In this eye-opening episode of the BigMikeFund Podcast, Big Mike explores Employee Stock Ownership Plans (ESOPs) with expert Matt Middendorp. Recorded during the holiday season, they break down how ESOPs serve as a powerful exit strategy for business owners—preserving control, legacy, and community impact while rewarding employees with retirement ownership. Matt explains the mechanics: creating a trust that buys shares (often 100% over time), tax advantages (S-Corp ESOPs can eliminate federal/state taxes), seller financing, annual valuations, and vesting. Ideal for profitable companies seeking long-term transitions, ESOPs differ from stock options by being qualified retirement plans with no direct employee investment. From feasibility studies to real-world examples, discover why ESOPs attract talent, boost retention, and offer tax-efficient wealth transfer—perfect for owners pondering succession without selling to private equity.
About the Guest:
Matt Middendorp is a leading ESOP consultant and founder of resources like ESOPReady.com, specializing in guiding business owners through employee stock ownership transitions. With deep expertise in tax-advantaged structures, he helps companies implement ESOPs to maintain control, reward teams, and secure legacies—while avoiding common pitfalls.
HIGHLIGHTS OF THE EPISODE
0:00 – Welcome to the BigMikeFund Podcast
0:19 – Guest Introduction: Matt Middendorp
0:48 – ESOP Overview: Business Transition & Legacy Tool
2:03 – ESOP Purpose: Control, Identity, Legacy Preservation
3:18 – ESOP vs. Stock Options Differentiation
4:57 – Trust Structure: Trustee Represents Employees
6:32 – Tax Advantages: 100% ESOP-Owned S-Corp Pays No Federal/State Taxes
7:30 – Installment Sale & Seller Financing Common
9:08 – Qualified Retirement Plan: Distributions Taxed Later
10:17 – Prohibited Transactions Avoided via Beneficiary Ownership
13:00 – Key Employees Rewarded via Phantom Shares/SARs
13:56 – Annual Independent Valuation Sets Share Price
15:22 – Vesting & Payout Rules on Departure
17:02 – Publix ESOP Example: Long-Term Employee Millionaires
19:09 – Feasibility Study Process
21:35 – Strategic Tool, Not Just Exit Plan
22:48 – Construction Company ESOP Case (Closed 12/31)
24:04 – Governance: Sellers on Board + Independent Member
26:39 – When to Consider ESOP: Anytime Transition Planning
27:28 – Resources: esopready.com & NCEO.org
34:23 – How to Get Started: Assessment & Free Consultation
If you found this episode substantial and want to dig deeper into real estate, or maybe you want to discover better investment opportunities, be sure to check out www.tempofunding.com.
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Website: https://esopready.com/
Full Transcript:
Mike Zlotnik (00:02.274)
Welcome to the Big Mike Fund podcast. I'm the Big Mike, Mike Zlotnik. And today it is my pleasure and a privilege to welcome Matt Middendorp. Hey, Matt.
Matt Middendorp (00:11.427)
Hey, Mike, how's it going?
Mike Zlotnik (00:13.294)
Thanks for coming on the podcast. It's great to have you. And this is going to be a different episode. We talk a little bit about real estate. We talk about investing, and this is going to be very different for our audience. We'll talk about variable compensation, employee stock option plans. And you're a resident expert. You're a consultant in the field of helping companies put together an ESOP, employee stock option plan and similar. So welcome and you hail us from the cold.
Wisconsin, how's the weather and tell us a little bit about you before we get going.
Matt Middendorp (00:48.815)
Sure, first of all, I have to say that you look exactly like I would expect somebody to be a big Mike to be. So I'm just want to get that out there right away. We can start there. You know, as far as the beauty of Wisconsin, it is a gorgeous time of year. And I got to admit, go Bills, by the way, Bills Muffet. You know, we don't even want to talk about last weekend. We can forget about the Packer game. But. You know, there's not enough snow. We need more snow. If I'm going to live in the tundra.
I want snow and I've only got maybe this much on the ground and I should have this much. So what do you do, right?
Mike Zlotnik (01:23.128)
I gotta give you a hug. I am on the same camp. I love snow actually. And yes, I'm Buffalo Bills fan. I used to live upstate New York and last weekend was rough for the Packers and the Bills made it through. And I mean, that's life. But one thing we can all complain about is the weather. That's what university loved or hated. And depending on who you are.
Matt Middendorp (01:45.389)
Ha ha!
Mike Zlotnik (01:48.152)
There isn't harm about complaining not having enough snow or somebody else can say you gotta be crazy, not enough snow, you guys are crazy. Well, know, the weather is a politically, universally safe place to talk about, so we'll move on.
Matt Middendorp (02:03.203)
Well, that's why I live here, just so I have something to talk about. If I lived in some place like Arizona or Florida, man, if they had 70 degrees again today, what do you do,
Mike Zlotnik (02:13.986)
Well, you're here for all four seasons. Wisconsin, our state, New York has both the cold and the hot. And we'll take it with the, you know, we'll take the beauty of each season as it comes.
Matt Middendorp (02:28.271)
Well said.
Mike Zlotnik (02:30.112)
All right, so let's talk a little bit about ESOPs. So give us an overview. Yeah, what is an ESOP? What kind of companies use it? Folks could be participant in a plan. They could be part of the executive team who puts the plan together. So let's just talk a little bit about what the purpose of what these plans do. What's the objective of these plans? And just let's start with the basics.
Matt Middendorp (02:34.403)
Yep. Employee stock ownership plans,
Matt Middendorp (02:59.363)
Yeah, so the short short of ESOP is if you're a business owner and you're trying to figure out what's next for your business, what that transition looks like, it could be a strategic transition out of the business, right, over three, five plus years. It could be that you're looking for a business model where you wanna be able to hire and retain better talent, right? That's where employee stock ownership plans are ESOP.
come into place. And a lot of that has to do with that business transition, right? And if you're investing, if you've invested yourself in this business, if you've taken the risk of starting a business and growing it over years and you want to leave, the challenges that a lot of business owners face aren't about how much money they're going to make. Right? If you're to the point where you're thinking about exit, you've built a business that's sellable. What a lot of people are thinking about is control.
Right? They may not be ready to step away, but they want to start pulling liquidity out of the business. They're thinking about, as somebody who has owned a business and sold a business, I can tell you that a large part of my identity was wrapped up in being a business owner in this thing that I had built and nurtured through good times and bad. But a lot of business owners, besides thinking about control and identity, are also thinking about legacy.
thinking about the people that work for them that help them build this, thinking about the communities that they're in, that they've supported and invested in. What does that legacy look like? And the only way to exit a business and maintain control, maintain your identity as a business owner and control your legacy with your employees and your community is through employee ownership. Employee stock ownership plans or ESOP specifically, because you don't have to give up.
any of those things like you do when you're selling to let's say a third party or private.
Mike Zlotnik (04:57.134)
Yeah, that's very interesting. It's a different angle on stepping away from the businesses to attract right leadership and attracting great people. have to reward them for their great work. And I remember from the days, you know, I've been in real estate now for many years now, but before that I a career in high tech. spent 15 years higher career in high tech. And I saw these ESAP plans.
Matt Middendorp (05:02.404)
Yes.
Matt Middendorp (05:09.603)
Yes.
Mike Zlotnik (05:27.394)
with restricted stock and stock options being a very common currency to attract leadership, to attract even the rank and file employees.
Matt Middendorp (05:37.584)
Well, and I do want to differentiate, right? ESOP, Employee Stock Ownership Plans, is different than stock options. So I just want to be clear about that. So in an ESOP transaction, what actually happens is a trust is created in ESOP trust. The trust is overseen by a trustee. And that trust buys the company from a seller, from the business owner. Now it could be a piece of the company, it could be all of the company.
But that trust actually owns the company to the extent that it's sold. But the beauty of it is that trustee that oversees the trust represents the employees is not involved in the day-to-day of the company. So when we talk about maintaining control, maintaining identity as a business owner, you don't have to give that up because you still tech, the people who run the company before the transaction run the company out.
Mike Zlotnik (06:32.92)
Understood, so it's used as a tool to give ownership through a trust rather than direct ownership in terms of shares, non-voting shares in a manner of speaking.
Matt Middendorp (06:42.083)
Yeah, yeah. So let me give you an example of where that can come into play, for example, from a longer term. I have one of my clients that actually sold their company to an ESOP, 100 % of it. And there were four owners and they were in their 40s. They weren't retiring. They weren't going anywhere. As a matter of fact, they're going to stay with the company for 10 to 15 years, but they used ESOP as a tool to pull liquidity out of the company, right?
and they went and did other things with the money. They made other investments like, for example, say real estate, which I know is part of their portfolio now because of that transaction. So they still run it. They still profit from it. They're actually part of the ESOP. They still get shares as part of the employee stock ownership plan, but they themselves do not have the risk as individual owners.
Mike Zlotnik (07:30.168)
Yeah, understood. So here an example would be it's a transfer of ownership to that plan trust or partial ownership or partial. What I remember years ago, certain portion of the equity was, and again, this is high tech days, was allocated to the employees. So you typically have private equity comes in or venture capital that
buys a portion of the company and then the founding members or the founding employees are still there. Some of them leave, some of them stay, but then 10, 20, 30 % of the company, depending on the company, was allocated to the employee pool. And it's different, the option pools are different from the ESAP. So let's just kind of cover the difference between
kind of an option plan versus an actual ESAP owning piece of the company where I'm sure these plans could be set up with appropriate vesting. So as people join the company, they could be given certain percent ownership, but they have to vest over some amount of time. Just curious, give us a little color how this works practically with any business that wants to go through the transition where the founders can
exit the business or be involved less with the business, maybe retain some level of control in the direction, but the employees are running the company. Just give us an example of how a company would transact.
Matt Middendorp (09:08.633)
Yeah. Yeah. So, so one of the biggest things to know about this is that the employees of an ESOP company are beneficiary owners, right? They aren't direct owners. So they don't have voting rights. They don't get to change the name. They don't get to hire and fire people. and that is one thing I want to make sure people come away understanding. But really what it comes down to through this is that an ESOP is a qualified retirement plan.
Right, that's one of the big features of an ESOP is that it's a qualified retirement plan. So there are tax benefits to the sellers through that process. There are tax benefits to the company as a result of that. And again, it gives the employees a retirement plan that they don't have to put their own money into. They're committing to the success. They're giving their time, talent and expertise to the company. The company grows, the company is more successful, the share price increases.
and their value of their beneficiary shares increase over time. Yep. Okay.
Mike Zlotnik (10:11.021)
Well, on this topic, thank you for that clarification. I didn't remember whether ESAP was a qualified plan or a non-qualified plan. So it is a qualified plan versus just a stock option, which is a non-qualified type of ownership. So an ESAP would own a piece of the company or maybe the entire company. So I assume the company, when ESAP owns it, would have to be a C Corp. Otherwise, how do they deal with the U-Bit?
Matt Middendorp (10:17.541)
Yeah.
Mike Zlotnik (10:41.023)
Because generally speaking, are you time plan that always an operating company, whether it's like a McDonald's franchise or any business, the government still wants their tax. They want it through a C Corp tax. So they want it through UBIT tax. I'm just curious how does that work? At least if you
Matt Middendorp (10:58.776)
So do we want to blow your listeners minds right now? Or do we want to drum roll that and say that we should actually we should probably clarify before I throw this up. Yeah. Yeah, before I just want to want everybody pull over really quick if you're driving because this is kind of a big deal and I don't want you to just work off the road. So what's really, really cool about employee ownership and ESOPs is because they're a qualified retirement plan. If the company is 100 % employee owned.
Mike Zlotnik (11:05.263)
The short version of it. The short version of it.
Matt Middendorp (11:25.488)
You can be a C or an S Corp, but for this example, if you're an S Corp and you're 100 % employee owned, you no longer pay federal taxes. And in 46 out of 50 states, the company no longer pays their state taxes either. So those K1s that used to go to the owners now go to the ESOP and the ESOP doesn't have to pay that tax.
Mike Zlotnik (11:47.375)
So if I heard you correctly, you're saying that an ESAP plan can own the company. The company could be an operating company generating profit, right? So it's not a high-tech that's losing money. That doesn't make any difference,
Matt Middendorp (11:59.813)
Yeah, if you're losing money, doesn't make sense. It's got to be a sellable company.
Mike Zlotnik (12:02.831)
Yeah, it's got to be a, well, it could be a sellable company that loses money, right? A high tech, you're just building up user base, But in a practical sense, an ESAP can own a real estate operating company or it could be a tire shop or it could be anything, right? Any kind of business, a manufacturing facility. And it can…
Matt Middendorp (12:05.146)
Yeah, okay. Yeah, I know, yeah.
Mike Zlotnik (12:29.593)
produce profits and not pay taxes in the formal via the C Corp taxes. Essentially you go into an S Corp, which is a pass through. That is fascinating. I never heard of it. I thought the moment the qualified plan comes in and starts owning anything operating, this is the wonderful world of UBIT kicks in because the IRS wants that tax either through a C Corp or through UBIT, they still want a tax. How does it work? I'm just curious. How is it even possible that
Matt Middendorp (12:37.06)
Yeah. Well.
Mike Zlotnik (12:59.353)
this can function like this.
Matt Middendorp (13:00.718)
Yeah. So, well, you can call it in the IRS to get their piece of it. Right. And the way that happens is through the employees as they build, build balances in their ESOP shares. So take, for example, Publix is a very, very well known ESOP, the Publix grocery store chain in the southeastern United States, their employee owned. And you hear stories all the time about people who were cashiers there, who worked there for 20, 30 years, and they walk away multimillionaires.
through the ESOP. Now what's amazing about that then is that as they start pulling money out of that qualified retirement plan to retire, Uncle Sam does charge income tax. And that's where Uncle Sam's, yeah, on the distributions as they start cashing in on that retirement plan, yep. So Uncle Sam gets their money in the end through the individuals as they're pulling money out of the retirement plan. And I think ideally,
Mike Zlotnik (13:41.807)
On distribution, right? On distributions from retimes.
Matt Middendorp (13:56.719)
that allows the businesses to read, it's a redistribution of wealth strategy, right? The business owners profit from the business they've built as they sell it to the ESOP. The company is better off through the process. The employees are better off through the process, right? Building these balances. And lo and behold, Uncle Stem still gets its share.
Mike Zlotnik (14:18.159)
So just to clarify, can ESAP be traditional and rough or it can only be a traditional plan? In other words, the distributions typically, like you said, if an ESAP owns a company and then the distributions as part of the plan, then those distributions are subject to the taxes, right? Can an ESAP be a rough like a rough?
Matt Middendorp (14:27.962)
Mm-hmm.
Matt Middendorp (14:46.672)
That is actually a growing option for individuals to choose a Roth The route that work through a Roth type where you pay the tax upfront versus later upon distribution Yep. Now I want to be clear. It's rare. Most people do and don't but that is something that is a growing option. It's becoming
Mike Zlotnik (14:57.839)
to the ownership.
Mike Zlotnik (15:05.294)
Like any other qualified plan, there may be a conversion even option for employees and then they pay tax on the conversion. So if they have, you know, build up an equity stake of $100,000 and then they want to convert to a ROF, the plan can be designed to have a traditional component and a ROF component. Is that accurate?
Matt Middendorp (15:22.12)
To an extent, yes, and you can also actually diversify later on too. Once you hit a certain age and a certain point in the plan, you can start to actually diversify out of just the company shares.
Mike Zlotnik (15:33.679)
Well, that's very powerful. mean, what you described is a very powerful tool people can… And what about prohibited party transaction? That's one thing that I've always been worried about with these retirement plans, where employees or key managers or key people are not allowed to invest in their own business. Their retirement money is not supposed to be… It's like the primary disqualified party that you can do business with.
Matt Middendorp (15:35.342)
It is.
Matt Middendorp (15:39.247)
Mm-hmm.
Mike Zlotnik (16:02.937)
So how does that function? How does it work? How can a retirement plan that benefits employees of the company, including some key employees, managers of the company, be as effectively an owner of the same company? Pardon me.
Matt Middendorp (16:19.76)
So here's the beautiful part of it. Again, if the company is 100 % employee owned, the employees aren't putting their own money into it. They're not making their own financial investment into the ESOP. Their investment comes in the form of time and talent and expertise to grow the company, to help it be more successful, to help it to be more profitable, which increases the share price that comes back to them. So I think that's where that prohibitive investment piece gets around it is they're putting their own money into it. So they're buying in.
they're being awarded beneficiary shares that they then influence through their performance.
Mike Zlotnik (16:55.567)
Yeah, I was just, and maybe you know this better. was, and this is brand new area for me. So I don't know, like you said, public's is only.
Matt Middendorp (17:02.362)
Yeah. I could, I could tell your mind's working and you're going, okay, wait a minute. What's yeah. Go for it.
Mike Zlotnik (17:07.085)
Yeah, I'm pretty familiar with self-directed IRAs and 401ks, but I'm not familiar with an ESOP owning a part of the company. So it's actually a very powerful way to basically give employees a critical stake in the company. But I understand the important component of that is that they are not directly owning shares. It's not a voting block.
It's more of a passive ownership. So they have to play along. that kind of removes the possibility of the disqualification through management decisions goes away because a trustee runs the whole thing, not employees. it's not designed. That's the reason. It's not a prohibited transaction because of that, to that degree.
Matt Middendorp (17:56.187)
Well, and again, the trustee doesn't run the company, right? The trustee just runs the trust. Yeah, to the benefit of the employees, right? That's their fiduciary responsibility. The company is still run by the people that are set up to run it every day.
Mike Zlotnik (18:02.031)
with the benefits of the employees.
Mike Zlotnik (18:11.789)
Yeah, understood. It's just that whole component. One is the, think I can understand the plan. And I probably need to speak a little more with CPA. But again, a large gross public is run, majority owned or maybe entirely owned by employees throwing these up, that's a very fascinating thing. So how do people make this decision? What drives them to make a decision? Is this worth?
to try to use an ESOP to set it up for a basis where I guess the existing owners would sell the company or portion of the company into a plan. Where does the money come to actually finance the purchase? Is this a sell a carry, owners basically sell it and then the plan owns kind of have to pay off these loans over time? I'm just curious.
Matt Middendorp (19:09.498)
Yeah, so this would be the part where ESOP's not for everybody, right? It's not perfect. There's always something about it. And one of the components of this is almost everybody who sells their company to an ESOP gets paid out over time, right? So that's part of this is, yeah, so whether it's seller financed or a combination of bank and seller financing,
Mike Zlotnik (19:29.295)
It's an installment sale or something of sort.
Matt Middendorp (19:36.729)
There's almost always a component of seller financing that goes along with it. Now, they earn interest percent, percent and half above the going rate, right? So it's not like it's not profitable for them to do so, but for some people they want to sell their business and do this, right? Now, let's be fair, that doesn't even happen in private equity transactions anymore. There's always an earn out, there's always a catch. You don't get your money up front there either like you used to. Mostly, most of the time.
But that is one thing about ESOP that some people are uncomfortable with is they want to exit now. They don't want to stay on in a governance capacity on the board and keep their pulse on the company for five to seven to 10 years, whatever it is that ends up taking. But just to give you an example, I just actually closed a transaction on 1231 with a company.
in the construction industry, which is the third largest niche of ESOPs behind professional services and manufacturing. Fourth is financial services, by the way, banking, which is interesting. But this construction company had received a lot of offers from strategic buyers, from private equity, and every time they got one of those offers, they looked at it and they said,
I can't look at myself in the mirror if I do this because I know what's going to happen to the people that got me here. Right. And when they got the terms, when they went through the due diligence on that several times with several different parties, they finally said, you know what, their advisor, their broker finally said, you should take a look at ESOP. Right. And let me connect you to somebody that I know and trust that can at least do some education on this and explain it. And that's the direction they chose. Like I said, they closed on 12 31. They made just as much money as if they had sold to one of those other offers.
their company is better off, and they can look at themselves in the mirror and know that they did the right thing for the people that got in there. It's a pretty powerful tool.
Mike Zlotnik (21:35.833)
Yeah, and the key conditions on the key, just from what I heard from you, the key requirements is really transferring the ownership to the employees rather than external parties that could completely break up the company, chop it up, merge with somebody else, do whatever else they want to do.
Matt Middendorp (21:53.797)
Well, let's be honest. That's a lot of time what happens, right? If private equity buys and I'm not villainizing private equity, they have a role, right? But the truth of it is, is three to five years, a lot of those businesses are gone. I'm working with a client. Literally, I have a meeting with him this afternoon to decide if he's going to move forward from from the studying it to the doing it step. And he sold his company to private equity, private equity, ran it into the ground. He bought it back for pennies on the dollar, built it back up again. And now he's doing it. But he believes to be the
and selling it to an easel.
Mike Zlotnik (22:25.231)
And I understand from that perspective that it's a loss of control, loss of decisions. And at that point, it's a purely monetary type of event. But with ESAP, if a public is completely owned by an ESAP, 100%, so who makes the decision? So ESAP is the board. Is this composed of key employees? Or how does that work? Who is the board at that point?
Matt Middendorp (22:48.848)
Yes. So again, the day-to-day operations of the company continue with the people who ran the company. Now you're right though, there is a governance piece. So let me give you the example of this company that we just closed on 12-31. Within 12 months, they're going to have to set up a three-person board, two of which are the current sellers, right? Because they're getting paid out over the next five to seven years, both from the bank lending that they're borrowing as well as the seller note.
and they want to stay on top of the company and then there's going to be one independent member that they choose. Now I want to be clear they do have to get that independent member approved by the trustee but really what they're doing is confirming that they're independent right somebody that hasn't done business with them somebody that's not related to them or worked with them in the last 12 to 24 months depending on on what's negotiated they pick the person who's the independent member so
Governance is a huge part of any successful business anyway. It should be something that most businesses have. And setting strategic directions so the day-to-day operations have a path, right? And both of those stay in control of the people who are in control of it at the time of sale.
Mike Zlotnik (24:04.687)
Yeah, that's very powerful. It is in fact for any company, right? It's setting up an independent board or at least, you know, having some insiders and some outsiders that both technically are independent and at the end of the day, there's a formal requirement, like you said, for an independent. So how do companies go through this decision? No matter what industry, at which point in the conversation, at which point people call you and say,
Matt Middendorp (24:06.553)
You
Mike Zlotnik (24:33.763)
I might need little bit of help here trying to figure out if this is the right path forward versus a private equity. Is this a consideration to be done when they're thinking to exit or this is something that gets set up way, way earlier for potential exit later?
Matt Middendorp (24:52.228)
The answer is yes. We've hit all the scenarios, right? We've had people who at the close of the sale are out of their business and moving on. We have people that are, like I said, the client I mentioned is staying in for 10 to 15 years. Both of those are legitimate and viable scenarios to transition to an ESOP.
So here's the cool thing is if somebody is genuinely curious about this, there's a few different steps that you go through before you even have to decide if ESOP is it. And the first thing is education, right? It's listening to conversations like this, learning a little bit about it. And then you reach out to somebody, whether it's me or somebody else who can dig deeper and understand what your goals are and your specific situation. What are you trying to accomplish for yourself, your business and your employees, right? And does ESOP fit that?
And at that point, can decide, like, yeah, this makes a lot of sense. You do something called a feasibility study. So you aren't necessarily making the first decision about whether or not you want ESOP. You're making the first decision to decide whether or not you want to formally explore that it works for you. Right? So a feasibility study is a valuation. How much is your company actually worth? A feasibility study is checking out the impact on the sellers, meaning what's their return? How much money are they going to make?
It's laying that out. It's showing the impact on the company, both in the tax savings and in the costs of being an ESOP. And then a lot of sellers really like to see the impact on their employees. How much money are they going to make? I just delivered a study last week where their employees after 10 years are going to have $860,000 for the average employee in their ESOP account. And that seller wanted us to start there with the presentation because that's what they were most excited about.
Mike Zlotnik (26:39.565)
Yeah, that's very interesting. So you start with feasibility study, you're doing projections of what…
Matt Middendorp (26:42.755)
Yep. Yeah, you get a decision-making tool that allows you to actually compare apples to apples.
Mike Zlotnik (26:50.287)
Understood. So it can be implemented at the early stage. could be implemented at an exit stage. It could be somewhere in between. It's just more of a, it's a tool in the toolbox that owners of businesses could consider to incorporate into their decision tree. So go ahead.
Matt Middendorp (27:11.001)
Well, and let's just be really clear about it. It is a strategic transition, right? ESOP is a strategic tool for your business. It's not just an ExaPlan. And that's something a lot of people, through that process, can recognize and benefit from. So go ahead, sir, you're going to say something like…
Mike Zlotnik (27:28.013)
Yeah, yeah. so we're at least what I'm hearing is this, just basically, like you said, strategic tool for the companies that are looking for potential exit. And I've seen a little different, maybe this is for more of successful operating companies with cash flows and profits versus a, you know, tech firms where they, they usually just give away stock options. They don't have the company is going to be worth anything in a few years, right?
So the complexity to set it up and the cost has to make sense if it's a successful growing company with a clear path forward. If it's an early stage or speculative company, it may or may not be the right solution, at least not in the initial phase. The moment you said ESAP, I immediately thought, years, years, years back when I was in the high tech, we had, I think we had a version of an ESAP. And for some reason,
I thought maybe it was a stock option plan, maybe ESOP is a stock ownership plan. I just didn't remember that being qualified. remember years ago, this was a, at least what was called ESOP, was a combination of options and restricted stock versus now you're saying it can be set up as a qualified plan. Maybe it can be even both, right?
Matt Middendorp (28:51.823)
I'm not familiar with the other path with the options. They may have called it employee ownership, right? But it wasn't ESOP as it was designed under the 1974 ERISA law. Yep.
Mike Zlotnik (29:03.703)
Yeah, so the moment you said, it's a qualified plan, you could do a lot of similar things versus restricted stock. It gets done all day long today. mean, look at all these high tech companies, employees get restricted stock and they get options. And if these are qualified options or qualified grants, there's no tax implications on the grant. Usually tax implications come in on exit when the stock is sold.
through either the public market or private transaction. On a qualified side, it's almost like revelation. It opens up a whole lot of set of possibilities if it works the same way. But now you have a qualified component, which is significantly more valuable because over the years it could be worth a lot more. Now, what happens when employees leave? So if somebody is part of the plan and they want to move on, I'm just curious how does a qualified plan work today?
Do they carry, can they roll over their money or transfer their money or they are in that plan and the plan is not selling company so there's no transferability or mobility.
Matt Middendorp (30:14.083)
Yeah, so I'm going to look at this from two different directions if that's okay. And I want to start with key employees, right? Because right when you're going through this process, some of the employees are key and they can't leave. You don't want them to leave. And it's not just about employment agreements. So I want to just mention this when you're talking about stock options, is there are ways to reward those key employees outside of the ESOP.
Right? And that's a standard part of creating these using phantom shares or SARs, stock appreciation rights. So they get rewarded above and beyond what they would also get rewarded inside of the ESOP plan. So those are two different things. So just want to be clear that those key employees aren't left out in the cold. Now, how do people, and those, by the way, those SARs are also tied to performance and it's tied to retention.
Right? So that's part of the reason you give those, right? Is you want to keep them on board. Now, what happens inside the ESOP though? How do we know what happens to those shares as people come and go, which is naturally part of a business. Now, people create ESOPs to hire and retain better people. And people do stay with ESOPs four times longer than they tend to stay with non-ESOP companies. So it is a significant change in the tenure of people in ESOP companies.
What's awesome about that though is there is still a vesting period, right? Graduated vesting 2040, 60, 80 over the course of six years. Standard, just like a qualified retirement plan, like a 401k vesting schedule. When people leave, when you design your plan, if they're under a certain threshold, you just pay them out. If they're over a certain threshold, they get paid out over time. And the people that leave can then roll that into other qualified retirement plans like IRAs.
and not have to pay the tax until they're
Mike Zlotnik (32:08.303)
The difficult part in that whole exercise is valuation. So if it's a publicly traded plan, that's easy. You can value those shares all day long. If you're a private company, they own, I don't know, a million shares and somebody owns 10,000 shares, 1%, whatever you want to call it, of that plan.
the value could have been assessed at the time of a setup. Does the plan have to revalue the shares every year?
Matt Middendorp (32:43.178)
That is part of the ESOP process is an annual evaluation, which then goes to the trustee and the trustee sets the share price every year.
Mike Zlotnik (32:50.541)
Yeah, because there's a difficulty with private company valuation. It's very subjective and it's a new beast. It's a different beast versus public company.
Matt Middendorp (33:00.281)
Yep. Now, it's not just what the market values it at, it's what's the actual fair market value of the company itself as determined by the trustee's valuation firm. Yep.
Mike Zlotnik (33:10.031)
So the Kenya retirement plan, the trustee will try to establish an annual value for this, at least for the sake of this map. And if people have asked it out and you give them an option to redeem or somehow sell out, there's a process how you, I guess, you give them liquidity option if they leave the company.
Matt Middendorp (33:28.655)
Yes, if they leave the company, they have that option for the vested portion of their other shares.
Mike Zlotnik (33:36.769)
Interesting. I mean, it's similar to the other plans, right? It's similar to the traditional 401Ks when people leave, especially if they are in publicly traded funds, then the value is very easy to establish.
Matt Middendorp (33:48.855)
all established under the same law.
Mike Zlotnik (33:51.663)
So I appreciate this. This was very interesting. This was different. This was kind of like a revelation. There's another angle to this. It's another opportunity. Very different, very powerful. So how, I was going to say how would folks reach out if they wanted to explore the possibility of you helping them out, look at their company considering an implementation of ESOP as part of their…
Matt Middendorp (34:04.559)
Thank you. Go ahead.
Mike Zlotnik (34:20.145)
legacy or business continuation planning.
Matt Middendorp (34:23.075)
Yeah, no, that's a great question. The easiest way to do that, if you want to learn more, is to go to esopready.com, esopready.com. And while you're there, you can learn about ESOP, do some digging, get some good information about what it is, how it works, the process to become one.
You can actually take an assessment to see if your business might be a fit to continue a conversation. And at the end of that assessment, if you believe it is, you can actually just schedule a time directly with me. No cost. We have a conversation. Find out what your goals are. Dig into it and just kind of understand, is this something that lines up with what you're trying to accomplish? And that usually happens over several meetings where it's just a constant iterative education process.
Mike Zlotnik (35:06.339)
Yeah, man, I appreciate that because this this year this is take this education first and you're building trust and faith. This is the right approach. And then obviously some technical structuring and working with CPAs and attorneys.
Matt Middendorp (35:10.489)
Yes.
Matt Middendorp (35:20.131)
Part of my fun. As a former banker, I love that stuff.
Mike Zlotnik (35:23.629)
Yeah, I can tell you're very passionate about it. This is your thing, right? This is what you do. This is what you like and you have deep expertise in the field. By the way, are there good books on this topic? Obviously, esuppready.com, maybe you have it on the website, resources such as good books folks could read to better understand how this function.
Matt Middendorp (35:43.332)
Yeah, so the other place I would go for great information and absolutely books as well as just information is the National Center for Employee Ownership, NCEO. They are a fantastic resource. It's a nonprofit organization that's sole purpose is to advance the ideas of employee ownership. And believe it or not, we're talking about ESOP. There are a lot of other ways to accomplish employee ownership if you want to transition your company to the employees, but maybe ESOP's not the right model.
I have conversations every day with people that want to talk about ESOP and it just isn't the right fit for what they are and what they're trying to do. But they like the idea of their legacy being intact and being able to look in the mirror for what's after they accomplish what's next for their company. There's other ways to do that. And that's another great resource.
Mike Zlotnik (36:29.677)
Yeah, I appreciate that. I didn't realize there's a whole industry to this. It's nonprofit. It's almost like it's been the norm for the tech world. Almost there's no other way folks join these companies. expect some form of stock options or other employee ownership at least early stage. And even successful companies that even some of the largest companies in the world like Nvidia, they continue to grant annually stock.
and options to the employees. And I don't know whether they incorporate an ESA part of the plan, but that secondary component quite often is viewed as the first component. Not the plan is the biggest value driver, but it's interesting that the ESA plan could be that for some people or some businesses. It could be a large part of that long-term retention plan versus some of these companies that they focus.
Matt Middendorp (37:10.841)
Mm-hmm.
Mike Zlotnik (37:26.511)
sort of a short term, you don't know what's gonna happen in the, you have an AI startup. If the idea catches up, wonderful, but setting up an ESA plan too early doesn't make sense because it's just not in our head.
Matt Middendorp (37:36.08)
Nope. Well, yeah, and it really is designed to be a long-term play. And let's just be honest, in a lot of those companies, they have a different set of goals. They're not looking for a long-term play. They're looking to build it up and move on to the next thing. it really is a different approach to building a business and transitioning a business. It's just a matter of, again, goals. And if you aren't sure, esupporty.com. Just schedule a time and let's talk.
Mike Zlotnik (38:02.499)
Yeah, that makes sense. It's the suitability and the right fit is the kind of question number one. And obviously, there are many other questions. Matt, I appreciate your wisdom. Thank you for coming on our podcast. Lots of great nuggets. And esupready.com is the website. Thank you kindly once again.
Matt Middendorp (38:21.54)
Perfect. Thanks, Mike. Appreciate it.
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