ARTICLE
17 July 2024

From Cubicles To Corner Offices: Let's Talk Employee-Owned Business Structures

Acuity Partners

Contributor

Acuity Partners is a dynamic corporate finance & business law firm in Nigeria dedicated to serving Africans and African businesses. We are renowned for our holistic approach and exceptional service delivery. We specialise in providing practical and goal-oriented advice across a spectrum of commercial transactions.
Tunde, Ama, Akeem, Leila and I – 5 different routes
Nigeria Law Department Performance

Tunde, Ama, Akeem, Leila and I – 5 different routes

I came to grab some light bites at a cozy cafe when I bumped into some of my old classmates — Tunde, Ama, Akeem, and Leila catching up over coffee. The conversation turned to our respective workplaces and how employee ownership structures is finally becoming a thing even with emerging corporates.

Tunde: The Restricted Stock Structure

Tunde leaned back, sipping his latte with a satisfied grin. "So, my company uses restricted stock to keep us motivated," he said. "It's like a golden handcuff, but in a good way."

Ama raises an eyebrow. "Golden handcuff? Explain."

Tunde laughs. "Yeah, it's basically giving us shares, but we have to stick around and hit certain goals before we can cash them in. It's awesome because it makes us feel like we're really part of the company's future. Sure, there are some tax headaches and we can't sell the shares right away, but knowing our hard work is directly tied to the company's success? That's a huge motivator."

Ama: The Phantom Equity Structure

Ama nodded thoughtfully. "That's cool, Tunde. But my company does something called phantom equity. It's like the benefits of owning shares without actually owning it."

Akeem looked intrigued. "Phantom equity? Sounds like something from a sci-fi movie."

Ama chuckles "Yup! But it's actually cool. We get a share of the company's profits, or its value increase, without holding real shares. This way, we benefit from the company's success without the risks of actual ownership. It's flexible, though it lacks the security of real shares and can be changed or stopped by the company anytime. Still, it works for us because we feel the upside without the downside."

Akeem: The Profits Interests Structure

Akeem jumped in. "Interesting... that's close to profits interests we use at my Firm. It's mostly used by partnerships, and it lets us share in future profits or the appreciation of the company."

Leila tilted her head. "How's that different from phantom equity?"

Akeem explained, "Profits interests are more like a share in the growth but not in the current value. It's super flexible and can be tailored to what the firm needs. But the tricky part is valuing it, especially if the firm's growing fast or fluctuating. And if it's not set up right, there can be some unexpected tax hits. But overall, it's a great way to keep us engaged and focused on long-term growth."

Leila: The Stock Options Structure

Leila nodded along, waiting for her turn. "Okay, guys, we are simply sailing with the typical stock option. They let us buy shares at a set price within a certain period."

Tunde smiled. "Stock options is a Classic!"

Leila grinned. "Yep, it's a classic for a reason. If the company does well, we can buy shares cheap and benefit from the growth. The downside is they expire, which might not sync with long-term goals, and if the stock price doesn't go up, they're not worth much. But they give us a direct link to the company's performance. It's exciting, like a financial rollercoaster!"

I took another sip. "These are all great, but have any of you heard about Employee Share Schemes (ESS)?"

Ama raised her hand. "Oh, my cousin works at a company with an ESS. Basically, there's a trust that holds shares for employees. It builds a deep sense of ownership and loyalty. They literally own a piece of the company."

Leila leaned forward. "That sounds intense. What's the catch?"

Ama responded, "Setting it up is expensive and it needs ongoing administration. Plus, employees have to hold the shares in the trust until they retire or leave the company, which limits their liquidity. But it creates a market for shares, helping with buying and selling when employees come or go. It's a big commitment but fosters a strong culture."

Conclusion: Aligning Interests for Shared Success

As we finished our drinks, one thing became apparent – employee ownership aligns our interests with the company's success. We are not all cut out to be entrepreneurs but we all have a sense of ownership in our various organisations.

The key is choosing the right model for each company's needs and managing it well. And if one is serious about it, consulting experts can make all the difference.

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Curious about how employee ownership structures can transform your business? Read the full story and see how each model could work for you. #EmployeeOwnership #BusinessSuccess #SharedSuccess #FinancialPlanning

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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