Employee Stock Ownership Plan (ESOP)

An equity plan established by a company that permits the grant of options on stock of the company as long-term incentive compensation for employees.

See Also

Management Buyout (MBO).

Tips

ESOPs are “qualified” in the sense that the ESOPs sponsoring the company, the selling shareholder, and participants receive various tax benefits. ESOPs are used as a corporate finance strategy and align the interests of a company’s employees with those of the company’s shareholders. An 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 necessarily exiting the business. An ESOP is usually the last resort for an owner wishing to exit because an ESOP generally does not maximize value for the owner(s).