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Here's my interpretation of how this might work (reading between the lines and based on how ESOPs typically work): 1. The founder wanted out but didn't want to

by zrail 3y ago

Here's my interpretation of how this might work (reading between the lines and based on how ESOPs typically work): 1. The founder wanted out but didn't want to sell to a PE firm, and they wanted to give control to the employees. 2. The founder set up a trust that will gradually buy them out over the course of 7 years. The financial arrangement is probably something like: the trust got a long term loan for the initial tranche of purchases which it will pay back via dividends attached to those shares. It will also use those dividends to pay for future tranches of shares. 3. Employees don't have any ownership rights at all, the trust is the sole shareholder. Employees do have control of the trust, to an extent, because at least some members of the trustee board will be elected from the staff. The trust is probably written such that the trustees can elect to distribute to the staff some or all of the dividends remaining after founder share purchases and debt service. To answer the ownership question, trusts don't really have owners. Trust materialize into existence when a grantor (the founder) funds them for the benefit of beneficiaries (in this case the staff) and are controlled by trustees (in this case, at least some part of whom are staff).

refulgentis 3y ago
Thank you, I was real curious how this was working. It sounds so fraught, I admire people who are able to handle ambiguity, and avoid simple interpretations, better than I. My naive read: You have to convince a bank to give a brand new entity a loan, with the only real benefit accruing to the bank in the form of interest and yourself in the form of giving yourself a retirement gift. I honestly don't understand why anyone would play ball with that unless the interest rate was, say, 3-4 points above treasuries, so now it's the same thing as a PE buyout, but at least the money went to you
- zrail 3y ago
  There are lots of ways to structure it that don't involve an actual bank loan. It's very possible that the founder loaned the first tranche of shares to the trust and the trust is paying some amount of interest on that loan over time. Sometimes this is called seller financing.
- derefr 3y ago
  > It sounds so fraught Wait until you hear about charitable trusts! (And specifically, ones defined into existence by a person's will, such that it's up to a probate judge to figure out how to make the act of charity happen.)

by zrail 3y ago

refulgentis 3y ago

Thank you, I was real curious how this was working. It sounds so fraught, I admire people who are able to handle ambiguity, and avoid simple interpretations, better than I. My naive read: You have to convince a bank to give a brand new entity a loan, with the only real benefit accruing to the bank in the form of interest and yourself in the form of giving yourself a retirement gift. I honestly don't understand why anyone would play ball with that unless the interest rate was, say, 3-4 points above treasuries, so now it's the same thing as a PE buyout, but at least the money went to you

zrail 3y ago
There are lots of ways to structure it that don't involve an actual bank loan. It's very possible that the founder loaned the first tranche of shares to the trust and the trust is paying some amount of interest on that loan over time. Sometimes this is called seller financing.
derefr 3y ago
> It sounds so fraught Wait until you hear about charitable trusts! (And specifically, ones defined into existence by a person's will, such that it's up to a probate judge to figure out how to make the act of charity happen.)