How Employee Ownership Works

ESOPs are Defined Contribution Plans

The modern employee stock ownership plan was formalized by Congress in 1974. As a result, there are concrete rules that govern plan development, share allocation and ongoing management.

Join employee ownership expert Larry Kaplan for a video walk-through of the basic mechanics these unique business transition strategies. Read ahead to learn more about how leveraged ESOPs function and create meaningful benefits for all stakeholders.

Who is the Buyer?

An employee stock ownership trust, representing at least 10 ESOP participants, buys company stock.

Who Sets the Price?

The price is negotiated with an institutional trustee, based on an independent valuation.

How is it Funded?

Sponsors borrow money on the trust's behalf, in the form of third-party financing and/or seller notes.

Who Gets Shares?

Full-time eligible employees are allocated company shares, proportional to their annual compensation.

How is Stock Earned?

A portion of all ESOP shares is allocated annually; the shares vest within three to six years.

How do Employees Cash Out?

Vested stock is sold back to the company, at a current valuation, when employees depart.