An Employee Ownership Trust is a special fund that enables employees to become part-owners of the company they work for, without any investment of their own. An EOT buyout is a leveraged buyout model, i.e. a buyout financed by the company itself. In 2014, the British government provided the EOT model with a legal basis and tax incentives. Today, there are more than 1 500 EOT companies in the UK, of which 1 000 have been set up in the last two years.

In a nutshell:

Prevalence

• 1500+ companies (June 2023)
• 1000+ companies founded in the last two years
• 35.000+ employees

Benefits

• Leveraged buy-back
• Possibility of partial redemption
• All workers can participate

Challenges

• Collectivised ownership
• Participation in governance is not ensured
• The financial burden of the buyout is passed on entirely to the first generation of employees

sloESOP builds on good practice from the UK... 

Leveraged buyout under the ESOP Fund

Like the EOT model, the sloESOP model creates a separate legal entity that holds the shares of the company on behalf of the employees. The separate legal entity allows for partial and leveraged buy-outs, while anchoring ownership among active employees, thus preventing leakage of employee ownership.

Involvement of all employees

The sloESOP model enables co-ownership for all employees in a given company. sloESOP prevents the separation between key and "non-key" employees, which in practice has a negative impact on organisational culture and the success of employee co-ownership - differences in responsibility are recognised by differences in shares.

...and improve certain shortcomings of the EOT model

Workers' cooperative instead of an EOT fund

Unlike the EOT model, the sloESOP model gives employees the right to democratically co-determine and set the Board of Directors. In the EOT model, the board of trustees is appointed by the board of trustees of the fund, which is also composed of trustees appointed by the seller when the company is sold. As the employee-owned vehicle used in the sloESOP model is a specific type of cooperative (worker-owned cooperative), the employees, as members of the cooperative, have the right to choose their representative, who sits in the company's general meeting. Experience has shown that workplace democracy has a number of positive effects on the company's performance and also contributes to greater employee satisfaction. In addition, the administration of cooperative membership is simple and cost-effective.

Capital value roll-over system

In Mondragon, the cooperative has to pay the full capital value to the employee on leaving, which can put liquidity pressures on the company. sloESOP pays out a portion of the capital value periodically according to the date on which it accrues, so that the employee's departure from the company does not trigger an additional financial liability for the company. sloESOP pays out a portion of the capital value periodically according to the date on which it accrues, so that the employee's departure from the company does not trigger an additional financial liability for the company. Roll-over thus allows for a more predictable and sustainable management of the liquidity requirement in the event of employee turnover.

Individualisation of ownership through individual capital accounts

In EOT companies, the profits transferred are fully collectivised, which means that employees have no right to the capital value of the company. This internal capital structure can cause a number of problems. Firstly, since in models with collectivised ownership the reinvested money is virtually lost from the employees' point of view, they have no interest in investing in capital and jobs, which can lead to capital malnutrition of the company. Secondly, since the EOT buy-out is financed by the company's profits and the employees have no right to the capital value of the company, the financial burden of the buy-out falls entirely on the shoulders of the first generation of employees. This means that only the next generations of employees who join the company after the buy-out will benefit financially from the new co-ownership structure. As a result of these asymmetries, there is a risk that the first generation of employees after the buy-out may decide to reward themselves by selling off their employee shareholding. In the sloESOP model, this risk is not present, as the employees are not only granted an economic right to profit, but also a right to the capital value of the company. To this end, the model establishes individual capital accounts which record the capital share of each employee. The system of individual capital accounts is present in both Mondragon cooperatives and ESOP companies in the USA.

Supported by the ACF Programme in Slovenia 2014-2021.

Read more about the project here.