Vesting
Employees with ‘skin in the game’ will put in more effort and will be more connected to their job. Furthermore, it is a way for start-ups – with limited financial resources – to reward employees.
However, as an entrepeneur, you do not want to be bound to employees that left your company. In the Dutch employee participation structures set out below it is possible to incorporate (reverse) vesting. With (reverse) vesting, the employee earns the employee participation regularly over some period or is obliged to waive the participation upon leaving the company.
Structures
In the Netherlands there are several employee participation structures that let your employees benefit from the value growth of your company:
Shares (Stock Purchase Plan)
Under the conditions of the Stock Purchase Plan employees will obtain shares in the holding or operating company. Employees will become a party to the shareholders agreement and have to be invited to the general meeting of shareholders (even if they only receive non-voting shares).
If the employees own at least 1% of the shares they can call for a general meeting of shareholders. If voting shares are issued to employees they will have the accompanying voting rights at such meeting.
Depositary Receipts (Stock Purchase Plan)
With a Stock Purchase Plan and the establishment of a STAK (‘Stichting Administratiekantoor’, a Dutch foundation) it is possible to grant depositary receipts on shares to employees. The employees do not own stock (the STAK is the stockholder) but are entitled to dividend and other distributions (e.g. in the event of an exit) attached to the shares. Employees do not have any voting rights nor are they entitled to attend the general meeting of shareholders.
The STAK is the stockholder and will become a party to the shareholders agreement. The STAK will exercise the voting rights in the general meeting of shareholders. The board of the STAK usually consists of the same board members as your company. This allows the company to maintain control. A Stock Purchase Plan with a STAK is a commonly used structure in the Netherlands.
Options (Stock Option Plan)
The Stock Option Plan stipulates in which events (e.g. a qualified financing or meeting defined milestones) and against which price (usually with a discount) employees are allowed to exercise their option and obtain a certain amount of shares or depository receipts. Only after exercising the option the shares or depository receipts will be issued to the employees and they will become a stockholder (see variation 1) or depository receipt holder (see variation 2).
The implementation of a Stock Option Plan is less expensive than a Stock Purchase Plan because shares and depository receipts do not have to be issued yet (with a notary).
Stock Appreciation Rights
Stock Appreciation Rights (SAR’s) do not allow employees to (eventually) own shares or hold depository receipts. Instead of shares or depository receipts employees will be granted a claim on the holding or operating company. This claim is linked to the value groth of your company. At the moment of granting the SAR’s the company is valued with a certain formula and it is determined what the value of the SAR’s are (usually expressed in percentages of shares).
For example: An employee is granted a SAR with a value equal to 2,5% of the shares. At the moment of granting the SAR the company is valued at EUR 500,000. The SAR is worth EUR 12,500. If the employee exercises the SAR when the company is valued at EUR 2,000.000,- the SAR will represent a value of EUR 50,000. The value growth at the moment of exercising the SAR will be paid in cash by the company to the employee, meaning the employee will receive EUR 37,500.
The benefit of SAR’s is that no shares or depository receipts have to be issued to employees. This makes the SAR a cost-effective structure that does not require a lot of paperwork. Furthermore, the payment of the SAR by the company is deductible from the profits and gives you a tax advantage (compared to a Stock Purchase Plan or a Stock Option Plan).
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Contact
Please contact us if you have any questions on employee participation within your company or if you have any questions on (reverse) vesting in the Netherlands. We regularly advise companies on all variations of employee participations. Please, have a look at our services.