If your business has employees, it may be possible for you to sell stock in your business directly to them. Like other equity arrangements, you will give up a degree of control. But with an ESOP, you will share control with your employees rather than with outside investors. This can be beneficial because your employees will have a vested interest in making your business successful and employees can have a large impact on operations.

How do they operate?
An ESOP operates in a similar fashion to other equity sales. Employees purchase shares of stock and thereby gain an ownership interest in your business. You gain capital to be used for expansion. Employees may also offer to take a reduction in salary or benefits in exchange for partial ownership in the company. This is a good point to consider if you anticipate problems in meeting a payroll but cannot reduce staff. One obvious drawback to an ESOP is that a plan of this type is workable only after you have hired employees. It is not an option when your business is in the very early stages.

Where can you get more information?
Both your attorney and accountant can provide information on how to structure an ESOP. They will be very useful in helping you consider all relevant aspects and potential advantages and disadvantages of the decision. More information is available from the ESOP Association, 1100 17th Street, NW, Suite 1207, Washington, DC 20036.

Source: SBA, Financing For The Small Business FM-14