Employee ownership is a powerful tool for building equity, fostering engagement, and ensuring the long-term sustainability of businesses. In Colorado, the introduction of Alternate Equity Structures (AES) has added a new dimension to the employee ownership landscape, offering companies a flexible set of mechanisms to share value and decision-making with their workers. 

What Are Alternate Equity Structures?

AES are mechanisms that allow employers to grant employees a form of ownership interest – broadly defined to include not just traditional stock, but also profit interests, phantom equity, stock appreciation rights, and more. The key is that AES focuses on function over form: it’s less about the specific legal vehicle and more about the outcomes – sharing value, information, and decision-making with employees. 

Why AES Matter

The statutory requirements for AES are intentionally rigorous. To qualify for Colorado’s tax credit, a company must:

• • Offer the plan to at least 20% of eligible workers (full-time, non-seasonal, non-managerial).
  • Ensure at least 20% of eligible workers participate.
  • Allocate at least 20% of fully diluted securities, synthetic interests, or net profits to participating employees.
  • Grant information, decision-making, and non-financial rights at least equal to those of common stockholders. 

These requirements are designed to ensure that AES are more than just another employee benefit – they are a meaningful commitment to shared ownership and governance. 

Types of AES: Practical Examples

AES can take many forms, each with its own legal and tax implications:

• • Profits Interest (for LLCs): Grants employees a share in future profits and enterprise value, but often comes with administrative complexities, such as shifting employees to self-employed status.
  • Profit Sharing Plans: Can be qualified (subject to ERISA) or non-qualified, with the former requiring careful compliance and broad-based participation.
  • Phantom Equity and Stock Appreciation Rights (SARs): Offer employees a contractual right to share in profits or appreciation, without conferring actual equity – providing flexibility but requiring careful tax planning.
  • Stock Options (for Corporations): Give employees the right to purchase stock at a set price, aligning incentives with company growth, but only make sense for companies on a growth and exit trajectory. 

Challenges and Creative Solutions

One of the biggest hurdles is the requirement to grant information and decision-making rights. Many business owners are comfortable sharing profits, but less so with sharing governance. Creative solutions – such as requiring financial literacy training before granting rights, or structuring voting agreements – can help bridge this gap. 

Policy and Field Innovation

AES are not meant to be easy. They are designed to reward companies that make a serious commitment to employee ownership. As practitioners, it’s our job to help companies navigate these requirements, provide feedback to policymakers, and innovate in the field. The policy is intentionally flexible to allow for creativity – whether that’s stacking AES with other ownership transitions, or designing new financial products to support incremental ownership expansion. 

Conclusion

Alternate Equity Structures are a vital tool in the employee ownership toolkit. They provide on-ramps for companies not ready for a full ESOP or EOT, and they incentivize meaningful, not just symbolic, employee participation. As we continue to experiment and learn, our collective feedback will help refine these tools and expand the reach of employee ownership in Colorado and beyond.

If you have questions or want to discuss how AES might work for your business, feel free to reach out – I’m always happy to brainstorm creative solutions!

 

Disclaimer: The information contained in this article is for general informational purposes only and does not constitute legal advice. The content provided should not be relied upon as a substitute for consultation with a qualified attorney. For specific legal questions or situations, please consult with a licensed legal professional who can provide advice tailored to your particular circumstances.