Start-ups are risky, and hard. Until the business is established, there’s no reliable income stream. But there are still costs, and plenty of work to do.

This means at least in the short term, whoever works there suffers long hours for minimal financial reward. Possibly even negative finances, as they put their own money in to pay early costs.

People can be happy to do that where they know they’re building something. But they’ll normally want to benefit from those efforts at some point.

Start-up business

Every business starts somewhere. On day 1, it has:
– no income, but
– lots of work to be done,
– and often also costs incurred.

That’s not an appealing prospect for anyone! It’s the reason not many people start their own businesses. Lots of hard work, potentially for negative money.

Of course there are some people in a position where they’re both able to, and want to do this. They’ll consider it an investment. They’re putting in their time, effort and money. But they’ll want to think there’s a chance of decent reward at some point.

– Personal ownership

If that person owns shares personally, there is.

Their efforts are building a business, which hopefully will have value/reliably generate income further down the line. They will own some/all of that business.

Whilst there’s a risk it comes to nothing, there’s also potential for significant jam tomorrow.

– 100% EOT ownership

If the business is 100% Employee Ownership Trust owned from day 1, whilst whoever started the business will have some prospect of jam tomorrow, it’s limited. They’ll be sharing that jam with anyone else working there in the good times (even though those people weren’t there in the earlier hard times).

Eg founder puts huge effort into the business in year 1, when it makes no money, not even to pay the founder minimum wage. In year 3, it has 10 staff, all on fair market value salaries. It also makes £100k profit in year 3. Whilst there are some options for distributing profits in an EOT company, they have to be split between staff “equitably”. This means recent joiners who didn’t suffer the early hardships will still benefit.

Getting through rough periods

The business has progressed, and has modest, reliable income. It can afford to pay staff. But it’s still fragile.

There will be tough times. Things will go wrong. Unhappy customers. Systems breaking. Fall out between staff. It will be painful.

During these periods, people will at least consider quitting. There’ll be temptation to believe the grass is greener elsewhere. Other companies wouldn’t have any of these issues and would pay just as well…

– Personal ownership

This is where someone owning shares directly helps. If they leave, and the business collapses, they lose far more than their job. They lose the value built up in that business to date.

Whilst it may seem a negative way of looking at things, key staff having something significant to lose if they leave/things collapse can be the saving grace for many small companies. This “skin in the game” is what keeps them going even when things get tough.

– 100% EOT ownership

Where a company’s 100% EOT owned, people can leave without losing anything other than their job. If they’re a skilled individual, it likely won’t be hard to find another role soon enough.

This can be a problem for small businesses, reliant on one/a few key person/people. If they leave, the business can be in real trouble very quickly. The individual loses little, but the business loses a lot.

Size is relevant

The bigger a business is, the less important any individual worker tends to be.

A business with 1,000 employees is unlikely to fall apart if someone leaves, even the most important person there.

A business with 10 employees can really struggle if a key individual disappears.

Of course when we’re talking about EOT from day one, it’s highly unlikely there will be ‘000s of employees already!

Minority direct ownership long term

It’s worth remembering Employee Ownership Trusts don’t have to own 100%. It doesn’t need to be “all or nothing”. It’s not uncommon for companies to be controlled (ie >50% shares owned) by an EOT, whilst still having some owned personally.

This can be a great way to tie in/incentivise key individuals. Encouraging them to stick with the business, and really push it forward.

Some will dislike the Animal Farm-esque nature of this. “We’re all equal, but some are more equal than others”. But it’s certainly an option where in a business the blunt reality is some staff are more vital than others.

Summary

It boils down to two things:

EOTs are suitable for stable, profitable companies. Staff need a very high chance of being paid for their efforts. Start-ups are rarely stable or profitable.
Whilst not all people are selfish, few are altruistic enough to go through all the effort, cost, and stress of starting a company if it were 100% EOT owned from the start.

Most people aren’t prepared to take on the risk/effort of starting a company even when there IS a prospect of big pay off if it goes well. If you take away that prospect, even fewer people would be prepared to do it, to the extent very few companies would get started at all.

…but if you want to do it, nothing’s stopping you!

Our view

Of course we think Employee Ownership Trusts are great. We’re in favour of founders selling a controlling stake to an EOT. But in most situations this can only be done after the business is stable and profitable.

To get the business to that stage, it needs someone to have taken the plunge and started it. To have invested the blood, sweat and tears to build it. People are unlikely to do so unless they have direct ownership to give the chance of personal benefit further down the line.

If you are interested in finding out more about transitioning to an EOT, get in touch with us at Go EO to see how we can help.

Want to find out more about the key people behind Go EO?

EOT from day one?