Demystifying Employee Ownership Trusts

Welcome to our webinar on demystifying employee ownership trusts. I am Megan Gordon. I am a business engagement and partnerships manager with Project Equity. I've been here for 2 and a half years and I tend to be the kind of first line of uh questions or the first line of the tip of the spear in terms of people who uh when people have questions about employee ownership, they generally talk to me and my team first. So, I'm going to have our panelists introduce themselves and talk a little bit about project equity and then we're going to dive right in. So, uh David, would you like to please introduce yourself? >> Sure. Hi everybody. So, my name is David Gray. I uh had a chance to be working on employee ownership trust for several years now. Um I am the director of our client services team here at Project Equity. And as many of you likely know, Project Equity, we uh specialize in employee ownership. And yeah, it's a pleasure to kind of share some of our kind of in the trenches experiences, stories, insights, and wisdoms with you all. >> Thanks, David and Courtney. >> Hi, everyone. And it's really nice to see all of these faces in one place um of you and are excited to see the people that we maybe haven't met yet. Um I'm a senior client services manager at Project Equity. I've been involved in building our employee ownership trust practice for the last several years as it has been kind of rising in interest and popularity. So, it's been really exciting to see the growth of the field and I'm excited to speak with you all about it today. Um, David can possibly share more about, you know, our work, um, as we get into our, you know, questions and what we're going to share with you all today. Um, but I've been, you know, a part of our projects for the last several years, supporting clients as they go on this journey. um and have written several articles with the national center for employee ownership and kind of participated in the founding of the purpose trust ownership network as well which is a separate kind of organization that built the purpose field uh purpose trust field more broadly. So excited to talk about project equity and employee ownership trusts and get into the meat of our topics today. >> Yeah. And Megan, before you jump in, let me just kind of set the the context for you all. Courtney and I have been working together for almost six years now. So, we kind of um have had a great chance to work together. And so, we'll probably both be kind of jumping in, chiming in, giving kind of our own perspectives on things. Um, and Courtney, I'm glad you kind of mentioned Perpetual Purpose Trust Network. Um, the purpose trust ownership network that we've kind of helped establish and moving that thing forward as well. But Megan, let me hand it back to you. >> Awesome. Thank you, David. Thank you both for that context. Really excited to get into the conversation. Um, before we do, I think a lot of folks on this call may already know who we are at Project Equity, but Project Equity is a national leader in the movement to harness the power of employee ownership to provide business owners with an accessible succession plan to preserve legacy b businesses, strengthen local economies, and increase wealth among workers. So, writ large, that's our mission. That's what we're coming from and what we're here to do. Um, if you have more questions about what we do, feel free again ask questions uh or reach out to us. So, as I mentioned in the in my introduction, I do sit on the business uh engagement team. And what that means is a lot of my day is spent in conversation with business owners and with business owners who are wrapping their heads around what's my next step? Maybe I've heard of employee ownership. Maybe I've even heard of of EOTS. Um, but I don't I don't know if it's right for me and I'm not sure if it's the right fit and they have a lot of questions and some of them are very unique and tailored to just their business, but there are some kind of broad themes and questions that come up again and again and when those come to me, I go to the client services team. And so, uh, David and Courtney and I have a wonderful rapport that we've built over years of working together. And we thought this was kind of a nice opportunity to give you guys a little bit of a peak behind the curtain, so to speak, of what kind of conversations do we have and what kind of questions are coming up and how can we frame those questions up for you guys and kind of answer them on a broad stage. All right, so starting out, uh, what is an employee ownership trust? what is a perpetual purpose trust and how do those two relate to successfully creating an employee ownership trust? >> So, historically there's been kind of two primary models of employee ownership in the United States. uh workerowned cooperatives which project equity was really kind of launched around and then employee stock ownership plans or ESOPs and EOTS are kind of a colloquial term for uh a third really viable option for employee ownership that have has emerged more recently on the landscape of employee ownership in the US. So what they really are, at least in our work, are trusts that use a perpetual purpose trust model. So that's another acronym, PPT. And it's an irrevocable trust that is established to uphold a particular purpose. So that's why they're called purpose trusts. There's a purpose that is actually defined in a legal document. uh and typically it's to benefit you know a wider set of purposes rather than a specific individual. So there's not a specific person that this purpose identifies but when it identifies employees then we think about it as an employee ownership trust. So there's a wide variety of purposes that a business could have. Might be environmental in focus, might be sustainability, you know, in their operations, might be community focused. Um, you know, there's a lot of different things that different businesses might choose to focus on from an impact perspective. But when that legal document explicitly articulates that employees and employee benefit more specifically is the purpose of that business's existence and why the trust has been created. We consider it to be an employee ownership trust. Um, so that I always like to talk about when we get into discussions about EOTS is that unlike a workerowned cooperative or an ESOP, there is not direct share ownership on the part of the employees. And I think that's an important distinction that everybody understands um because some people don't like that and some people really are compelled by the direct share ownership and the employee ownership trust model. it's the trust that owns the business or a portion of the business on behalf of the employees. And so that's a pretty clear distinction. Um, and David will talk more, I think, a little later about, you know, how we as Project Equity have gotten comfortable with that and and why we consider it employee ownership despite there not being that um, you know, direct ownership piece. But that's something that's that's good to keep in mind. I think the other piece of this uh is that perpetuity. So these are perpetual purpose charts. They are meant to exist on an ongoing basis. Different states have different, you know, laws and and frameworks put in place here. So it's still a bit of a patchwork, but the idea is that the company via this trust can preserve its mission, its purpose, and any other values that it wants to codify over the long term. So the idea is that the company it's going to be a little more difficult to resell that down the road, and that's really not the intention in most cases. Um the and then the other thing about this is they're just highly flexible models compared to both the cooperative and the ESOP. So they generally are going to have less overhead and administrative costs and something like an ESOP. Um, and there's going to be a bit more flexibility in the design of governance, profit sharing, and those different kind of key employee ownership elements when you're comparing to looking at the employeeowned cooperative model. So, we'll get more into, you know, what the design really looks like. Uh, but these are really emergent structures in the United States. They're fairly new. I would say I think 2014 is when they really came on the scene, but only in the last few years have they really kind of risen in popularity. Um that being said, there's a lot of precedent for them internationally. So in the UK, for example, they are the primary form of employee ownership and there is best practice uh around some of the design and you know how these things function. It's just that they're a little bit newer in the United States. So, it's very exciting. I think the official number is about 60 or was about 60. I think now that number is probably closer to 80 companies that have chosen this path in the United States and that's growing all the time. So, that's just a a quick overview and I can, you know, deep dive into anything else as we go. Yeah, Courtney, I love how you explained that. And part of my experience has been uh when I talk with owners about what an employee ownership trust is, sometimes I I find that I need to kind of clarify it a little bit with an image. And so one of the images I've used is I I sometimes talk about and I don't know if any of you had the same experience that I did when I was in elementary school, but in elementary school we would sometimes vote for like a class monitor or there was some different kind of role that various students could could play. And it seemed to me and maybe I'm kind of show showing my age here. It seemed to me one of the standard approaches was our teacher would have a shoe box and she would have a shoe box, cut a little slit in the top of it and and and then we would vote by putting our votes in that shoe box. And I find that a helpful kind of image to think about what Courtney you've just so eloquently explained in terms of what an employee ownership trust is. I like to think of that in relationship to this box. And so sometimes I can say that the trust is represented by that box, that shoe box, and it's got that little slit on the top of it. And so what we do when we're creating an employee ownership trust is we create that trust, that box, and then we transfer ownership partially or fully to that trust, that box, and we put the stocks as it were almost into that box. And then the box, the trust owns percentage of the company. Ideally, where we're aiming is a really broadbased employee ownership. So, usually at least 30% is owned by the the trust. Our goal is really kind of broad-based and moving this to scale. And so, you know, ideally it'd be 100% owned by the trust. But the problem is is that box, the trust is not able to express its desires. It's not able to say what it wants done with the business where I'm like a stockholder of businesses right now. Every once in a while I get a chance to vote on board of directors. I get to have a say with my ownership. The previous owner of the business is they held all the stock or a portion of the stock. They were able to exercise their ownership by saying things and determining where things would go. But that trust the box as it were is not able to do that. And so one of the things that we do is Courtney said is we work on creating documents, legal documents that specify what the desire of the trust is. So what is the desire that the trust has and then that's its purpose and in that list of its purpose some of the things are that it will go on forever. It's perpetual. Another could be that it continues to function in some of the values that the business has held. So we've got some businesses that have really been focused on organic foods and so they might put that in the trust as a goal for long term. But the other thing is that it who does the trust benefit? who does the business, what's the purpose of the business as it moves forward? And so, one of those is to benefit the employees. And that's really where we see employee ownership sit in an employee ownership trust where it's benefiting the employees. So, there's that document right next to that shoe box. And then the final thing is we want it to go on forever. And so I sometimes talk about like wrapping the box in a chain to basically say this is the box is not going to sell its stock of the business to another company or merge. Now there are some nuances and Courtney we can kind of maybe get into some of the potential nuances there but ideally here we're talking that that purpose is locked long term. The trust there is that agreement that specifies how the ownership is going to function, what the purpose is. And then we've got that final thing where we've got that purpose lock. And so, Megan, I found that this is a useful metaphor to help explain to folks what this looks like in the real world because we're not used to the idea of ownership being held by something that's not a person, right? That there's not that person. And so, one of the things in employee ownership trust is we have governance systems in place to help ensure that the purpose is being met. >> That's awesome, David. I love the box metaphor. It's I haven't quite gotten myself to the point where I'm able to use it, but I'll get there. But I I think it's a great way of um visualizing it. And it really helped me also understand the trust better when you explained it that way. So hopefully that was helpful for our attendees too. Um so and I just want to mention folks, I see those wonderful questions coming in. We'll do them at the end. Keep them coming. Um, let's talk a little bit about what ownership means in an employee owned business. You know, David, how do you kind of approach that question? >> Yeah, you know, that's the right question. And I think as as you heard, as I was just trying to describe that ownership piece, I'm already wrestling with kind of what does it mean to what does ownership really kind of mean? And Courtney, you alluded to this even earlier. There is a lot of conversation within the field is a employee ownership, trust, real ownership. And I think really where we're coming as a organization established in the principles of broad-based employee ownership. We think about ownership all the time. And we're really kind of form agnostic. Like if it's going to if the ESOP is the right form, that's great. If a worker co-op is the right form, wonderful. If an employee ownership trust is the right right form, outstanding. Like we don't care what form. And I think each form has like unique situations that they thrive best in, right? But all of them have to wrestle with this question is what is ownership? And and so where we have kind of come internally in our own thinking is focusing on these three key things that ownership implies influence, responsibility, and benefit. And and I I like to think, you know, I've got a son just turned 17. He's been saving for a couple years to buy a car. I think he's still a long ways off from buying a car. But when he buys a car, he's going to own that thing. He's going to own the car and he will be able to exercise his ownership in these ways. So he will be able to influence, right? So the influence will be like, does he want to put a lot of money into a paint job? Does he want to take it to the car wash every Friday afternoon? Does he want to park it in the street or does he want to park it in, you know, a garage? That's not going to happen, but let's just assume, right? So, we can start to understand this idea of influence. Ownership allows for um influence. The second dynamic around ownership is responsibility. So, if he has this car and he's driving down the street and he crashes into a city bus, he's going to have to take the responsibility, the risk, the ownership of paying to fix the car. It might mean that he loses his license, right? All these other dynamics. The third dynamic of ownership is benefit. like that he gets the benefit of being able to not have to go on public transit and and drive to school or he gets the benefit of being able to go where it's hard to go on public transit, right? These types of things. And so I've been talking about what ownership means because I think that's a really helpful framing for us to think about how does ownership function in employeeowned trust. But here you can see how we're talking about ownership. And so when we're thinking about an employeeowned trust, how do the employees kind of function in that ownership space? And so we see that influence, we can structure influence to show up in voting. And so the employee base can vote for who would be on the trust stewardship committee. They can maybe vote for a panel of potential folks to be on the board of directors in terms of the governance. They can have a voice in specific types of decisions and they can also possibly sit in those governance seats in the various parts of and we'll get into the nuances of how you structure employee ownership trust. So that's how we see influence showing up responsibility the ownership dynamic for the employees really plays out in that they start recognizing that how they show up in the workspace can influence and take on the responsibility of the performance of the business. Is it going to be a sustainable business? Are they going to be able to figure out how to address potential losses or changes in the e the ecosystem with regard to kind of the economic factors as we've been seeing playing out over the last several years, right? And then there's the benefit dynamic. Are the employees benefiting? Right? And one of the things that Courtney, you alluded to earlier, and I'd love your perspective on this is kind of you've seen it play out, but one of the things that really is attractive to me about an employee ownership trust is that all the employees benefit, right? Right? And so like with a worker co-op, you have to go through membership. You might have to go through a criteria that you've been there for 6 months or a year or so. But here with an employee ownership trust, all the employees can get the benefit. But the benefit can be very broad. It could be retirement benefits. It could be reduced work hours. It could be better health care. It could be profit sharing. There's a whole slew of options that that benefit can really show up. And part of the thing that's exciting is that the decision can be made to ask what are the best benefits for this subset or this group of the employees or for the broader employees of that and what could we use to have that benefit show up to also possibly reduce our tax liability. Right? So you can kind of think through what's going to play out the best for both the employees and the long-term sustainability of the business. But Courtney, I'd love to hear your perspective on this as you've also kind of been involved in these conversations as we think about how ownership shows up and employee ownership trust. >> Yeah, I think that was great. >> Okay, great. Cool. >> Yeah, this is just to hearken back to what I was saying earlier. This is kind of how we have gotten around this idea of indirect ownership. And when these three elements are in place, you know, we view this as meaningful employee ownership to employees. >> Yeah, >> that's fantastic. Um, and David, I hope when your son does save up for a car, he gets one as snazzy looking as the one on that slide because that top car. Um, that's that's great. I really appreciate both of you guys on that. I would say one of the questions that I get asked all the time and I always punt to to you guys and I think this is a great opportunity to to bring it up here is what does governance look like in an EOT? Um I would love to open the floor up to you two. >> It kind of looks complex at first glance. Um, and there are some stakeholders going on, you know, that we need to kind of define and look through, but really it starts with that ownership piece. So, we shift an equity or a portion of equity into the trust. I saw a question come in, can you just have a portion of equity? Yes, you can absolutely have a partial sale in the employee ownership trust context and it's fairly straightforward to do so. Um, so you can absolutely put a minority of the company into a trust and a we find that often to be actually a great uh option for people because you're kind of locking in your succession. You're you're building a pathway to majority employee ownership, but you're just starting maybe with 30% for example. So you can absolutely do that. So then we get this company that's owned either wholly or partially by a trust and then we've got some other things that we need to create in terms of supporting infrastructure. Uh the first place I like to start because it's more familiar to people is a corporate board. So one thing for people to be aware of is that typically not in every case but typically companies that choose this path are going to convert to a CC corp. Um, again, that's not always required, but I I would I would expect that to be a very likely scenario if if you're looking at this option. Um, and as a result, we build a corporate board, and that corporate board is sort of tasked with the traditional board duties that that we think of. So, they're at the governance level. They're not in necessarily day-to-day operational decisions, or they shouldn't be if you have an appropriate split of governance and management at the company, but they're doing things like strategy, budget approval, and development, um, hiring, firing, supporting the senior level CEO or president. Um, additionally to that group, we have what's called a trust stewardship committee that's created. And this looks different from company to company, but really it's meant to be kind of the safeguard of the trust. It's the group of people that is making sure that the purpose that the trust has defined via a trust agreement is being followed. And so it kind of reviews what the board is doing. It works with the board. Sometimes it works on specific initiatives that are more impact or employee related at the company just to ensure that that purpose is being carried out appropriately. And ideally these two groups are really working synergistically rather than oppositionally. So although there are two we see usually there's a liaison between the two or there's some overlap or when they are distinct we see that it's really important to foster a positive kind of communication and working relationship so that everybody's working toward the same goal which is company health and the manifestation of the purpose. In addition to that, we have kind of a prefuncter role uh by virtue of having a trust in place which is a trustee. This is a directed trustee. So, it's an administrative function and it's the trust stewardship committee that is really working with this uh person or firm uh to do whatever administrative duties needs to happen in regards to the trust. But there's no decision-making authority there. And then lastly, we have a trust enforcer that gets uh put into this ecosystem. Oftent times we see this person becoming uh or this person who's seated into this role as a selling owner. Not always. There are exceptions to that, but often I see that occurring. Uh but the idea is that this is a neutral third party. They are able to come in in the case of any issues uh to establish a grievance process that is followed for this future employee owned company um so they can have an appropriate party to respond to anything that comes up that the board and the trust stewardship committee is not able with management to resolve. I would say this position is also a bit prefuncter. It's very important. So I don't mean to demean its existence or the people that are in these roles. There has not been however a case that I'm aware of where there this person has really been engaged in a meaningful way uh of the EOTS that I'm familiar with thus far. So they might be looking over things, you know, keeping up to date with the goings on of the company and the board and the trust stewardship committee, but they're really just there in the worst case scenario. Um, now I would say the other two bodies, the stewardship committee and the board are really great vehicles for broad-based employee participation. And so I I also saw a question come in. How do you kind of decide who's on these things? Um, how how are these people selected? I think you want to be working with a technical assistance provider who has designed these before. You want to be working with an attorney or set of attorneys who has familiarity with this model and those people are going to help you do this. But what we like to see at Project Equity on these bodies is typically an election from the employee body to to seat the trust stewardship committee. Doesn't always happen right away. often the founding bodies are appointed just to make sure we've got the right people uh kind of stewarding the company at the time of conversion so there's no issues at that time. Um but down the line at least we we like to see an election from the employees to the trust stewardship committee. So usually the majority of people on that body are going to be from the employee base. We love to see a mix of management and non-management, but oftentimes these bodies are pretty management heavy. In EOTS and then for the board, those are technically appointed by the trust stewardship committee. You can have some creative ways you go about that appointment process. Some people make it look kind of similar to an election because they really want to instill employee participation. Um, and other people really kind of do a pure appointment process and it's pretty management heavy. So this is where we get into the flexibility piece which is not always a satisfying answer but there is quite a lot of flexibility in how these things get set up. You do have to have these things defined though and this is what's placed in your trust agreement the decisions about how all of this is going to function. >> Yeah. And I think Courtney one of the things that the reason I started by talking about how what ownership looks like is you just kind of alluded to it Courtney. Part of what we are always asking ourselves and we're trying to have a kind of context, Megan, when we're thinking about moving into this kind of work is how is ownership showing up? How is it meaningful ownership for the employees? How does that show up in this system? Right. And um part of the thing that I've also seen in some of the clients that I've worked with and I think Courtney you've also worked with some of these as well is how they utilize kind of their the owners the selling owners priorities and their values and how those things can play out here. Right? So some of the questions that have come in is can you do a partial? Yes, you can do a partial. We've also seen progressive sales and so I I can think of some situations where you had a selling owner that was really committed to this process. They want to move this forward, but they were like, "You know what? I want to I don't need to leave right away. I'm here for a bit. Let's let's kind of do this based on like a scaffolding approach. Let's set up the systems. Let's let the systems run for a bit and I'll still be here giving support, giving inside wisdom, and then I can then move back as it feels that things have really been established." Right? So, that was like a partial sale. What they did is they helped appoint these situations like these governing bodies. They had a role in some of these governing bodies. They had sold a percentage of the business and then after it felt like things had really kind of solidified, they were like, "Yeah, let's move on to 100% sale here." And so once those systems were functioning and so one of the things that I like about employee ownership trust is it allows for that flexibility. The other thing that I've seen also show up in some of the situations we've worked with is sometimes owners come with multiple desires out of the sale of their business, right? And so we've already talked about that a bit, right? So, say like I've started a couple businesses and like it's it's not like it's a kid, but it's something. And I don't know the right way to describe what it is, but when you've put your heart and soul into something, you've started a business, you're connected to it. You have a a commitment to the long-term success of that. And you also want it to to be the thing you created, right? Like I I created a thrift store down in Southern California. You know, when the fires just ran through Pasadena, Aladena area, I was on the phone with the manager the day those fires were going through. I'm way like I'm in a different nonprofit now, but I cared about it. I cared about the legacy. I've been following the news stories. And so, one of the things that I think selling owners bring is this desire for long-term legacy and involvement potentially. And so I've seen some clients where they've said, "You know what? This trust stewardship committee is a great opportunity for like me to stay engaged with this business and not have to worry about the nuances of how we're going to deal with this economic challenge or that and you know just kind of letting the business letting the board of directors focus on the operational health of the business. But the trust stewardship committee is kind of like that big highlevel ownership kind of questions. they chime in on strategic key issues, right? So, I've got one business in particular I've been thinking about where there was a a father that set up this business. It really was based on where he had come from. He was a new immigrant to the states, I think 75 years ago now, but he started this business and it really kind of hearkened back to a lot of his own heritage. And and when he passed away, the family was running the business. And they're looking at doing an employee ownership trust because what they're excited about is to be able to always have a family member potentially be on that trust stewardship committee. Not because they want to see any benefit, not because they really want to be making all the decisions, but they want to maintain that kind of relational heritage to the business that really was this beautiful thing that their father put so much of their life into. >> Yeah. No, that's that's really helpful and and it kind of inherently leads to the fact that these are really complex and there can be a lot of complexity in there. And so I'm curious when you're looking at EOTS, I mean just even in the examples you gave, I'm like, wow, I feel like we could go down a million rabbit holes here, but how do you address the variance in the size and complexity that you see in EOTS and how do you go about kind of right sizing that governance? >> Yeah, it's a great question. Certain that you want me to? Yeah, just in the interest of time, I think I would just say there's variation. So, some common things I would see are blending of the trust stewardship committee and board. So, depending on the type of company you have, you can kind of blend those duties. Um, and there are pros and cons to these approaches. And again, you really do have to understand your transaction structure first before you can really define all of this. And that's why it's important to work with TAs and attorneys. Um, and then I've also seen a real blend of the board with management. Some people really like that, especially in the beginning. Um, but that's kind of all I would say for now. I I I think it's important just in general to keep the spirit of adaptation. Most of our clients, for example, we work with two up to two years post transaction and we like to build in different checkpoints so we can kind of refine policy, change policy >> um to adapt to whatever's going on at the time. >> So, I'd love to talk a little bit about both profit sharing, how it works, and financing, how we how we finance. So, if you guys could jump into those two, that would be really helpful. >> Sure. Just to go over profit sharing um at a high level and I did see some questions come in about this. I think you know the key distinction here is that as we all know in traditional companies when we're looking at profit sharing it's tends to be tied to ownership percentage. In a trust kind of system it's really geared toward employee benefit and so it's not tied to any kind of personal funds that an employee is putting into the business. And that's one of the key distinguishing factors between a cooperative and a trust as well. There's no buy in. There's no money that an employee is kind of putting in to the employee ownership trust. Uh there's this term that isn't my favorite, but that is widely used called naked in naked out. So an employee is not really bringing anything in terms of capital to their employment. They're also not taking anything when they leave. So there's no vested shares. there's no individual capital account uh that an employee is taking when they exit the business. Um so each company is going to create a profit sharing policy. Many already have them and if you do, I think it's important to understand there's not a legal requirement that you change it. That's really part of kind of the conversion process to determine how it would be best to adapt that model or create that profit sharing model just to meet the company's kind of individual goals and we like to see that done at least a little bit in collaboration with employees to understand what they do want. But there are some kind of key things to be thinking about. The first is just the overall profit sharing pool. And that question did come in the chat. you know, how do we know how much to kind of claw back into the company versus distribute to employees? There's no rule here, but we do see people often having sort of a retained earnings policy that might be a percentage of net income or having kind of an account that has to be at a certain threshold before you distribute profit sharing. Those are two common methods. Um, and so, you know, the idea is that we're not distributing 100% of allocatable, you know, net income at the end of the year to employees, but that we are keeping a portion back to reinvest in the business. And I would say common thresholds I see is 25 to 50%. Uh, it it really does depend, but that that's kind of one quick metric to be thinking about. Next, you determine a profit sharing formula. So of the total amount that we're kind of going to be distributing to people, how are we going to do that? Uh in EOTS, I often see a fixed variable there. So everybody gets a certain kind of piece of the pie, but then I also see variable components as well. Might be performance-based, it might be hours based, might be tenor based. So it really depends what you want to incentivize. You have to determine frequency. So annual, quarterly, monthly distributions. Again, I think that's very workforce dependent. We most often see annual maybe with some quarterly thrown in. And then eligibility is a big piece, too. So, you want to determine who's eligible for profit sharing. We often see a waiting period of maybe 6 to 12 months of employment before profit sharing kicks in. And then authority, you know, who's really looking at this year-over-year when we're looking at that governance ecosystem. Um, typically I would see this sitting at the board level because it's it's budgetary and it has to do with protecting the company's, you know, cash on hand over time. And then this is an area where the trust stewardship committee since it does relate to employee benefit would probably have heavy input and at least be reviewing the choices of the board and offering their consultation about that. Um, but any other profit sharing questions that have come in? Well, Courtney, let me just chime in too on that because I think it illustrates kind of the dynamics between how this trust stewardship committee relates to the board of directors and the board of directors to the the company. So if let's say there's a situation where the board of directors wanted to do a really robust profit sharing approach but they weren't putting adequate funds in re reserved retained earnings and it looks like they were potentially jeopardizing the long-term sustainability of the business. That's where the trust stewardship committee might come in and say wait the purpose states the trust ownership here it the purpose is that this business stays on and is sustainable and we are concerned that this decision around profitabil or profit sharing is going to address the long-term sustainability. So we would maybe exercise ownership and say no that is too high of a profit sharing right now based on what's coming in the future. Right? And so that's kind of where we see the interplay. And you see that the board of directors is focused on operational making those key decisions. But some of those things that might jeopardize the purpose of the trust really sit with that authority of the trust stewardship committee. >> I'd love to have a moment where we could talk just a little bit about how are these things funded because that's a common question. People come to me, my employees can't buy this. How do I how do I get that funded? So if you guys could take >> let me jump in first and give you kind of so when we at project equity work with a business we start off with a feasibility. So Megan owner talks to you a TA brings a client to you. We do a feasibility where we are diving into the performance of the business. What approach of employee ownership is the right fit what the likely sale price could look like and how we could structure things. Then we would move into transition. The transition really we are designing the purpose. We're designing how the bylaws or operating agreement is going to function. We're creating the governance. We're right sizing everything. And then we move into the the deal, right, and the financing of that. And I want Courtney to speak to that. But then what we also do is after that happens, we do the this thrive program where it's a year or two years or even up to three years where we support that business to live into employee ownership. But I think you're asking the right question in terms of how does financing come into this? Is it all carried by the selling owner? Is there outside lending that comes in? So Courtney, let me let you speak to that. >> Sure. So I saw the question, is it more common for sellers to finance or do they manage to raise external financing from outsiders? Currently, it is more common for sellers to finance EOTS. That doesn't mean that they have to do that. I think part of that is a lack of awareness about the various uh financing opportunities that exist. Um, there are not too many to be completely upfront with people. This is a newer area, but there are some really established employee ownership funds that do finance these transactions. Project Equity has the employee ownership catalyst fund, for example, that is set up for that explicit purpose. So when company shares are transferred into the trust uh then we have typically a redemption process where somebody the seller is getting kind of paid back for the shares that they put in the trust. Uh with that comes a sale price. And so there's a lot of analysis done and often an external valuation as well where we're establishing a sale price and that is paid back to the seller over time and usually that's for a period of 5 to 10 years out of the future operating profits of the company itself. So, it's the company that would be taking on this debt, whether it was from a seller or a bank um or a community development financial institution. Uh we see a blend if we're using our fund. Uh we see the seller carrying a portion of the sale price and then for example the employee ownership catalyst fund carrying a portion of the sale price. Um that is because there's no personal guarantees for these employee ownership funds. So even though the company's carrying the debt, there's not an individual person who is signing, you know, for a personal guarantee, which is very different compared to traditional financing as we all know. So what that allows though the seller to do is have some upfront cash at the time of sale. And our fund also in addition to this conversion work where we're financing the conversion itself offers kind of working capital notes for any trust company that needs a new piece of equipment or or something else to reinvest and improve their company. So I'm happy to go into any more detail about you know how that's done if people have more questions about it. But there are external financing sources available and Project Equity has a fund to help make that happen for sellers that have kind of liquidity needs at the time of sale and aren't comfortable just saying, "Sure, I'll get a certain amount over X amount of years, but really want something at the time of sale." >> Yeah, >> that's great. Yeah, thank you. Um, obviously there's so much we could go into here and um, I think this is a good time maybe to pivot and take a look at some of the questions that have come in. We've had a lot of great questions coming in in the chat. I know you guys have answered a couple extemporaneously, which I so appreciate. Um, >> but I wonder that I saw uh, was what might the owner's role be once the transition's completed? What does that look like? Yeah, there's a lot of flexibility there and it really is based on what the needs and desires are for that owner. Um, I would say a common I mean, yeah, it's really based on what the owner wants, right? We've got some situations where the owner was like, I am just done. I get they they're a great business. They're functioning. I'm ready to retire. I don't want to really be involved much. And then they're just able to kind of walk away. There's others that have said I'd say that's not the norm. We usually see the owner involved in one way or the other in the governance. It could be on the trust stewardship committee. Maybe they meet quarterly. Maybe they meet twice a year. So, they're showing up for a meeting or that. I've also seen some owners that sit on the board of directors and they're like, I want to be a little bit more in the weeds. I want to be able to kind of share my wisdom and and be able to kind of help the operational long-term strategic thinking there. Um, so there's variety, right? And as I already alluded to earlier, some owners want to continue to have some relationship ongoing, but um we've seen owners that have stayed on as the CEO for a bit and then rolled out of that. We've seen some that have kind of sat on boards or trust stewardship committees and then others that have just really kind of stepped back. >> Great. That's really helpful. Um in your guys experience, what are some examples of things that have worked really well? Um, and when you're in, you know, when you're creating an EOT, some best practices or processes. >> Yeah, I'd love to hear your thoughts here on this, Courtney. But first off, I would say having a team uh like that we we often times call it the transition team. So, the attorneys, the CPAs, the transi transactional support folks like us, having the people that have experience. There's a lot of interest right now. There's a lot of people that are learning stuff and you don't want people that are trying to figure it out their first time. You want to go with somebody that knows this work, that understands why you want to put a trust in Delaware or in Oregon versus trying to create your own little thing in in a state that doesn't have kind of like a robust track record, right? So, I think having the right team in place is key. um giving yourself the commitment that it's going to take some time and recognizing that having folks like us be able to ask the owner, what are your goals here and how do we ensure that we structure something or even to be able to bring in lending, you know, that doesn't require a personal guarantee or things like that. But Courtney, are there any other things you've seen? >> Well, in terms of it being a good fit, I think that's the first thing I think you should assess first if this model is right for you. there are other types um and other obviously succession options that maybe this isn't the best one. I think it should be considered alongside other options that you may have and >> um when you're doing that, yes, I think that's absolutely correct. You should be doing that with a team that has done them before. Um but times that I've seen them work really well is when there's a legacy component that is just so strong, there's a family or some dynamic regarding legacy where they do not want the business sold. They really want things to be locked in um to disincentivize a future sale and they're really derive most of their satisfaction from that piece. Partial sales is accommodate really well. And so if you're looking at a progressive or a partial, this is a very great way to go typically. Um, I think if you have a workforce that's um, younger or less interested in sort of the retirement plan incentivization structure of the ESOP um, or a more seasonal workforce where they're coming in and out can be a great option. So, I've seen that come into play. Um there I'm sort of answering a bunch of different questions at once because I've seen them pop in. But just going through various factors that you know really make the EOT a successful model. >> Um I I do think you need managers that are bought in. If your if your key managers are not really interested, it it's hard to do this because there is some structure going on. You do have a board. You do have a stewardship committee. even if there's overlap, you know, you want some level of participation to really get the success uh and the positive impact of employee ownership at your company because if you're not getting that positive impact uh whether that's a financial impact or otherwise um you know there might be a better option for you. So those are the things that kind of immediately come to mind. Just in the last kind of second here I'll throw out because I've seen some tax questions. there's not um an immediate benefit to sellers to selecting this path. So, if utilizing some of the tax breaks that you would get from something like a cooperative is really important to you or make or break for you and your personal financial situation, then this may not be the right fit. because unfortunately from a policy perspective because they're so new, there's not a lot of policy infrastructure that's helping move this movement along at the moment. And that's another key difference when you're kind of assessing this model compared to others. And some of that detail is in some of the follow-up documents that we would send. >> And I'm Oh, sorry, Courtney. I'm noticing I think we've had close to 40 questions and so it's been hard for us to kind of speak to them all. But one of the things I do want to flag is part of our role at Project Equity is to bring employee ownership to scale. And we have found that we can't be the ones that answer everybody's questions all the time one-on-one. And so we've created some really exciting learning products that I kind of wanted to share with you all. And so right now we've I'm just put this link in here and you guys can all grab a screenshot of this and then follow up later. Um, but we've got these exciting learning products that really go into these things that we've been talking about, right? There's specific sessions specifically on employee ownership governance or the financing of deals or things like that and that you can kind of get deeper into the weeds. Um, you can also if you've got a CPA and you're a business owner and you're like, I'm interested in this, but I want my kind of trusted advisors to understand it. this might be the right place for them to go to be able to do a session, be able to even get some continuing credit for it. Um, so that's something really exciting that I want to make sure we share because we can't in an hour get to all the questions out there and that's why we've created this and we've also got new learning products that are going to be coming out in the near future. I think we've already got four of them recorded and we'll be releasing those in the year to come. >> Thank you, David. Thank you, Courtney, for the work you guys do and for this conversation, which every time I listen to you guys talk to you guys, I learn something new about the work and I really appreciate it.