, yes. The EOT company is then controlled by its own directors. It’s then easy to add/remove the humans who will actually control things.

The EOT trustee company will (for small situations) have three directors. Bigger companies may have more, sharing decisions more widely.
Legally the trust has just one trustee, the EOT company.

However, informally we refer to directors of that EOT company as “the trustees”. They control the EOT company, so make its decisions.

“But…now you’re confusing me by mixing up terminologies?!”

It’s one of multiple technically incorrect but commonly used terms when it comes to EOTs! They are for simplicity/ease of understanding.

When it comes to the people in power:

when we say “directors”, we mean directors of the trading company. They lead the business, being responsible for its key decisions.

when we say “trustees”, we mean directors of the trustee company. Their role is important, but limited. They loosely oversee things, and can hold the directors to account.

Who will be the EOT human “trustees”?

You can choose. However the strong recommendation, especially where you have just three is:

A director of the trading company

Often the founder, at least short term. It must be someone who understands the finances, knows where the business is heading etc.

They will normally have the most knowledge about the business.

A staff member

Typically this would a well-respected, “shop floor” employee.

Not someone too senior, but often someone who’s been there a long time.

They’re a spokesperson for the employees, to ensure they have a decent say.

An independent trustee

Someone who doesn’t work for the company, but is connected. Often an accountant/lawyer/coach/business adviser.

By being external to the company, they can see the big picture more easily, and have experience of other businesses.

Does it have to be three trustees?

Legally, no. There are no fixed rules on how many trustees you need, or who they should be. However, it’s recommended to have at least one from each of the above three categories.

Three is also good as:
– decisions can’t end in deadlock
– at least two people must agree on a proposed action

A maverick trustee with whacky ideas can’t force them through without at least one other person agreeing.

For bigger employee owned companies, they may have several trustees from each subcategory. For small companies, one of each should suffice.

Three trustees may seem a lot if your company only has half a dozen employees. But three is a practical minimum. One person from each type recommended.

We can suggest suitable people to be your independent trustee if you don’t know anyone suitable.

Who chooses the trustees?

Often the founder will select initial trustees, for ease. They would of course get agreement from those people to be appointed.

Longer term, the employees should have the power to choose the trustees.

As above, this should always consist of:

The employees have the power to choose the individuals, subject to those categories.

Like a general election, voting is fairly infrequent. Each individujal employee may feel their vote doesn’t have much sway.

However, it’s something for them to take seriously, for the long term benefit of the business.

What power do trustees have?

On paper, their powers are massive. They can appoint/remove directors of the trading company. This would only be in extreme situations, but the power is there.

The trustees do not run the trading company.

That is left to the trading company’s directors, to make the important strategic decisions.

The trustees are there to:

Who holds the power in EOTs?

Power in traditional companies

In a traditionally owned company, power runs vertically.

Small companies often have a sole director who is also the sole shareholder.

In that common situation, you have one invincible person at the top, everyone else must do their bidding (subject to HR law etc).

Power in an EOT company

In an EOT owned company, the directors still have power over the employees. Nothing changes there. The directors can hire and fire staff members.

However, beyond that, it’s very different.

Trustees replace shareholders. They have power over directors. But…trustees aren’t invincible. Employees elect trustees.

So:

A circle of power, nobody has ultimate control.

Everybody is overseen by someone else/another group of people.

The role of the employees and directors in EOT companies is negligibly different to in traditionally owned companies:

The EOT just gives staff some extra power (collectively rather than individually).

What’s the end result for EOT companies?

The trading company itself remains largely unchanged.

The key things that have changed are:

1) What it does with profits

More info on EOT funding

2) How it makes decisions

It’s important staff understand they can’t throw their weight around just because the company is employee owned.

The above are no different to employees of privately owned companies.

In EOTs:

Examples of Employee Owned companies

Many high-profile UK companies are controlled by EOTs. The most famous is John Lewis. It’s been set up that way for a century, way before it was fashionable!

In 2014 legislation changes made it appealing for other companies to follow suit. Some of the big names that have done so include:

Richer Sounds – Hi-Fi/TV retailer

Aardman Animation – Wallace & Gromit fame

Go Ape – Aerial assault courses

Riverford Organic – Farm/veg box suppliers

Increasingly lots of smaller firms are realising the benefits of EOT ownership too. They don’t make headlines. Few people have heard of them. But they still get the EOT perks! Indeed our founder set up Go EO after successfully transitioning Maslins Ltd (what was his accounting firm) to an EOT.

How to move to an EOT?

In terms of the big picture of what happens:

Read about how to get your company ready for transfer to an EOT here.

Summary

Structuring an EOT needs thought: