Frequently Asked Questions

Employee Ownership FAQs

Common questions about employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), and other forms of employee ownership, from the basics to technical topics.

This FAQ is written primarily for business owners, managers, and advisors involved in setting up or running an employee ownership plan. If you're an employee at an ESOP company looking to understand your own benefits and rights, see our articles on Working at an ESOP Company and The Rights of ESOP Participants.

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How does a leveraged ESOP work?

The company borrows money, usually from a bank or a seller note or both, and then loans it to the ESOP. The terms of the two loans do not have to match, and the “inside loan,” the loan from the company to the ESOP, is usually paid off over a longer period of time (10-30 years) so as to allocate shares more gradually to employees. The ESOP can buy either newly issued or treasury shares (in this case, the proceeds would be used for normal business financing purposes) or, more commonly, shares from existing owners. The company makes tax-deductible contributions to the ESOP to enable it to pay the loan, meaning the stock redemption is financed in pre-tax dollars (redemptions are otherwise not deductible). The shares are put in a suspense account. As the loan is repaid, shares held by the ESOP are released and allocated to employee accounts. The shares are subject to vesting over up to 6 years. After employees terminate service, they get either the shares or, more commonly, the value of the shares. If they get the shares, they can sell them back to the company.

For more details, see Selling to an ESOP and Financing the Deal .

Link to this FAQ Topic: ESOP Basics & Feasibility