1. Owner[s] sell their stock to the company
(note the company needs to be fairly successful to have the cash to buy the shares. Sometimes it's bought all at once, but often on some sort of multi-year payment plan. Bob's Red Mill took approx. 10 years to buy out Bob and his partners.)
2. The company puts the stock into a trust held for the benefit of employees.
3. A portion of shares may be immediately distributed to employees based on key status, years of service, etc.
4. The shares are used as part of benefit packages. It's sort of like a 401k that the employees don't actually have to pay anything to participate in. The longer you're there, and the more important your role (generally), the more you end up owning, and it's generally treated like employer 401k matches in terms of income tax.
Usually after you reach a certain threshold, you're allowed to sell your shares to others or back to the company in order to diversify.
