Direct / individual ownership
The direct ownership model enables employees to become individual shareholders of the business they work for
Direct ownership
One of the compelling arguments for direct ownership is that owning a tangible individual stake might make ownership feel ‘real’ compared to employee ownership through an employee trust.
As an employee shareholder, employees have the opportunity to benefit directly from the businesses success. This benefit is normally through the receipt of dividends and increases in the share value.
When an employee eventually leaves the business, perhaps due to retirement, they own shares that they can offer for sale and ‘unlock’ the value they have helped to create over the years.
Additionally, employees are able to influence key decisions that affect their business such as appointing and removing directors, the sale of the Company or its subsidiaries, acquisitions of other businesses or joint ventures, etc.
However, like any other conventional investment, should the business not be successful employee shareholders carry the risk of their investment losing value and potentially becoming worthless should the business ultimately fail.
Employees are ‘beneficiaries’ of the employee trust, rather than direct shareholders. Therefore, employees have no right to any dividend, nor do they own shares they can sell when they leave the business, nor do they have a right to vote as shareholders on key matters affecting the Company.
There are no ‘right’ or ‘wrong’ decisions and as such direct share ownership schemes might include ‘non-voting’ shares, different classes of shares, voting on a ‘one person one vote’ basis, a maximum number of shares that can be owned, or indeed a minimum number of shares that must be owned.
However, some tax advantaged employee share schemes such as a HMRC Share Incentive Plan do stipulate a number of conditions (for more information about employee share schemes click here).
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Able to influence/control the company.
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Right to dividends based on number of shares held by each shareholder.
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Right to attend AGM/GM and vote on key decisions that will effect the Company.
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If Company is successful shareholders have the potential of seeing this reflected in the share price.
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Shareholders share in the capital of the Company if it’s wound up.
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At some point shareholders will want to sell. Need some form of market for the shares shareholder.
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Limited market if only other purchaser is fellow employees who may already own enough shares
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If the Company wants to fund the purchase this will impact on cash as the money will need to be found from within the Company’s resources
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New employees who join and contribute to the success may not be able to buy shares if existing holders don’t want to sell and will not agree to new shares being allotted.
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Value of investment could drop if the Company isn’t successful. In the worse case scenario the investment could become worthless.
How can we help?
If you are exploring employee ownership, we can help you to identify the most appropriate model to suit your objectives. We are happy to meet at client’s offices, or at our LONDON OFFICE, without charge or future obligation. Please contact us for an initial discussion.