Employee ownership trusts: A viable option for your tech business?

Is employee-ownership a viable way forward for technology companies? Goodman Derrick LLP partner Paul Webb weighs up the benefits

Tech companies on a growth trajectory have long understood the need to motivate and incentivise key members of staff. Human capital is a tech company's most significant asset and it is crucial that employees' creativity is harnessed and encouraged to promote the business's commercial success.

Equity participation through share option schemes is a standard feature of tech companies' offerings to selected employees.

There is a growing interest in what may be the next stage in employee involvement: the employee-owned company. In order to encourage employee ownership, it has been possible since 2014 for business owners to sell a majority stake in a company to a trust established for the benefit of employees, an ‘Employee Ownership Trust' (EOT), without being liable for any tax on the sale.

Employee-owned tech companies include Agilisys, Aardman Animations and Clansman Dynamics

The sale price is determined by an independent share valuation expert, and to the extent that the price cannot be paid at the time of the transaction (ie: the EOT does not borrow in order to fund the acquisition), the price is effectively paid to the selling founders out of the profits of the business in future years.

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In addition to the capital gains tax exemption, the company is subsequently able to pay tax-free cash bonuses of up to £3,600 a year per employee.

This package of tax measures has been designed to encourage business owners to establish long-term employee-owned businesses which can uphold and develop the culture and energy which was critical to the business's success. A feature of the model is that founders are permitted to continue to be involved in the business following disposal, for as long and in such capacity as is agreed, and can continue to receive remuneration at market rates.

Employee-owned businesses have higher levels of employee engagement, and create more trusting environments

According to the Employee Ownership Association, there are 350 businesses in the UK which have adopted the employee-owned model.

By far the biggest and best known of these is the John Lewis Partnership. Employee-owned tech companies include Agilisys (a provider of managed cloud-based services), Aardman Animations (the animation studio behind Wallace & Gromit) and Clansman Dynamics (a manufacturer of robots for the foundry industry). In general, however, tech companies do not figure prominently among UK companies which are majority-owned by their employees.

Perhaps the time is right for tech companies to embrace more wholeheartedly the movement towards employee ownership.

Deb Oxley, CEO of the Employee Ownership Association, claims that employee-owned businesses have higher levels of employee engagement, and create more trusting environments which enable employees to work more effectively, responding and adapting to customers' needs.

Oxley comments: "This culture differentiates these businesses as attractive employers for future staff, helps retain the best talent, and directly supports better wellbeing. This in turn unlocks the discretional effort from employees that leads to higher levels of productivity."

Sometimes the innovative, creative culture on which the success of a tech company has been founded and developed is lost when the business is subsumed within a bigger player

Tech company founders have traditionally looked at trade sales when contemplating a full or partial exit from their businesses. Large US tech firms, in particular, have been eager and well-resourced acquirers.

But HP's acquisition of Autonomy is not the only example of a trade sale that has run into trouble. Sometimes the innovative, creative culture on which the success of a tech company has been founded and developed is lost when the business is subsumed within a bigger player.

Perhaps founders are unconcerned if they have made their money and moved on. But often founders have a profound connection with the business and will seek to ensure that it continues to flourish after they have ceased full-time roles.

The tax advantages of the EOT model provide an attractive backdrop against which tech business owners will increasingly consider whether sale to an EOT, enhancing the employee engagement and enthusiasm which founders have nurtured, provides the best route for the future success of the business and a lasting legacy for the founders.

Paul Webb is a partner in the corporate team at London law firm Goodman Derrick LLP