EMPLOYEE STOCK
OWNERSHIP PLAN
Employee Meeting Template
Presented by:
YOU (Eventually)!
Agenda
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A history lesson for the future…
What is an ESOP?
Why do we have one?
How does our ESOP work?
• ESOP terms at-a-glance
• How is value determined?
• What can I do to affect value?
• Questions, Questions, Questions
A History Lesson for the Future
1920's
First Modern
Employee-Owners
1950's
Louis Kelso
1974
Russell
Long and
ERISA
Today
10,000+
ESOPs
Millions of Employee-Owners
On average, ESOP companies have…
• Faster Growth
Companies with ESOPs grow 2.3% to 2.4% faster measured in
sales, employment, and productivity growth.
• Higher compensation
5-12% higher wages than in comparable non-ESOP companies.
• More assets
ESOP employees have 2.5 times the retirement assets in companysponsored plans.
• Improved company stability
Less likely to face bankruptcy or acquisition; 20% better “survival”
rate.
What Is An ESOP?
• Employee Stock Ownership Plan
• An ESOP is a retirement plan (just like
a pension, profit sharing or 401(k)
plan) with two significant differences:
– An ESOP is designed (in fact, required) to
invest primarily in our own Company
Stock; and
– Our ESOP can borrow money based on
the credit of the Company to buy stock.
How Do Companies Benefit From
ESOPs?
• ESOPs Help Companies:
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Increase employee motivation and productivity
Achieve faster growth
Provide tax benefits to selling shareholders
Accomplish business succession planning with pre-tax dollars
Transition ownership of the business without damage to operations
Take advantage of significant tax benefits as operating ESOP
companies
• ESOPs are a very effective vehicle to accomplish a wide range of
corporate objectives:
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Shareholder liquidity
Growth through acquisition
Business succession
Employee benefit
Ownership culture
How Does An ESOP Work?
• Each employee who meets certain basic eligibility
requirements has an account in the ESOP trust
• Each year, the company may contribute to the
ESOP, and the trustee will either buy stock directly
for employees or make a payment on ESOP debt
• Shares that are purchased (or paid for) are then
added to participants’ accounts (either as a
uniform percent of pay or as earnings on shares
previously allocated)
• On retirement, death, disability or following other
termination of service, employees are entitled to
receive their vested shares (or the cash value)
Important Terms
(A Group Project with Your SPD)
• Plan Year:
• Participant:
• Allocation:
• Vesting:
• Forfeiture:
• Valuation Date:
• Service:
• Others?
Important Terms
• Plan Year: The accounting period for the ESOP
• Participant: An employee who has met the eligibility requirements
and entered the ESOP
• Allocation: The annual process of determining each participant’s
entitlement under the ESOP
• Vesting: The process of earning a right to benefits through service to
the Company
• Forfeiture: The non-vested portion of his or her account that is left
behind when a participant terminates before completing the required
vesting service
• Valuation Date: The date each year on which the Company Stock’s
value is determined by the independent appraiser
• Service: Time employed by the Company. There is usually a
different service requirement for entry, allocations and vesting
• Others: ????
Why Do We Have An ESOP?
• To provide for the orderly retirement of a founder over
several years.
• To create liquidity for a shareholder without selling
the Company.
• To create a stock based employee benefit that
provides benefits for employees that are directly
related to the success of the Company
• To create a program of ownership that will enhance
all of our stakeholders’ future value.
• To provide an employee benefit that is cost effective
and aligns employee motivations with those of the
shareholders.
How Do ESOPs Benefit Employees?
• The ESOP is fully funded by the company
• Employees develop ownership without
investment of their own funds
• ESOP accounts grow on a tax-deferred
basis
• ESOP ownership creates no liability for
employee shareholders
• ESOP benefits are protected from creditors
• ESOPs allow employees to share directly in
the success they are helping to create
The Basic Non-Leveraged ESOP
Basic ESOP Funding Structure (an Example)
Company
Contributes cash or newly issued
shares to the ESOP
Purchase Shares
At Current FMV
ESOP Trust
Build Employee Equity Over Time
Shareholders
How Does a Leveraged ESOP Work?
Leveraged ESOP Transaction Structure (an Example)
Typical Term Loan
Company
Lender
May Be Longer or
Shorter Term
Shares
ESOP Trust
Shareholders
How Does a Seller Financed
ESOP Work?
ESOP Financed by Selling Shareholder(s)
Your Company
Contributions,
Loans or Earnings
Shareholder
Purchase Shares
And Makes Payments
on ESOP Loan
ESOP Trust
Shares Are Added to
Participant Accounts
as the Debt is Repaid
How Stock is Allocated to Your
Account?
$ Term Loan Repayment
Company
LENDER
$ ESOP Loan Repayment
ESOP Trust
Stock Allocations
$ Fully Tax Deductible
Contribution
Suspense
Account
Participant
Accounts
Year
1
2
3
4
5
6
7
8
9
Shares are Added to Your Account Each Year as the Debt is Repaid.
1
0
ESOP Accounts Grow!
• Each year, Employees who qualify have shares of stock added to
their accounts
• Employees become vested in their shares based on years of
service with the company
• Since the ESOP is invested in Company Stock, its value reflects
the value of the Company
• As the company grows in value, ESOP shares grow in value
based on independent appraisal of fair market value
What is the ESOP’s Role in Management?
The ESOP is
Represented by
the Trustee
ESOP TRUSTEE
- Is Appointed by the
Board of Directors
- Is An ESOP Fiduciary
- May be an Institution
or Individuals
- Is the Legal Owner of
Shares
- Votes Shares on All
Matters (including
Election of Directors)
- May solicit voting
instructions from
Participants on major
issues.
Shareholders Elect
The Board Of Directors
The Board of
Directors is the
elected Body
Responsible for the
Direction of the
Company
Board of
Directors
Appoints
Officers &
Determines
Compensation
of Company
Management
OFFICERS
MANAGE THE
COMPANY
Non-ESOP
Shareholders
Vote Directly
In order to Operate
The ESOP or Assist
Communication, the
Board May Make Use of
Advisory Committees
- ESOP Administration
- Communications
- Other Committees
Who Controls an ESOP Company?
• ESOP is a vehicle to share value, not corporate control
– Shareholders elect the board of directors
– The board of directors appoints the ESOP trustee
• The Trustee is the shareholder for all legal purposes
and is charged with the responsibility to protect the
value for participants
• The Trustee votes the ESOP’s stock
– As the Trustee determines in closely held companies;
– As directed by participants in public companies;
– As all participants direct on major corporate issues
• Mergers, sales of all assets, recapitalizations, etc.
ESOP AT - A - GLANCE
• Become an ESOP Participant:
– Employees become ESOP participants on
_________ after:
• ???
• Except Leased Employees, Independent
Contractors and Union Employees.
• Qualify for an allocation of the
Contribution:
• ???
ESOP AT - A - GLANCE
• Become 100% vested:
– Upon retirement (DEFINE), disability, death or
– Based on years of vesting service (DEFINE beginning
DEFINE).
Vesting Service at Termination
Less than 2 years
2
3
4
5
6 years or More
Vested Percent
0%
0%
20%
0%
40%
100%
60%
80%
100%
 Non Vested Stock is forfeited after termination and reallocated to the
ESOP Trust.
ESOP AT - A - GLANCE
• Participants will be entitled to begin
receiving a distribution of the fair market
value of ESOP stock:
– During the year following the year of
retirement, disability or death, or
– Within the year that includes the 6th
anniversary of termination for other reasons,
or, if later
– Following the end of the year in which the
last ESOP loan payment is made.
• Benefits will be based on independently
determined fair market value at the time
your stock is cashed out.
IN THE END,
IT’S ALL A MATTER OF VALUE!
How is Value Determined?
• Independent Fair Market Valuation
• The valuation process:
– Determine the value of all our assets,
– Analyze the Company’s past performance,
– Compare us to similar reporting companies,
and
– Compute a present value of our future
earnings.
• The appraiser issues a report to the ESOP for review and
approval.
• The per share value you see each year is
the result of this process.
An Exercise in Valuation
Let’s Try Our Hand At Valuing
Something Fun!
The Tale of Harry the Horse
• Harry is a 4 year old race horse
– Harry is owned by a syndicate of 5 investors; one
owns 60% and each of the others own 10%
– Harry raced 17 times in the last two years and won
$300,000
– The annual cost to keep Harry in feed and board is
about $250,000
– Harry is for sale because two of the minority
investors are pressing the syndicate to buy them out
– There is no complete agreement among the
syndicate members on the price the horse should
bring, nor is there complete agreement as to
whether he should be sold at all
Willing buyer and willing seller meet…
• What affects Harry’s Value?
– Do past earnings indicate future performance?
• What is the “useful life” of a horse?
• What are other horses trading for?
• Are you getting control of all the winnings?
– How much profit is Harry really making for the
syndicate?
• Is $50,000 the “real Profit” number?
• What about their initial investment?
• What about other types of expenses?
– What are the industry considerations for you as a
buyer?
• Do you know the ins and outs of horse racing?
Or put another way, what would
YOU pay for Harry?
So What Does That Mean to Me?
We May Not Be Able
to Influence:
But Most Keys to Value are
in Our Power:
• Changes in the
business cycle
• Overall Economy
• Natural Disasters
• Increased Productivity
• Reduced Waste
• Customer satisfaction
What else do you do that affects Company
Performance? Value? The Future?
Retirement Safeguards Under ERISA
E MPLOYEES'
ETIREMENT
R
I NCOME
S ECURITY
A CT
1. SPONSORS ARE FIDUCIARIES
-No Self-Dealing
-Minimize Risk of Loss
2. DISCRIMINATION NOT ALLOWED
-Required Coverage
-Consistent Participation
3. VESTED BENEFITS PROTECTED
-Reasonable Schedule
-Vested Means Non-forfeitable
4. EXCLUSIVE BENEFIT RULES
-BUT-
THE PERFORMANCE OF THE FUND IS NOT GUARANTEED
ESOP BENEFITS ARE YOUR BUSINESS!
How ESOP Benefits Grow
Annual Contributions
Add Shares to
Participants’ Accounts
Forfeitures Add
Shares to Participants’
Accounts
Your Interest Grows!
Vesting Increases
the Value of
Participants’ Benefits
Value Affects Us All!
Growth in Stock Value
Means Growth in Participants’ Accounts
Work Smart and Watch Your Future Grow
Questions?