Employee Stock Ownership Plan (ESOP)

What Does Employee Stock Ownership Plan (ESOP) Mean?

An employee stock ownership plan (ESOP) can be classified as a type of exit strategy for business owners. In an ESOP, the business owner is selling a portion of the company's equity to an employee or employee group. It allows the employees to participate in the share ownership without a significant and immediate capital outlay. It is similar to an MBO, but in an ESOP the existing owner is not necessary exiting the business.

ESOP's are very common in the US because there is specific tax legislation that provides significant tax advantages to the seller, which makes buyouts led by employees all the more appealing. The primary challenge with ESOP's in private companies is that they are costly requiring administration and legal oversight, and they require a certain level of financial disclosure that the private owner may be unwilling to provide.

Divestopedia Explains Employee Stock Ownership Plan (ESOP)

The perceived benefit of an ESOP is that it provides employees with a sense of ownership which will lead to increased productivity and profitability.

A number of things need to be consider in the implementation of an ESOP including:

• Whether an employee needs to pay for the shares or whether they are given at no cost;
• What happens when an employee is terminated or dies;
• What information is provided to employees post implementation? This could be a big issue for private companies that have never shared their financial information with employees;
• Who is eligible for the ESOP; and
• How are the shares valued at inception and ongoing?