More Entrepreneurs Want to Share the Wealth With Employees—But Financing is Tricky

Anne Field | November 12, 2016


Interest is growing in business models that share ownership more broadly, such as worker-owned coops and Employee Stock Ownership Plans (ESOPs). When ownership is concentrated in the hands of a few, little trickles down to workers—one reason wages have stagnated and the wealth gap has widened. Employees that have a stake in a company are also likely be more motivated and engaged.

But companies that want to embrace these inclusive models face challenges, particularly when it comes to financing.

“It’s not necessarily harder, but it seems harder, because it’s different,” says Majorie Kelly, executive vice president and senior fellow at the Democracy Collaborative. In other words, funders need a greater comfort level with these models before they dole out the money.

With that in mind, Democracy Collaborative recently published a report examining a variety of ownership models and ways to finance them. Here’s a look at a few, along with some innovative financing approaches.

Employee stock ownership plans (ESOPs). With an ESOP, entrepreneurs sell ownership in their company to their employees. ESOP shares are held in trust, and the number of shares can vary among employees. It basically serves as a retirement plan: Employees cash out either when they retire or when they leave the company. Companies can be partially or completely employee owned. Or, they can follow the path of New Belgium Brewing in Fort Collins, CO, (photo, above) which started out as a partially owned  ESOP in 2000 and moved to 100% ownership 12 years later.

Traditionally, ESOP financing has relied on a combination of commercial borrowing and seller financing, among other methods. But one innovative approach involves the U.S. Small Business Administration’s (SBA) Small Business Investment Company (SBIC) program. According to the report, it licenses private investment funds as SBICs and “these funds then use their own capital plus funds borrowed with an SBA guarantee to invest in qualifying small businesses.” A few private equity firms now use SBICs to finance leveraged ESOP transactions. Another move: Some state employee ownership centers operate revolving loan funds.

ESOPs also offer some tax advantages. First of all, both principal and interest on a sale to an ESOP are tax deductible. In addition, owners selling at least 30% to an ESOP can defer capital gains taxes if they invest the money in another U.S. company. Plus S corporations that are 100% owned by an ESOP trust pay no corporate income tax. (These advantages have also led to abuses of the ESOP structure from some financially-motivated corporate owners).

Worker cooperatives. With this model, ownership is in employees’ hands, with a ‘one member, one share, one vote’ system. Examples include Evergreen Cooperatives in Cleveland, but worker coops are moving into the digital world as well, as highlighted by the Platform Cooperativism conference taking place this week in New York.

Traditional funding for coops has come from CDFIs and specialized banks, like the National Cooperative Bank, although many mainstream lenders are uncomfortable with lending to unfamiliar coops. One innovative financing approach is to raise donations for new members who can’t afford the fee. Others include devoting a portion of profits to funds that can support cooperative growth; selling preferred shares with limited voting rights to attract outside capital; and conducting a direct public offering (DPO).

Also, over the past two years or so, foundations have stepped up their support of cooperatives. For example, in 2014, the W.K. Kellogg Foundation gave a $225,000 grant to the Center for Community Based Enterprise in Detroit to “assist low-moderate-income Detroit residents in generating jobs with worker equity,” according to the report.

Hybrid and social enterprises. These two categories include double-bottom line companies, benefit corporations (corporations with a legal structure protecting a financial and non-financial mission), and L3Cs, or, limited liability companies with a social mission. One novel financing approach: A small number of municipalities are working on ways to help fund companies registered as benefit corporations. For example, in 2009, Philadelphia introduced a sustainable business tax credit for such enterprises.

Related: Crowdfunding Platform Wefunder Becomes a Benefit Corp. 

The Worker-Owned Sharing Economy Aims to Disrupt the Disruptors

Coops Find New Options in Investment Funds and Crowdfunding

Anne Field is a New York-based journalist who writes about social enterprise and impact investing. A version of this article originally appeared on her Not Only For Profit blog on Forbes.com.


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