ESOP (Employee Stock Ownership Plan)

A company-funded retirement benefit that gives employees an ownership stake through shares held in a trust — most common at private companies.

An Employee Stock Ownership Plan (ESOP) is a qualified retirement plan in which employees receive company stock as a benefit, held in a trust on their behalf. Unlike stock options or RSUs, employees typically don't buy or exercise anything — the company contributes stock (or cash to buy stock) into the ESOP trust on employees' behalf, and accounts accumulate shares over time. ESOPs are especially common at private companies and are often used as a succession tool when founders or owners want to sell to employees rather than an outside buyer.

ESOPs are distinct from other forms of equity compensation. RSUs and stock options are granted to individual employees and vest over time based on continued employment. An ESOP is a company-wide plan — typically covering all eligible employees — funded by the company rather than representing individual grants or purchases. The value of ESOP shares at private companies is determined by an independent annual valuation (required by law), which employees receive in their annual account statements.

When employees leave an ESOP company (or the company is sold), they receive the value of their vested ESOP account — either as a lump sum or in installments. This can be significant at successful employee-owned companies that have grown substantially. The risk: ESOP accounts are concentrated in a single stock — the employer — which violates basic diversification principles. If the company struggles, so does the retirement account.