Lullabot’s Road to Becoming 100% Employee-Owned
Lullabot has successfully serviced major businesses and organizations in the strategy, design, development, and maintenance of digital experiences. Their clients range far and wide, from IBM to NBC to NYU. Founded in 2006, Lullabot is exclusively focused on Drupal and has remained one of the communities’ significant organizational contributors.
At this year’s DrupalCon, Lullabot gave a presentation on their shift to a fascinating business model that allows every employee to become a partial company owner. It’s called an ESOP or an Employee Stock Ownership Plan, and Lullabot transitioned to this organizational structure in 2021.
Rather than just receiving hourly or annual pay, employees are additionally now owners of what they contribute, leading to a deeper investment in the outcome of their work.
Here are some of the questions answered by Lullabot executives at their presentation.
How does a company make this happen?
There are several ways to convert to employee ownership. For Lullabot, the best decision was to make the owner of their company a retirement plan. Sounds strange, right?
By creating a trust in the form of a retirement plan and giving that retirement plan ownership of the company, Lullabot can now dispense shares of the trust to 100% of their employees, top to bottom. It is similar to a 401k, except that the 401k itself owns the company.
As employees work, the company grows, and the shares of this trust accrue value. When the time comes for an employee to leave, they can retrieve their money over a five-year plan.
This five-year bumper was instituted to deter a stock owner from looking to make a quick purchase by suddenly pulling a large sum of money out in the form of this retirement fund.
Every employee is given, not offered the chance to purchase, shares in the trust.
How long did this reorganization take place?
“It was a tremendous amount of work,”
said Karen Stevenson, Chief Operating Officer at Lullabot,
“and it took about six months to do, but ultimately it was worth it.”
Perhaps six months doesn’t sound very long to you, but when the executive level of a company takes on a project this large, alongside all their other responsibilities, it must be a draining endeavor.
Beyond expenses in the form of time, it also cost Lullabot north of $300,000 in hiring legal help, third-party administrators, and trustees.
Why become an ESOP?
By aligning the incentives of shareholders and employees, ESOP’s create a greater sense of connection to one’s work. Lullabot has found that people care more about the outcome of their labor and feel more purposeful in their work under ESOP.
Although it was not an exact statistic, during the “Great Resignation,” Lullabot saw high employee retention numbers – something they suspect is connected to employee ownership.
On the corporate side, an ESOP does not pay any federal taxes. Because the ‘owner’ of the company is a tax-exempt trust fund, if a company is owned entirely by its ESOP, then it is not subject to federal tax.
How does the change in ownership structure affect the governance of the company?
Despite this organizational restructuring, an ESOP doesn’t necessarily mean everyone votes on everything. Lullabot is still run like a fairly normal company, with leadership and a board of directors.
However, employees get to vote on things like recapitalizations and other instances that shareholders get to vote on by corporate law – similar to a public company.
How does having an ESOP factor in Lullabot’s diversity, equity, and inclusion efforts?
For instance, how are the shares of this trust being distributed among employees?
The retirement fund is divided into 50,000 shares, says Lullabot, and the shares are distributed proportionally based on wages and hours worked. If there were significant income gaps across the company, this distribution form could be very unfair.
At Lullabot, however, wages between the different levels of the company are not hugely different. So, for them, this type of organization works. Lullabot stressed that an ESOP must be well thought-out and paired with the right company to bring all its positive qualities to light.
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