How we set up our Employee Share Ownership Program

In a previous post, I explored the reasons why VistaVu Solutions moved to employee ownership and I outlined the many benefits that resulted. In this post, I’ll explain how we structured our Employee Share Ownership Program and how it’s managed.

When I first looked at this idea in 2016, my initial thinking around employee ownership involved share options. I decided to run the idea by a former classmate of mine from Wharton who’s extremely skilled at finance.

He felt that since VistaVu employees already depended on the company for their salary, an equity investment in VistaVu would make them too dependent on VistaVu’s success. If something happened to the company, people would be harmed financially from two directions.

That made sense, but I still needed a way to move to employee ownership. After discussing it thoroughly with my wife, we decided to give shares to VistaVu employees.

Here’s how the gifting happened. First, we received a valuation of the company through a Chartered Business Valuator (CBV) and then we did what’s known in Canada as a Section 85 rollover – a step to freeze the value of the firm at that moment.

We transferred that value to preferred shares to be held by my family’s trust. Then we issued 1 million common shares to everyone (including me) at a $0 value (remember, the current value is locked up in the preferred shares) with a three-year vesting period. This incentivized people to drive the value up past its current value so they can share in every dollar above the original frozen value.

After the first year, assuming the value goes up, the difference between the total value and the preferred share value is attributable to the common shares. Say the company’s worth a dollar at the time you freeze the value. You roll that value of $1 into the preferred shares say 1 share at $1 value. Next year the company’s total worth is two dollars, the first dollar goes to the preferred shares (locked in one share at one dollar) and the second dollar is value the employees own in the common shares.

In 2016, the first wave of VistaVu common shares were given to current employees based on seniority and responsibility with the company. Those performing the most senior roles like executives or managers were given the most shares, followed by individual contributors. For employees with the same title, time with the company would determine who received either more or fewer shares.

Managing the Program

Since this original share-gifting, staff can acquire shares in three ways:

  • new employees receive a certain number of shares based on their role once their 90-day probation is complete
  • upon promotion from one role to another, people receive additional shares consistent with their new position and responsibilities
  • based on outstanding performance in the previous year, employees are gifted additional shares in the new year.

These are actual shares and not stock options. Twice per year we revalue the shares internally using the same formula as the CBV. Every three years we bring back the CBV to do a formal revaluation. We host a semi-annual shareholder meeting to discuss strategy and respond to questions and concerns.

Because staff can leave VistaVu and cash out shares, we formerly used a liquidation value for share sales and kept the share price intentionally on the lower side of valuation models for cash management purposes. Today, we use market value. This has helped these managers see even greater value from their efforts to raise VistaVu’s worth.

Legal and Tax Implications

VistaVu’s Employee Share Ownership Program took quite a bit of professional advice to set up. We had legal entities in Canada and the US and Canadian and American employees owning shares in each legal entity.

In terms of tax implications, Employee Share Ownership Programs in the U.S. are subject to Alternative Minimum Tax. Under AMT, you must pay tax in advance of receiving any cash from a disposition of your shares. To help our U.S. staff with this, we have offered them an interest-free loan on the tax, which is repaid at the time of sale (when they leave VistaVu for retirement or for another position).

The initial setup cost was more than $100,000. Each year, the program costs approximately $25,000 to administer. Still, all that is a drop in the ocean compared to the benefits that greater employee engagement fueled by employee ownership has brought about.

Those are the basics of VistaVu’s Employee Share Ownership Program, how we set it up and how we run it.

Over the past six years, we’ve seen how much employee energy, creativity, dedication and customer passion are unleashed when employees are also owners. I wholeheartedly invite business owners to consider how employee ownership can transform their company, their people and their relationships with customers.

Thanks for reading – feel free to let me know what you think.