It is an employee benefit plan that offers employees ownership in the company. Employee Stock Option Plans (ESOPs) are tax-efficient and benefit sponsors, the selling shareholders, and the participants.
An ESOP is a succession planning tool that allows employees to buy shares in a closely held company. It is usually set up as a trust fund and can be funded through various means; the employees are provided with ownership with no upfront costs. Companies can use this plan to focus on corporate performance and share price appreciation as the shares are part of the employees' remuneration package.
When a company becomes fully vested, it purchases the shares from the employees who leave or resign. The money is typically a lump sum or a regular payment.
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