The ESOP: A Great Fit for Forum One

Forum One strives to be as “employee friendly” as possible. One recent step in that direction is the launch of a company ESOP.

An ESOP (or “Employee Stock Ownership Plan”) is a corporate retirement account, similar to a 401(k), but which can buy stock in the company as well as publicly-traded equities. This means that employees become true owners of the firm.

There are three main reasons why we chose to launch an ESOP:

• First, we want employees to be owners of Forum One. We believe this is good for both employees and the company. While we have granted stock options to staff in the past, we haven’t been successful, in practice, at having current or former staff "exercise" their options because of the need to pay the strike price (which can be substantial) for stock in a privately-held company. ESOPs provide an alternate, proven model for sharing ownership.
• Second, an ESOP brings financial advantages to the company. Contributions to the ESOP and earnings of the ESOP are all tax-deferred. Eventually, if the ESOP were to own the full firm, it no longer pays any taxes at all. In addition, an ESOP can provide the company with a new, substantial source of working capital that can be helpful to fuel growth.
• Third, private companies like Forum One frequently face shareholder succession issues. Creating an ESOP lowers the eventual need to bring in outside investors or acquirers since employees will own more and more of the company. This helps the company stay autonomous and maintain a long-term focus.

At Forum One, In addition to the ESOP, we offer a parallel 401(k). In our case, the company provides a contribution of 6 percent of salary to the ESOP, 3 percent to the 401(k), and the employee provides 3 percent to the 401(k). Our expectation is that 12 percent of payroll (at least) goes to retirement accounts at the company. That’s a lot, but we believe it makes sense from both a tax and financial planning standpoint.

Many great companies are ESOPs (Proctor & Gamble, SAIC, Gore-Tex, Mathematica, Round Table Pizza, and 22,000 others). ESOPs have also been shown to repeatedly out-perform comparable non-ESOP companies. In our case, we considered our options, weighed what would be best for employees and the company, and chose an ESOP — it’s a great fit for Forum One.