more-arw search

Q&A Forum

implementing an ESOP

Rick Bigelow's Profile

I am helping a strong startup with financing and HR.  They are at the stage of considering an ESOP. They currently offer options to key employees and do not have a 401k plan.

What is the best step towards implemeting an ESOP and the estimated associated annual costs.





Topic Expert
Keith Perry
Title: Director of Global Accounting
Company: Agrinos, Inc.
(Director of Global Accounting, Agrinos, Inc.) |


You need:
-Valuation (per Tom, I believe was hinting at this). 409A appraisal. I've used American Business Appraisers; I've heard good things about Silicon Valley Banks. My recollection is $10K for the first and $5K for followups during the year if required. I'm guessing that if you've got this taken care of if you've got options out already.
-"Plan" as in similar in most respects to a 401k.
-Trust, that you will usually set up with a provider of said (and, back to Tom above, pretty sure he does this). These folks can help with the setup and admin of the Plan.



Topic Expert
Vernon Reizman
Title: CFO
Company: RCM Industries, Inc.
(CFO, RCM Industries, Inc.) |

There are ESOP lawyers and consutants who offer free no obligation educational classes. I attended a one day seminar and received a good overview.

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |


You state that they currently offer option to key employees. Is this being done under a plan? What are the parameters associated with those options? In my experience, such options are issued under an ESOP/ESIP (ownership/option/incentive) where the rules are defined in the plan itself.

If you mean a plan whereby employees have the right to purchase shares, I haven't a clue. However, if you mean a plan whereby the company issues shares or options to employees, the cost is limited to the cost of writing the plan and ensuring ongoing maintenance of the cap table. This can be done via spreadsheet, but for purposes of booking the value of the options you'll probably want to use third party software from the likes of etrade or Two Step Software. These will run you a few grand a year plus the internal labor to maintain the database.

Topic Expert
Rick Bigelow
Title: C0O
Company: LSSM
(C0O, LSSM) |

Robert - thanks for the reply. we offer board approved options to key hires and advisors at this time, but not to all employees. The ESOP would be available to all employees. We track it via spreadsheet cap table at this time. I am not sure the ESOP is the right direction at this time due to the need to sell above a certain portion of the company, the tax implications and the contiued valuation requirements.

David Howell, ASA, MBA
Title: Principal, Plante & Moran, PLLC
Company: Plante Moran, PLLC
(Principal, Plante & Moran, PLLC, Plante Moran, PLLC) |

Hi Rick

Steps in the process would be to meet with an ESOP attorney and valuation advisors to undertake a preliminary valuation/feasibility study. Those are usually the professionals at this stage who can help you understand how an ESOP could work for your company. An ESOP can be expensive to implement, and seems to cost $15 -$30,000 per year for administration, valuation, legal, and trustees. But, as always, the cost depends on the specifics of the ESOP and company.

If the company will have options or other equity based comp/incentives outside of the ESOP plan, it is possible to do so but there are a number of issues and regulations that must be addressed. Remember, when you think "ESOP", think "ERISA", with regulations and compliance requirements.

An ESOP appraisal may often be used for 409A, but usually not the other way around, as they can be on a different basis of value, and the ESOP valuation requires spcific factors and may need a finanical or fairness opinion.

Mike Adhikari
Title: Owner
(Owner, ) |

I question the use of ESOP for a start-up. ESOP's debt-service, repurchase obligations, annual maintenance, etc. will need cash flow. A start-up generally does not have cash flow, let alone it be used for ESOP purposes. On top of that you will have to continuously worry about DOL regulations. Also, ESOP shares are sold by current owners and the sale proceeds go to the selling shareholder. This does not create cash for the business, which a start-up needs. One more thing, in this situation, selling shareholder, most likely, will wind up personally guaranteeing the ESOP loan (because business is less likely to have asset collateral and cash flow). Is that ok to the shareholder.
I am in M&A. I have seen successful and unsuccessful ESOPs, and many more failed expensive attempts in ESOP exploration.
I hope I am not off-base here.

Stephanie Banister
Title: Managing Member
Company: ERISA Wise LLC
(Managing Member, ERISA Wise LLC) |

I agree with Mike. An ESOP for a start-up is not a strategy worth considering. If a start-up wants to offer a benefit to their employees, consider a SIMPLE, SEP-IRA, or 401(k). As far as the fiduciary responsibilities, those can be mitigated by outsourcing to a non-biased fiduciary consultant.


Get Free Membership

By signing up, you will receive emails from Proformative regarding Proformative programs, events, community news and activity. You can withdraw your consent at any time. Contact Us.

Business Exchange

Browse the Business Exchange to find information, resources and peer reviews to help you select the right solution for your business.

Learn more

Contribute to Community

If you’re interested in learning more about contributing to your Proformative community, we have many ways for you to get involved. Please email [email protected] to learn more about becoming a speaker or contributing to the blogs/Q&A Forum.