Employee Ownership Takes Time. Arbitrage Requires Urgency.

There’s a noticeable shift happening in how ownership transitions are being talked about right now. Terms like shared ownership, inclusive capitalism, and employee participation are showing up in deal announcements, conference panels, and glossy reports with increasing frequency. On the surface, it sounds like progress, a long overdue correction to decades of extractive dealmaking.

But language can change faster than power.

And when you look closely at how many of these transactions are actually structured, who controls them, how long the ownership lasts, and what happens when the next exit arrives, a different picture begins to emerge. One where the idea of employee ownership is advancing far more quickly than the reality of it.

That gap is where “equity washing” lives.

Ownership is decided upstream, not at close

Employee ownership is often treated as a destination, something you arrive at once a deal is signed and the press release goes out. In practice, ownership outcomes are shaped much earlier, long before lawyers finalize documents or employees are told what the new structure will be.

They are shaped by how opportunities are sourced, whether timelines are compressed or patient, who is invited into the process, and what problem the deal is actually designed to solve. By the time a transaction is publicly described as employee owned, the most important decisions have usually already been made: who controls the board, who sets the exit horizon, how risk is allocated, the size of the equity pool, and who benefits when liquidity eventually arrives.

If those choices were driven by speed and certainty, employee ownership rarely gets the time it needs to take root in any meaningful way.

Employee ownership compounds. It doesn’t cash out.

One of the most persistent misunderstandings about employee ownership is the belief that it’s an instant payoff. That employees sell the company and suddenly receive life changing checks. That framing may be comforting, but it’s largely inaccurate.

Real employee ownership builds value gradually. It compounds over time through steady participation in a healthy business, strong performance, and long term alignment. As Chris Fredericks, CEO of Empowered Ventures, explains on this episode of Ethical Exits, employee ownership isn’t a gift delivered on day one. It is something that compounds, meaningfully, year after year.

This is especially true for ESOPs. In practice, ESOPs function far more like retirement accounts than lottery tickets. Their value is realized through longevity, not immediacy. Which is precisely why they require patience, and why they sit so uneasily alongside transaction models built for speed.

Short term equity is not the same thing as ownership

Much of today’s confusion comes from collapsing very different tools into the same bucket. Short term equity plans, often referred to as STEPs, are frequently described as employee ownership. Structurally, they are something else entirely.

STEPs are designed to share a portion of upside during a defined holding period. They are typically super minority positions, often around ten percent or less, with no meaningful governance rights and no expectation of permanence. When the sponsor exits, the plan exits with them.

That isn’t a failure of execution. It’s the intent.

Employee ownership, by contrast, is meant to persist beyond any single owner. It is durable by design, oriented toward long term participation, and built to compound across generations of employees rather than disappear at the next liquidity event. If equity evaporates when the investor leaves, it may have created alignment, but it did not create ownership.

The 1042 strategy, explained without jargon

A significant driver behind many of these transactions is the 1042 rollover. In plain terms, a 1042 allows a founder to sell their company to an ESOP and defer paying capital gains taxes, provided the proceeds are reinvested into qualifying replacement assets.

For most people, the easiest way to understand this is through real estate. If you buy a house, sell it, and use the proceeds to purchase another qualifying property, you can often defer taxes on the gain. You haven’t eliminated the tax obligation. You’ve postponed it by reinvesting the capital.

A 1042 works in a similar way.

There is nothing inherently wrong with this. Tax planning is a legitimate consideration in any exit. The issue arises when the tax outcome becomes the primary objective, and employee ownership becomes the vehicle used to achieve it.

A 1042 is a tax strategy. Employee ownership is a governance strategy. They answer different questions. When they are treated as interchangeable, confusion and misalignment follow.

Where urgency breaks the model

Employee ownership takes time. Time to educate employees, time to design governance thoughtfully, time for capital to accrue, and time for culture to catch up to structure. None of this happens on an accelerated deal clock.

Retail arbitrage and forced liquidation horizons, by contrast, rewards urgency. Compressed timelines. Artificial deadlines. Best and final rounds. The quiet pressure to move quickly before a window closes.

This is the fault line.

Employee ownership requires time.
Private equity arbitrage requires urgency.

When urgency dictates the design, ownership becomes secondary. The structure may technically qualify, but the substance never has a chance to develop.

The impact extends beyond the company

There’s another consequence of this dynamic that rarely gets discussed. When large ownership transitions are engineered primarily to minimize taxes and accelerate exits, the costs don’t disappear. They are externalized.

Reduced taxable revenue affects the public systems we all rely on: schools, roads, infrastructure, social services, and retirement systems. When those systems weaken, the burden doesn’t fall evenly. It shifts downward, placing more pressure on those with the least ability to absorb it.

This isn’t just about extracting value from companies. It’s about extracting value from the commons, while using the language of employee empowerment to soften the optics.

That’s what makes “equity washing” so corrosive, for all of us.

This isn’t about villains. It’s about incentives.

None of this requires bad actors or secret motives. Incentives are doing exactly what incentives are designed to do.

Tools created for stewardship are being repurposed for speed. Language meant to describe shared power is being used to justify private gain. And as The ESOP Association has noted in recent reporting, what’s emerging is less a shift in worker power and more a reframing of existing control structures.

The danger isn’t malice. It’s normalization.

Call it what it is, and choose intentionally

Optimizing for a fast, tax efficient exit can be a rational and legitimate strategy. But it is not employee ownership.

Employee ownership is about who holds power after the deal. Arbitrage is about who gets paid when it closes. Confusing the two creates false expectations for employees, moral cover for extractive structures, and real downstream harm for communities.

Ownership transitions are happening faster than our ethical infrastructure can keep up. That gap is where “equity washing” thrives.

The good news is that none of this is inevitable. Ownership outcomes are shaped upstream, by sourcing, timelines, and intentional design, long before the press release ever goes out.

And those choices are still very much available to be made differently.

Shout out to our friends at Delta Fund for their leadership in pushing this conversation forward.