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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Why would a company choose preferred stock for the ESOP?

Preferred stock has a more stable value, which may be important to participants. It also can pay a higher dividend than common. Because dividends generally do not count towards the 415 limits in C corporation ESOPs, this can allow a company to make larger payments to the ESOP than it could with common, although it is rare for companies not be able to meet these limits by stretching out the length of an internal ESOP loan instead. Also, preferred stock usually yields a higher sales price for the seller per share, although not as a percentage of the total company's value (which is the same now matter how it is divided into shares). Because of this, selling preferred less dilutive than selling common, which may be important to non-selling shareholders.

In the 1980s and 1990s, a number of companies did use convertible preferred, but it is much less common today.

Link to this FAQ Topic: ESOP Basics & Feasibility