ESOP is an acronym that stands for an employee co-ownership model called the Employee Share Ownership Plan. An ESOP allows employees to buy shares in a company without having to invest their own savings - the buyout is financed by the company's expected profits. The ESOP model is primarily designed to solve the problem of ownership succession. However, in the case of partial buy-outs (where employees become minority owners), it can also serve as a tool to increase employee motivation and loyalty.

A detailed description of how the Slovenian ESOP model works can be found at here.

Main features

1. Involvement of all staff

Involvement of all employees ESOP buy-outs are financed by the company's expected profits, so employees do not have to invest their own funds. ESOPs give all employees the right and opportunity to co-own.

Why involve all employees? The separation between key employees who "deserve" co-ownership and the rest of the team is divisive. Research shows that for a healthy organisational culture, it is crucial that all or most employees are involved in co-ownership.

2. Buy-back through the ESOP Fund

The ESOP model means buying a stake through a special purpose vehicle that holds ownership of the company on behalf of the employees. Employees share all ownership rights within the fund as if they were direct shareholders.

Why a separate legal entity? First, the ESOP Fund ensures sustainable employee ownership by tying ownership rights to each generation of employees - new employees are gradually integrated into the ownership, and workers who leave the company are gradually paid out. Second, the ESOP fund provides a leveraged buy-out option. As the debt to the seller/company is being repaid, the shares in the ESOP fund are gradually transferred from the so-called temporary account to the personal capital accounts of the members. Third, in legal terms, the ESOP Fund is the sole owner, which simplifies the administration of the system and ensures lower transaction costs for maintaining employee ownership.

3. Leveraged buy-back

An ESOP buyout is a leveraged buyout, which means that the financing of the buyout is provided entirely by the parent company. The debt for the buyout can be provided by the seller, the company or an external lender.

Why leveraged buyout? Based on experience abroad, leveraged buy-outs ensure that all employees can take ownership. Leverage is often associated with additional risk, which makes a financial analysis of the value of the stake and the company's ability to finance the buyout crucial in ESOP buyouts. Abroad, the risk associated with ESOP buy-outs has been shown to be extremely low, as the primary purpose of an ESOP transaction is the long-term stability of the company and not financial speculation or stakeholder profiteering.

What does the Workers' Ownership Cooperative Law (WOCL) bring?

An ESOP law would introduce the legal basis for the most successful employee ownership model in the world. The ESOP Law provides a regulatory framework that would provide more certainty for stakeholders. The law also offers tax breaks for owners who would sell shares to an ESOP trust, for employees who would receive financial benefits through an ESOP trust and for companies that would finance an ESOP buyout. The bill is being drafted by the Ministry for a Solidarity Future, drawing on expert suggestions we have made at the Institute for Economic Democracy.

Why does Slovenia urgently need an ESOP law?

ESOPs abroad provide a very effective tool to address ownership succession in the SME sector. In Slovenia, we estimate that more than a quarter of all SME owners will retire in the next 5-10 years, while their options are very limited. This is the largest transfer of assets after denationalisation in the 1990s - who will be the new owners of Slovenian companies? It is the responsibility of the state to promote succession tools that will lead to socially responsible solutions. The European Commission and the European Parliament are calling for the ESOP model to be implemented in the EU space and several countries are already considering the next legislative steps. The Institute for Economic Democracy is working with various European stakeholders, but would like Slovenia to seize the unique opportunity to become an innovator in the field of employee ownership in the EU by adopting an ESOP law.

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Supported by the ACF Programme in Slovenia 2014-2021.

Read more about the project here.