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Guidelines for Equitable Employee Ownership Transitions How Investors, Founders, and Employees Can Share in the Value Created by Broadly Held Enterprise Ownership

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Guidelines for Equitable Employee Ownership Transitions How Investors, Founders, and Employees Can Share in the Value Created by Broadly Held Enterprise Ownership Guidelines for Equitable Employee Ownership Transitions How investors, founders, and employees can share in the value created by broadly held enterprise ownership A collaborative project of practitioners and thought leaders in the fields of investment management, employee ownership, and socially responsible business who believe deeply in the promise of shared enterprise ownership to build a more just and inclusive economy June 1, 2020 Version 1.0: Pilot Edition Foreword Dear Readers, The Guidelines for Equitable Employee Ownership Transitions are a collaborative offering of practitioners and thought leaders in With the impending wave of baby boomer retirements, millions the fields of investment management, employee ownership, and of privately-owned businesses could come to market in the socially responsible business who believe deeply in the promise coming decades and the COVID-19 pandemic will only accelerate of shared enterprise ownership to build a more just and inclusive that process. Meanwhile, interest in financing business owner economy. exits that result in employee ownership was already growing rapidly among impact-focused investors, from foundations to We now offer these guidelines, in prototype form, to the many family offices. What was once nearly absent appears now to be investors, asset managers, and employee ownership professionals an emerging investing trend, driven by a growing recognition who lead and will lead this important work in the future, and we that employee ownership is a proven, scalable, and sustainable invite dealmakers and other stakeholders to pilot test, innovate strategy to address the problem of rampant inequality. upon, and refine these guidelines. Impact capital could be the missing agent needed to ensure In the attached draft, we have arranged the draft guidelines that a significant portion of these firms transition to employee by deal stage, to make them most intuitive to third parties ownership, creating the momentum needed to drive long-term structuring deals. To accommodate the variety of deal types adoption of the model. But how? that exist in our field, we also chose to structure the guidelines on a tiered system that positions each item as necessary, good- Those of us professionals who have spent decades working in this practice, or aspirational. field know that structuring employee buyouts can be complicated and opaque for newcomers. We also know that it is vital to We hope this effort will serve you well. Thank you for embarking avoid an influx of new transaction activity that leads to deals on this historic journey with us. which inadvertently disadvantage employees or permit excess extraction of value by non-employee investors. Jessica Rose, The Democracy Collaborative Hilary Irby, Soros Fund Management Our collective hope is to impart some of what we have learned in order to communicate straightforward best practices that Marjorie Kelly, The Democracy Collaborative demystify this work and welcome new entrants and innovators, Robin Varghese, Open Society Foundations while at the same time proposing clear guardrails that ensure The Guidelines For Equitable Employee Ownership Transitions that future employee ownership transitions can create the best Project Design Team possible social and economic outcomes for employee-owners and their communities. 2 The Guidelines for Equitable Employee Ownership Transitions Part One: Goals of the Guidelines 1. Design equitable deal structures 3. Promote quality jobs & working conditions Balance interests between sellers, investors, and employee-owners Ensure that jobs pay a living wage, include meaningful benefits, through fair price of enterprise. Target a reasonable, market- offer career-building opportunities, and provide safe, fair, rate return for the risk and duration of any investment. Protect dignified, and engaging workplaces. employees from the potential for financial abuses. Limit over- leverage and investment risk to reinforce long-term financial 4. Consider prioritizing impacted populations sustainability. Structure the deal to sustain employee ownership Explore opportunities for employee ownership conversions to for as long as it serves the interests of the employees. benefit low-wage workers, people of color, and disadvantaged communities. 2. Embed broad-based ownership and support employee participation 5. Measure and report on employee impact Create substantial employee ownership that reaches broadly Establish goals and implement metrics to measure outcomes and fairly into a company, beyond top managers and executives. for employees, alongside company and investor performance. Embed structures that ensure employees of all levels have Require periodic reporting to key stakeholders on the results of voice and agency. Deliver business and financial education to these measurements. Align incentives accordingly. employees, relative to their roles and responsibilities as employees and part owners. Support access to key company data and financial information. 3 Part Two: Highlights of the Guidelines by Deal Stage and Goal GOAL DEAL STAGE 1. Design Equitable 2. Embed Broad-Based 3. Promote Quality 4. Consider Prioritizing 5. Measure and Deal Structures Ownership and Support Jobs and Working Impacted Populations Report on Employee Employee Participation Conditions Impact Stage One: • Select companies that have potential for • Select companies that have • Select companies • Recognize the potential of employee • Establish job Sourcing/ long-term viability and adequate wealth- sufficient free cash flow that have sufficient ownership to correct systemic wealth quality, asset- Selection building for employees to support investments in free cash flow and income inequality and consider building, and participatory culture to support naming benefit to marginalized other employee • Select companies whose free cash flow investments in job workers as an explicit goal. impact goals for the can support debt required to finance • Screen company culture for quality conversion conversion to an employee ownership risks/opportunities related to • Develop capacities, pipeline structure as well as investments in growth employee participation goals strategies, and networks to select and participatory culture target companies whose conversion to employee ownership will • Select companies with viable succession benefit the target populations or leadership and culture fit communities • Consider diverse viewpoints and seek community input in investment decisions Stage Two: • Ensure appraisals are balanced and reflect • Ensure employee job quality • Evaluate baseline • Establish baseline demographic data • Model estimated Due Diligence & true market terms and wealth-building outcomes job quality data, on impacted populations during due gains for employees Valuation are actively considered during such as employee diligence and consider opportunities alongside valuation • Ensure no premium is paid above fair negotiations compensation and for future improvement and investor return, market value for the interest being acquired benefits during to fully evaluate • Assess baseline asset-building • Consider leverage required to support due diligence opportunity for readiness for disadvantaged valuation and consider employee-owners employees and consider opportunities • Select trustees, fiduciaries, or other worker opportunities for future improvement representatives who are independent, for future ethical, and able to advocate for employee improvement interests throughout deal cycle • Provide trustee/representative complete, accurate information • Require trustee/representative to evaluate reasonableness of any data or projections used to determine valuation • Be transparent about selection of trustee/ representative and other advisors, as appropriate • When considering competitiveness of offer, factor seller tax benefits into price negotiations as appropriate 4 GOAL DEAL STAGE 1. Design Equitable 2. Embed Broad-Based 3. Promote Quality 4. Consider Prioritizing 5. Measure and Deal Structures Ownership and Support Jobs and Working Impacted Populations Report on Employee Employee Participation Conditions Impact Stage Three: • Protect independence of trustees, • Allocate the greatest amount • Factor cost • Consider partnering with capital • Establish impact fiduciaries, or other worker representatives reasonable, but at least 30%, of job quality providers who serve target metrics and Deal Structuring to company ownership to employee improvements into communities or populations reporting protocol, Closing • Structure capital to preserve the potential ownership group capital structure which include job for long-term employee ownership • Consider partnering with financial quality metrics • Distribute ownership clearly • Ensure employee capacity, education, workforce • Target no more than a reasonable and impacted and fairly and memorialize in outcomes are development, or similar organizations market-rate return for risk and duration of population metrics, organizing documents actively considered that serve priority communities investment alongside financial during deal • Clarify employee involvement metrics • Limit influence of short-term investor time structuring at time of deal; memorialize in horizons organizing documents • Ensure capital structure adequately • Consider embedding post- considers costs associated with any ESOP transaction pass-through administration or repurchase obligations voting to employee-owners on • Encourage trustees or representatives to issues
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