What to Expect in Your First Year as an ESOP
Transitioning to an Employee Stock Ownership Plan (ESOP) is a significant milestone for any company. But once the transaction is complete, what comes next? At the 2025 NCEO Annual Conference in Salt Lake City, Jennie Msall, Director at Ventura Trust Company, joined Joe Marx and Lindsay Shafer to walk companies through what to expect during their first year as an ESOP.
Laying the Groundwork: Understanding the Transaction
The ESOP structure is built on a complex web of legal and financial documents, including stock purchase agreements, loan agreements, trust documents, and management incentive plans. Understanding how these pieces fit together is essential for ensuring compliance and effective governance from day one.
Getting Organized
In the first year, companies must take time to review all key documents and understand the provisions of their ESOP plan such as eligibility, vesting, and share allocations. It’s also important to clearly define and identify internal roles like the Plan Sponsor, Administrator, Board, and any committees, as well as external partners such as the Trustee, Appraiser, TPA, ERISA attorney, and CPA. Establishing these stakeholders and their responsibilities early help streamline administration and communication.
A Year-One Roadmap
The first year as an ESOP is filled with important milestones. In the first quarter, companies typically nominate board members, begin the valuation process, and share plan documents with employees. This is also when internal and external announcements about the ESOP are made.
By the second quarter, the valuation is finalized, participant accounts are updated, and companies begin integrating ESOP branding into their culture. In the third quarter, participant statements are distributed, audits are conducted (if the company has more than 100 participants), and Form 5500 is filed. The year wraps up with year-end contributions and planning for long-term employee engagement.
Managing ESOP Administration
Administrative responsibilities include tracking participant eligibility, calculating share releases, conducting compliance testing, and managing trust accounting. Companies must also handle distributions, loan repayments, and prepare participant statements and summary annual reports. Most companies work with a Third Party Administrator on these tasks.
Communicating the ESOP
Clear communication is key to building a strong ownership culture. Internally, this means educating employees about how the ESOP works and how their actions affect share value. It also involves integrating the ESOP into HR systems and company culture. Externally, many companies update their websites and marketing materials, issue press releases, and inform clients and partners about the transition.
Fostering an Ownership Culture
The first year sets the tone for the future. Companies are encouraged to form ESOP communications or culture committees, provide ongoing education, celebrate milestones like the first share allocations, and continually reinforce the connection between employee contributions and company success.
Helpful Resources
To support this journey, companies can turn to tools like the NCEO’s ESOP Company Handbook and Board Excellence Toolkit and Ventura Trust’s Governance Resource Guide.
Conclusion
The first year as an ESOP is a time of learning, adjustment, and opportunity. With thoughtful planning, clear communication, and the right support, companies can build a strong foundation for a thriving ESOP.