Employee Stock Ownership Plans (ESOPs)

Employees who work(ed) at employee-owned companies earn shares of the company's stock, in an Employee Stock Ownership Plan (ESOP), sometimes instead of a 401(k). These are shares employees get to keep even after they leave the company's employment much like a 401(k) account. These shares of stock are not a gift; they are hard earned by employees through regular payroll deductions, again much like a 401(k). After leaving the company, usually, in 1-5 years, former employees can sell their shares based upon the then current value.

The most common way that employees who own shares in an ESOP get shortchanged is at the beginning when the ESOP is first formed, when the private owner of the company sells the company to the ESOP at an inflated value, reducing the value of the shares when employees then go to sell their shares years later.

The Department of Labor (DOL), which oversees the establishment of ESOPs, and Federal Courts are closely focusing on valuation. Those valuing a company selling to an ESOP can be influenced by the seller who wants the most money possible & the bank/trustee eager to earn fees paid by the seller to sell the company to the ESOP. This can lead to the employees/ESOP paying an inflated price for the seller's company. Sellers walk away with inflated millions while the employees are saddled with excessive debt (paid through employee payroll deductions), while, usually a year after the sale, the value of the ESOP shares plummet to realistic values. Employees who then have earned shares and later try to sell them, end up with a loss; nothing.