Also known as
Layered ownership, EOT with direct employee shareholders, or a combined EOT-ESOP.
Suitable for
Owners who want what an EOT sale offers, including the CGTE and broad-based employee benefit, but also want to give certain employees, like future leaders, a meaningful direct ownership stake. Direct share ownership isn't limited by the allocation rules an EOT must follow. That means it can be shaped to reward the people who will take the company forward.
It works best when there's a clearly defined group of future leaders, and those employees have both the interest and the ability to invest. As with any Share Purchase, this isn't a favour to employees. It's a chance to have financial skin in the game. The financing tools described under Share Purchase, like payroll deductions, share bonusing, and company loans, can help make it affordable.
What's in it for employees
Employees benefit on two levels. All eligible employees share in the company's performance through the EOT, without investing their own money. Direct shareholders also get a minority interest in the company and shareholder rights. When they eventually sell their shares, the proceeds are taxed as capital gains, with potential access to the LCGE.
Challenges
You now have two things to administer. The more employees you offer shares to, the more careful the tracking has to be: share register, FMV records, company articles, share certificates and a regular valuation. In an EOT, the shares never move (unless the trust buys more), and the EOT is always one shareholder, no matter how many employees there are.
The two structures also limit each other. The EOT has to keep its controlling interest, so there's a ceiling on how much can be held directly. Any future share issuance has to be modelled so it doesn't push the trust below that level. Employees who build a significant stake (generally 10% or more, counting related persons) can't be EOT beneficiaries. Future leaders need to understand that trade-off before they buy in. Both transactions should also rest on the same independent valuation, so the price the trust pays and the price employees pay are consistent and defensible.
The direct shareholders could also be seen as an insider club, which can create a divide. Clear eligibility rules for becoming a shareholder, plus consistent communication about the goals and reasons behind the structure, usually prevent this.
Getting the share structure, the Shareholders' Agreement and the fit between the two plans right from the start is critical. These choices shape every future issuance, departure and exit. Expert guidance on a hybrid structure is what keeps the equity of the EOT and the incentive of direct ownership working together rather than against each other.