When should you make use of Employee Stock Option Plans? That is our topic of the day, stemming from Equidammer Daisy’s article published earlier this week ‘Employee Ownership – The Pros and Cons‘. Check it out for a refresher on how we can weigh the benefits versus costs of implementing this program! But for now let’s dive into some synthesized information drawn from The National Center for Employee Entrepreneurship (NCEO) about how these different Employee Stock plans might fit into various corporate structures.

Privately Held

The NCEO discusses the primary situations in which Employee Stock Option Plans (ESOP) may serve a private company and its employees.

The first scenario is in the case of ‘traditional closely held companies that will stay private but do not have a selling owner’. In this case, ESOPs offer benefits in the form of tax reductions for both individuals and the greater company. Should the company make use of stock options or repurchase plans, however, the company has to implement a market for these stocks which, simply put, can be a drag. The implementation of Employee Stock Plans in this case should therefore be taken with a grain of salt, and should perhaps be used simply to compensate managers. Another notable scenario is with ‘closely held companies with owners looking to sell all of their stock’. The funds for purchases can either be borrowed, or the stocks can be sold slowly over the course of a plan spanning any number years. This also (potentially) has tax benefit implications for the owner.

Publicly Held

Publicly held companies have a stock market to play with and these companies on average have larger budgets to make use of than do privately held companies. Flexibility is the characterization of publicly held companies, and choosing the ESOP to implement is more about finding the option that delivers the most benefits; rather than in the case of private company’s ESOPs – that have to be more careful about what not to implement.

This flexibility, like most things in life, can offer a double edged sword. An over-allocation of employer stock options is what has led to accounting scandals (like the Enron case). In the aftermath of the 2008 financial crisis, employer stock has drastically plummeted in an effort to keep practices and managers in check, and clearly ESOPs should be closely and carefully monitored.

Make Educated Choices

The article serves as a jumping-off point to understanding ESOPs, hint at the nature of their complexity and communicate, especially to privately held company owners how imperative it is to choose the right program for your unique business environment.

If this piqued your interest, check out other posts on our blog or explore our website and learn about the nature of automated company valuation today!

The Equidam Team
The original content of this article was taken from The National Center for Employee Entrepreneurship (NCEO).