Creating Internal Markets with Employee Benefit Trusts: Unlocking Liquidity in Private Companies
In the evolving landscape of employee ownership, private companies are increasingly exploring innovative ways to provide their teams with real value from their shareholdings. While granting shares can serve as a powerful incentive, employees in privately held companies often face a fundamental challenge: how to convert their equity into cash when there is no open market.
One solution is the use of an Employee Benefit Trust (EBT) to create an internal market for employee-held shares. Structured and managed correctly, an EBT can act as a market participant - purchasing shares from employees and selling them to new or existing shareholders - while aligning with the company’s long-term goals.
This article explores how EBTs can be used to create internal markets, why this matters for employee engagement and company growth, and how such structures can interact with emerging platforms like the UK’s PISCES initiative.
The Liquidity Problem in Private Companies
For employees of private companies, holding shares is not the same as holding money. Without a listing on a public exchange, there is usually no easy or regulated way to sell shares. Common workarounds like one-off buybacks, infrequent tender offers, or private transfers, often lack transparency, consistency, and scalability.
This creates a major disconnect:
Employees may feel disillusioned when their “ownership” can’t be realised.
Employers struggle to retain top talent when their share schemes lose credibility.
Advisors face complexity and compliance risks when navigating bespoke exits.
To address this, some companies are turning to the concept of an internal market — a structured environment where employees can sell (and sometimes buy) shares at regular intervals, at fair market value, and under clear rules. At the heart of this model is often the Employee Benefit Trust.
What is an Employee Benefit Trust?
An Employee Benefit Trust is a discretionary trust established by a company (the “settlor”) for the benefit of its employees. The EBT is typically a long-term vehicle, governed by a professional trustee and designed to:
Acquire and hold company shares,
Distribute shares or cash to employees,
Act as a facilitator for employee share plans.
EBTs are already common in employee ownership transactions and as part of share incentive plans but the flexibility in the use of EBTs should not be underestimated.
Using an EBT to Create an Internal Market
When structured appropriately, an EBT can become an active buyer and seller of shares, helping to establish an internal market. Here’s how this typically works:
1. Funding the Trust
The company periodically funds the EBT, either in cash (to buy shares from employees) or by transferring shares directly (which the trust can later resell). In most circumstances, and where structured appropriately, this funding may be by way of loan from the company, mitigating the risk of value being “stuck” in the EBT.
2. Trustee Mandate
The trustee is empowered to buy and sell shares in accordance with the trust deed and a set of operational guidelines. These may cover pricing methodology, eligibility, dealing windows, and governance.
3. Regular Dealing Events
The company establishes one-off, periodic or ad hoc “liquidity windows” during which employees can submit offers to sell (or buy) shares. The trustee evaluates requests and transacts at fair market value, often based on a professional valuation.
4. Recycling of Shares
Shares purchased by the EBT may be:
Retained for future employee awards,
Re-sold to new joiners or other employees,
Cancelled (if bought back by the company).
This creates a circular flow - older employees realise value, newer employees get access to shares, and the trust helps maintain equilibrium.
5. Nominee
In addition to facilitating liquidity, the EBT can also act as nominee holder for employee shareholders, simplifying both administration and corporate governance.
Rather than issuing shares directly to individual employees, each of whom would otherwise need to be entered on the company’s register of members, the shares can be held legally by the EBT trustee on a nominee basis, while the beneficial ownership rests with the employee.
This approach reduces cap table fragmentation, preserves confidentiality, and streamlines voting, dividend, and transfer processes. It also allows the EBT to act swiftly during internal market events, aggregating buy or sell instructions on behalf of employees, which can support improvements in execution and manage regulatory compliance.
Nominee holding is particularly useful when employees are spread across jurisdictions or where the company seeks to avoid frequent share register updates.
Advantages of an EBT-Driven Internal Market
Enhanced Liquidity Without a Listing
The primary benefit is that employees can monetise their shares on a recurring basis, giving real-world value to their ownership.
Governance and Fairness
Transactions through the EBT are typically subject to clear rules and a consistent valuation methodology, reducing the risk of perceived unfairness or insider advantages.
Control Over the Cap Table
Unlike open markets or third-party transactions, the use of an EBT ensures that the company retains visibility and influence over who holds shares, preserving strategic and cultural alignment.
Tax Efficiency
In defined cases, the use of a Jersey trustee can minimise tax leakage with unencumbered shares in the trust typically sheltered from Capital Gains Tax. Additionally, in certain circumstances the company’s funding of the EBT may be deductible for corporation tax purposes.
Flexibility
An internal market via an EBT can operate even if the company has no plans for an IPO or trade sale, making it particularly suited to long-term private companies or employee-owned businesses.
Governance Considerations
Setting up and running an EBT-led internal market requires sound governance:
Valuation: A robust and independent valuation process is key to maintaining fairness and compliance.
Dealing Restrictions: Employees may need to be classified by role, seniority, or option type, with staggered rights to sell.
Funding Limits: The company must budget for liquidity events and consider the accounting treatment. Where sufficient funding is not available to facilitate all employee dealing elections employee sales can be scaled back.
Legal and Regulatory Oversight: Depending on the jurisdiction, securities laws, trust law, and tax rules all intersect here. Legal and professional trustee advice is essential.
Integrating EBTs with PISCES: A Future-Forward Approach
The UK’s PISCES initiative (Private Intermittent Securities and Capital Exchange System) aims to create a regulated platform for trading private company shares, offering intermittent liquidity windows and standardised processes. While still in development, PISCES represents a significant step toward creating access to private equity markets.
For companies already using EBTs, PISCES could serve as a complementary liquidity channel:
Hybrid Model: Shares could be warehoused in the EBT and released during PISCES trading windows, offering employees broader liquidity options.
Valuation Benchmarking: PISCES could provide market-based valuations that inform internal pricing mechanisms within the EBT.
Regulatory Alignment: Participation in PISCES may enhance transparency and governance, aligning with investor expectations and regulatory standards.
By integrating EBTs with PISCES, companies can offer employees a more dynamic and credible path to share liquidity, enhancing the overall attractiveness of their incentive schemes.
Conclusion
Employee Benefit Trusts offer a powerful and flexible tool for private companies seeking to incentivise employees and manage share liquidity. By creating an internal market, EBTs address a critical gap in private equity ownership - value realisation. As platforms like PISCES emerge, the potential to combine internal trust structures with external market mechanisms opens new horizons for employee share ownership.
At Fiduchi, we specialise in administering bespoke EBT solutions tailored to your company’s goals. Whether you're exploring internal markets or preparing for future integration with platforms like PISCES, our team is here to guide you every step of the way.
To discuss how we can help, please contact Tom Hicks or Pearl Rabet, or click here to read more about Employee Incentives.