As we enter our 14th year of operations in 2022, PreviousNext is taking a bold step into employee ownership, utilising a groundbreaking approach that’s only recently become possible in Australia.
Founded in 2009, PreviousNext has always looked for innovative approaches to ensuring employee work-life balance and retention. This has included initiatives like full support for remote staff a decade before COVID made working from home the new normal; directing up to 20% of working hours towards open source software contribution; self-managed flexibility around working hours; automatic salary increases in line with the cost of living and early long service leave after five years of tenure. As a result, the company enjoys very high rates of employee retention that are close to triple the tech industry average.
In turn, the benefits of a stable team translate into a sustainable and profitable company. While PreviousNext has always provided a staff profit share program, this is very different from actual ownership of the company. Likewise, Australian tax law has only just started to grapple with the complexities of employee share ownership and until very recently, staff would be taxed up-front for any shares they were granted before they’d even vested!
It piqued our interest when a company we’ve long admired in the USA, Lullabot, adopted an employee ownership model in early 2021 that ticked a lot of boxes we were keen to emulate. With a bit of investigation, it turned out that a similar model of using an Employee Trust had recently become possible in Australia, spearheaded by design firm Meld Studios. We then engaged a specialist firm to establish PreviousNext’s employee ownership model.
The main benefits of the Employee Trust model that were attractive to PreviousNext included:
- An Employee Trust can be established as the third owner of the company that is solely for the benefit of staff. This avoids the complications of having multiple minority shareholders.
- The purchase of shares in PreviousNext by the Employee Trust can be funded by company profit share and doesn’t require staff to “buy in” with their own funds as they would if purchasing shares directly. This also means that the Employee Trust can gradually acquire shares in PreviousNext over a defined time period. In our case, we expect the Employee Trust to be the majority owner of PreviousNext within 5 years and for the co-founders to maintain a minority shareholding or divest completely to the Employee Trust at the point of their retirement from the company.
- With all eligible staff being unit holders within the Employee Trust, it provides a lot of flexibility in terms of onboarding new team members and rewarding long standing staff. In PreviousNext’s case, all employees will grow their unit holdings in the first five years of tenure, followed by an equity vesting schedule over the subsequent five years. This model provides staff with full benefits of ownership after a decade of employment from the time of the trust’s establishment, combined with the growth in value of the company through that time.
- As unit holders, employees are paid annual dividends from PreviousNext, which is far more tax effective than paying profit share as a salary bonus. In the event an employee ever leaves PreviousNext, they’re also eligible for a payout of their equity in alignment with their vesting schedule.
This model means that while the focus for the team is on sustainable growth and performance, the conventional focus on needing to sell a company to a competitor for anyone to benefit from an exit event is vastly diminished.
With the shift to Employee Ownership, PreviousNext will also provide staff with deeper financial insight into company performance. While we won’t be adopting full open book accounting in order to keep individual salaries confidential, we will be sharing detailed data on financial targets and performance with opportunities for all staff to ask questions and have input on broader company strategy. This will include employee representation alongside senior management and co-founders on a Governance Team, more independence for the Operations Team to manage day to day issues and a schedule of full team catch ups and off-sites throughout the year.
While we’re at the beginning of this journey ourselves, we’re also at the forefront of a move towards employee ownership that we expect will be attractive to other companies in similar industries to PreviousNext.
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Sounds like a great way to show your employees they are appreciated while at the same time giving them a vested interest in the companies future.
Wow - this is a really good step!