Many types of businesses are turning towards employee ownership as a succession planning tool and as a way to incentivize employees. Industries that can benefit from employee ownership plans include architecture and design firms, construction companies, and defense contractors, among others. While many start-ups offer stock options to employees as an incentive, even larger tech companies can take advantage of the unique benefits of employee ownership.
An Employee Stock Ownership Plan (ESOP) is a qualified retirement plan that invests in employer securities. Eligible employees are provided a stock ownership interest as a benefit of working for the company, with their ownership interest increasing over time. An ESOP provides benefits for the employees, the business owners, and for the success of the company overall.
Startups Often Begin with Employee Ownership Stake
Most tech startups issue stock options to early employees. The reasons for issuing stock options in a startup illustrate the benefits of stock ownership to more established companies. Tech start-ups may be short on capital and need to use what they can to attract top talent. Stock options provide an alternative to a higher salary that rewards employees for their hard work and incentivizes staying with the company.
Similarly, ESOP ownership gives employees additional reasons to stay with the company, even in the face of tech recruiters and other companies offering higher salaries and more benefits. The longer the employee stays with the ESOP, the more they stand to lose by leaving the company early. Leaving the company before a designated time or before the age of retirement could mean losing their ESOP interest.
When employees have an interest in the long-term success of the company, their motivation aligns with the greater good of the company. This can increase productivity and cooperation among employees. Instead of short-sighted competition among employees, each has an interest in cooperation for mutual benefit.
Even Successful Tech Companies Can Be a Tough Sell
Tech companies can be so specialized that they are not comparable to other companies. When owners are looking to sell or are planning on succession down the road, the uniqueness of the company can make it difficult to find a buyer. Even if the company is turning a profit, it can be hard to find the right buyer who is willing to pay fair market value.
An ESOP can provide the company owners with a ready-made buyer that is willing to offer fair market value. It also provides employees with some sense of security that a new buyer will not come on board and lay off the entire workforce. Vendors and customers can also be assured that the company will continue operating as usual, providing necessary predictability.
With an ESOP, the owners can transition company ownership over time. During the transition, the owners can maintain a majority ownership interest and leadership positions to ensure the founders' vision for the company will continue after the business is turned over to employee ownership.
If you have any questions about how an ESOP can benefit your company, Butterfield Schechter LLP is here to help. We are San Diego County largest law firm focusing its law practice on employee benefits, ESOPs, and tax law. Contact our office today with any questions on how we can help you and your business succeed.