Kent-based businessman Chris Maslin, founder of Go EO, is sharing expert advice on what to think about if you are considering passing some of the risks and rewards of passing ownership to your employees.
“Two acronyms you’ll hear a lot with regard to employee share ownership are EOT and EMI. Whilst they sound similar, they achieve very different things,” Chris said.
EOT stands for Employee Ownership Trust and is a way of exiting your business. You’ll sell a controlling stake (potentially all your shares) to a trust, set up for the benefit of all company employees. The staff don’t put any money in, or own anything in their own name, however, they’re entitled to a share of profits.
EMI stands for Enterprise Management Incentive and serves as a means to motivate a select group of key individuals to drive the business forward. They are granted the right to purchase shares, typically at a price agreed upon today, to be exercised in the future. This arrangement provides them with greater stake in the outcome, as they stand to gain more if the company succeeds, but also risk more if it falls short!
A key thing not everyone knows is it doesn’t need to be one or the other. Whilst an EOT has to own a controlling stake to get most of the perks available, it doesn’t have to own 100%. So there’s potentially 49% available for direct ownership by individuals. Where the EOT doesn’t own 100%, it’s known as a ‘hybrid’ model.
Sometimes, a founder will sell most but not all of their shares to the EOT, retaining a minority. Sometimes after an EOT gains control, EMI share options will be issued to key staff. As long as they don’t dilute the EOT’s ownership below 51%, this is fine.
Chris pointed out: “Many employees will have been in a position where they’re promised ‘jam tomorrow’, but tomorrow never came or there was always a reason to ‘defer’ tomorrow. Both EOT and EMI prevent this. When implemented, it’s more than a promise, it’s set in stone. Of course this also means a founder/current shareholder needs to consider it carefully before putting either in place.”
A common option involves a founder selling to an EOT, followed closely by the company issuing EMI options to key staff. This can align their objectives. The founder wants the key staff to ensure the business thrives long enough for the founder to receive full payment. In turn, the key staff understand that if they achieve this, they will gain long-term benefits, as they can then become direct shareholders at a favourable price.
If you’re interested in either an EOT or EMI for your business, do check the small print or liaise with a professional. Whilst there are generous tax perks available, key criteria need to be met.
After exiting his own accountancy business using an employee ownership trust in 2021, Chris realised he could streamline the process and make it far easier and more cost-effective. Since that time, he’s helped many other business owners make that leap, too. For more information, visit Go EO