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Forum One’s ESOP Explained
If you follow Forum One as a company you will soon see a fact we talk about a lot: we are an ESOP. Perhaps this term doesn’t mean much to you, or maybe the term is familiar, but the particulars are a mystery. Even if you are an ESOP expert, ours is unique in some ways. Regardless of your understanding, we want to make sure you understand what it means that we are an ESOP and why it helps make us the special place we are.
What is an ESOP?
“ESOP” stands for Employee Stock Ownership Plan. As this name suggests, an ESOP is a legal structure that allows employees to have a financial stake in the company they work for, receiving benefits of its success on an ongoing basis. Ownership of the company is divided into shares, like a publicly-traded stock corporation. Instead of being available for anyone to buy, however, the shares are owned by a combination of a nonprofit trust—the ESOP—and private shareholders, often the founders. Employees have membership in the ESOP and thus the legal right to the financial benefits of their share of it. This is called beneficial ownership. Let us give part of the punchline now: because the ESOP is a nonprofit legal entity, this means that a percentage of Forum One profit—after year-end bonuses—goes back to employees through the ESOP, no dollar of which is taxed. As Good Will Hunting would say, “how ‘bout them apples?!”
Forum One’s ESOP
At Forum One, each employee currently gets an ESOP contribution equal to 6% of their annual salary. This is on top of their other compensation. It is our stated intention that these contributions continue regardless of business performance. They are not bonuses for a good year. These contributions begin when an employee has worked for Forum One full-time for 1,000 hours in the same calendar year. Once they have shares, they begin to get the profit distribution too.
Like any stock, shares of Forum One held by the ESOP have a per-share price. Being a private company, that share price is set, not by the market, but by an outside evaluator on an annual basis. Forum One stack has increased in value each of the last few years, so that has added to the value of all our accounts.
Here’s where Forum One is a little different, though. Remember that talk of vesting above? At Forum One we vest immediately. There is no vesting schedule. Zero. Zip. Bupkis. Once a Forum One employee has money in their ESOP account it is theirs. All of it.
Now, even though Forum One has strong employee retention, people do leave, for various reasons, before they retire. What happens then regarding the ESOP? After someone leaves, they still own their ESOP shares and can retain them as long as they want, until retirement age. They will no longer get the Forum One contribution, but will get profit distributions. Their share price will still change yearly and their account value will change accordingly. Alternatively, they can take their money out of the ESOP, typically over a few years, and roll it into a different qualified retirement plan such as another 401K or an IRA.
Why the ESOP?
You may see lots to like in the paragraphs above, but there are four main benefits we see in being an ESOP company.
- Shared sense of success – Many Forum One staff join because of our mission to serve organizations making a positive impact in the world. Many are driven to do good work to build their skills and grow their careers. These are real and valid reasons we work well together. The ESOP, as a means to put monetary value to the outcomes of strong, collaborative work, gives us one more reason to look out for the company and each other and ensure both are performing well.
- Stability of culture and jobs – Many of us know stories of people who worked at companies for years only to see those companies deteriorate or shed staff when some outsider bought them. Being an ESOP does not preclude Forum One being sold, but the founders cashing out through an ESOP provides a much greater level of stability for the company over the long term and helps ensure our great culture will live on as leadership changes. There is no outsider involved, so we can continue being just the way we are now, a way we like a lot.
- Shared profit and built wealth – Forum One’s founders wanted to create a company that would not just do good work, but be a good place to work. Part of that means paying employees well in the present and also helping them build wealth for the future, doing our part to narrow wealth gaps that exist in the US. By giving employees a substantial financial stake in company success and putting it in a long-term investment vehicle, the company helps all staff build for long-term, and, hopefully, multigenerational financial stability.
- The tax advantage – Tax policy and tax status never seems very exciting, but, being an ESOP means Forum One the company pays no corporate taxes. Legally. That means we are able to be more competitive in the marketplace, both for our clients and our staff.
How does the ESOP work?
The profit distribution is only part of the equation, though, so let’s talk more about how the ESOP works for employees. Employees experience the ESOP as a retirement benefit. This is because the tradeoff for the ESOP’s tax-free status is that each employee’s funds accrue in the ESOP and are not available for access, without penalty, until the employee reaches retirement age. An ESOP is, therefore, like a 401K, in that it is a retirement-oriented investment. Where a 401K invests in publicly-traded securities, though, the ESOP mostly invests only in its own company stock.
Like a 401K, an ESOP is typically funded, in part, through an employer contribution that is part of an employee’s compensation package. The other funding comes through distributions of profit, as we noted above, which are based on how much of a company the ESOP owns and how many shares in the ESOP an individual has. ESOPs are also, like other retirement benefits, typically subject to vesting, meaning that employees are only entitled to some portion of their ESOP shares until they have been with the company for some period of time, typically a few years.
What “ownership” means
Forum One is still run day-to-day by our CEO, Chris Wolz, and our senior management team. The CEO is appointed by a Board of Directors, and the ESOP votes its percentage share for the Board. The ESOP is managed by a trustee who is solely responsible for the fiduciary interests of ESOP shareholders, that is, employees’ financial benefits. We employees are thus not owners in the sense that every decision is up for a vote.
We are owners, though, in the sense that most of any positive financial output from Forum One accrues to us. When the company does well, we do well. It is in our interest, in multiple respects, for us to do our best work, help each other out, be innovative, be thoughtful, and be awesome. We own this output, in a very real sense, and take it forward with us. Again, how ‘bout them apples?!
