The clients I serve, are looking to implement an Employee Stock Ownership Plan (ESOP) through TRUST route to attract and retain talented employees. However, founders Sarah and James are concerned about losing control of the company’s governance and strategic direction, hostile takeovers and unsolicited buyouts, if employees are given voting power through ESOPs.
Key Concerns and Solutions
- Fear of Losing Voting Rights
- Concern: Trustees managing ESOP shares might vote against the founders’ vision, leading to conflicts.
- Solution:
- Appoint founders and senior executives as trustees to ensure alignment with the company’s strategy.
- Trustees’ fiduciary duty ensures decisions reflect both employee benefits and founders’ goals.
- Benefit: Strategic decisions remain consistent with the founders’ vision, mitigating potential conflicts.
- Fear of Employee Control Over Shareholder Meetings
- Concern: Excessive voting power for employees could disrupt governance.
- Solution:
- Limit voting power of ESOP shares (e.g., to 5%-7% of total voting rights) while retaining employee financial benefits.
- Benefit: Founders maintain decision-making authority, ensuring company stability and direction.
- Fear of Equity Dilution and Loss of Control
- Concern: A growing ESOP pool might dilute founders’ equity and influence.
- Solution:
- Cap the ESOP pool at 5%-7% of total equity to balance employee incentives with founder control.
- Benefit: Founders retain majority voting power while incentivizing employees.
- Fear of Hostile Takeovers and Unsolicited Buyouts
- Concern: Employees selling shares to external parties could lead to unwanted takeovers.
- Solution:
- Enforce Share Transfer Restrictions like a Right of First Refusal (ROFR) to prioritize buybacks by the company or founders.
- Benefit: Reduces the risk of third-party influence, ensuring the founders’ control over company ownership.
Conclusion
A trust-based ESOP structure provides a balanced approach for incentivizing employees while preserving founder control. By carefully structuring voting rights, capping equity distribution, and restricting share transfers, Sarah and James can align employee ownership with their strategic vision. For tailored solutions to secure your business succession, contact us at info@sncoglobal.com
