Any good resources / models for structuring broad base employee ownership?

April 02, 2025

by a searcher from Loyola University Maryland - Sellinger School of Business and Management in Sacramento, CA, USA

I'm looking to see if anyone in the community has experience with broad based employee grants in an SBA 7a financed business. Would love to learn from anyone who has researched or actively participated in something like this.

I know the SBA recently issued further guidance on using 7a loans for ESOP purchases from the existing owner, but I'm more interested in the specifics, practicalities, and potential pitfalls of a traditional 7a purchase, subsequent granting of shares, and then a traditional exit.

Thanks!

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Reply by a professional
from American University in Irvine, CA, USA

Hi, Pete. I haven't had client experience with this in the context of SBA 7a financings, but if it would be helpful, I have a couple of good SBA lending specialists i have worked with on client transactions, and could refer you. I think a very important part of your thinking has to be, irrespective of the type of lending you have, is the risk to owners of a shareholder who owns equity in the company. Under California law in particular, shareholders have significant rights under the Corporations Code which, in the event your relationship with an employee stockholder becomes adverse (such as following termination), can create huge problems for employers.. It is important to make sure that the employer always has a right to repurchase employee equity upon a termination (typically at FMV at that date). Several clients have opted for so-called "phantom equity" plans, where employees do not actually receive stock of the company, but rather the contractual right to participate in payment events tied to the stock (such as acquisitions) as if they owned a certain percentage of the stock. There are many variations of this technique. Feel free to DM me if you would like to speak further about any of the above.

Reply by a professional
from Villanova University in West Chester, PA, USA

Hi ^redacted‌, timing and compliance are important- there are a lot of compliance requirements to various employee ownership opportunities. There are several ways you could structure this, including through bonus incentives, phantom equity, profit interests (if using an LLC), and stock options, among others. These options come with different legal considerations, so it’s important to think about how interests are managed. Most people don’t realize how many ways there are to incentivize employees other than through an ESOP and it's helpful to find a solution that fits the company’s size and desired cost of implementation and management. We also discuss the legal aspects of M&A in our podcast, Dealmaking with Laura DiFrancesco, available here deanstreetlaw.com/links

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