An ESOP (Employee Stock Ownership Plan) is an ERISA-qualified retirement plan that holds company stock in trust for employees, used as a succession-planning vehicle. It is primarily deployed at established private companies, not venture-backed startups. It is not the same thing as a startup option pool, despite founders routinely using "ESOP" to mean both. The conflation matters because the two have completely different legal structures, tax treatments, and intended use cases.
The actual ESOP mechanic: a company sets up an ESOP trust, which then purchases shares from existing owners (often the founder selling the business) using a combination of company cash and bank debt. Employees are allocated shares in the trust based on a formula ...