Employee ownership comes in many varieties including equity compensation, direct share ownership, Employee Stock Ownership Plans (ESOP's) (often for larger companies), worker co-ops and Employee Ownership Trusts (EOT's) (often either works with smaller companies).
The three most common forms of employee ownership are:
- Worker co-ops,
- Employee Stock Ownership Plans (ESOP's), and
- Employee Ownership Trusts (EOT's)
The key constituents of any employee ownership transition are:
- selling owners,
- employee owners, and
- external debt or equity holders.
The three forms of broad-based EO primarily vary in terms of:
- how the economics from a business are shared across constituents,
- how control over a business is shared across constituents,
- any resulting regulatory, tax, and administrative considerations.
A Worker Cooperative is an employee-owned business (often 100% EO, though sales can be in parts, temporarily splitting ownership with the selling owner) where each worker-owner has one equal share and one equal vote, regardless of their pay or tenure.
Worker cooperatives are structured democratically, with worker-owners electing the board of directors and having a direct say in the governance of the company. Profits are typically distributed to worker-owners based on factors like hours worked, wages earned, or other measures of their labor contribution in a distribution called a "patronage dividend." Worker co-ops also can typically deduct patronage dividends made to worker-owners.
Worker co-ops do not typically grant any governance rights to non-worker-members, e.g., the seller, financiers, or external stakeholders, due to the co-op principle of democratic member control as well as autonomy and independence, however some worker co-op finance covenants do allow for shared decision making with a lender, or the selling owner, in order to proceed with the sale. Long term these covenants should wane.
An ESOP is a form of qualified retirement plan that provides company stock to employees, held in a trust on their behalf. Employees accumulate shares in the ESOP trust based on factors like their salary and the company's loan repayments to acquire the stock. Employees typically receive the cash value of their ESOP shares when they leave the company, but do not have direct voting rights over the shares (and the trustee, representing the employees' interests, may retain ultimate veto authority, even where some large decisions are subject to "pass through voting rights" for employee stockholders, such as deciding to sell the company).
The governance structures of ESOP are principally very similar to other company structures with a large number of shareholders, i.e., the voting power of constituents is proportional to their ownership in the company. This is most relevant for partial ESOP where less than 100% of the business is owned by the ESOP trust.
An EOT is a structure that provides substantial flexibility in the design of an employee-owned organization. It is common for EOTs to establish bylaws that ensure they remain employee-owned in perpetuity. The company shares go into a trust and stay there forever. The company is operated by the trustee on behalf of the employees like at an ESOP company. The company culture should also reflect its employee ownership structure like an ESOP. However, unlike an ESOP, an EOT is not a retirement plan. Employee-owners are “naked in, naked out.” They don’t have to make any contributions on the way in, and they don’t get bought out when they exit.
EOT employee-owners don’t accumulate shares in individual accounts. Rather, they receive a percentage of ongoing profits, in accordance with a formula, throughout the duration of their employment. Some of these profits can be channeled into a diversified 401k plan for retirement purposes.
Some other "flavors" of employee ownership include equity compensation, or direct share ownership (i.e., becoming an employee ownership through a holding company structure).