Allocation of shares with vesting, stock options and virtual stock options

Giving a start-up’s staff the opportunity to benefit from its value growth is generally seen as an effective way to alleviate initial cash flow requirements while increasing employee buy-in and motivation.

There are several techniques to achieve this:

• the allocation of shares;
• the assignment of a debt due at the time of the sale of the business.

In practice, this is mainly relevant for businesses that have chosen to organize themselves as a company. However, certain advantages are also available to the non-profit sector.

A member of staff is defined as employed or self-employed persons (including directors), and where appropriate active shareholders, a management company or members of an advisory body of the company (p. e.g. an advisory board) that we want to federate and reward.

Share allocation:

• Contribution to industry : the worker agrees to perform work in exchange for shares; In case of non-performance of the promised work, his actions can be suspended or even withdrawn.
• Grant of shares: the beneficiary receives shares, free of charge or on preferential terms, if necessary as and when a vesting period: the right to shares is acquired gradually. During the vesting period, the beneficiary may not dispose of his shares directly or indirectly (for example, he may not sell them). The continuation of the vesting period is subject to the beneficiary fulfilling certain commitments, generally including the obligation not to terminate a service agreement without good reason. In this example, if the worker terminates his or her service agreement without a valid reason, the worker loses all or part of this right. This is usually implemented in a shareholder agreement.
• Grant of stock options and subscription rights: these are options allowing the employee to acquire, on predetermined (usually preferential) terms, existing shares or new shares. In the case of new shares, we speak of subscription rights, also referred to as warrants. Each subscription right makes it possible to subscribe to a new share of the company.

In both cases, the beneficiary becomes a shareholder of the company, eventually; in the case of the option, if the beneficiary exercises the option and in the case of subscription rights, if he actually subscribes for the shares.

• • Options on existing shares are granted by shareholders, but may also be granted by the company.
    • In the first case, the shareholders may enter into a call option agreement regulating the terms of exercise of the option. This agreement generally grants a mandate to the members of the management authority to carry out the operation.

• • • In the second case, the company grants options on its own shares that it has repurchased from shareholders.

The repurchase of own shares is thus one of the techniques used to offer shares for sale to staff members or key people of the company. The Code encourages this approach since, when the repurchased shares are intended for distribution to staff, no general meeting is required. However, this is only possible if the conditions laid down for the distribution of profits are met. For the srl, for example, the double test of liquidity and solvency must be met.

• • The granting of subscription rights necessarily involves a general meeting (with certain exceptions within the framework of the authorized capital for SAs); A number of formalities must be complied with.

Acknowledgement of a claim: the virtual stock options plan

Unlike the grant of shares, beneficiaries of a virtual stock plan will not receive the right to acquire shares of the company. In reality, the beneficiaries will receive a contractual right to additional remuneration based on the value of the company’s shares at the time of resale.

It is because the amount of the additional remuneration is fixed on the basis of the value of the shares that we speak of virtual shares. Moreover, these virtual shares are not shares because they do not confer shareholder status or profit sharing.

How to choose?

Rights of beneficiaries

The granting of shares leads the beneficiaries to exercise the rights deriving from the holding of shares.

In order to reduce the proliferation of shareholders with small shareholdings, some companies issue non-voting shares for their employees or use certification of securities. Mitigating the voting rights of stock option beneficiaries is more appropriate at a later stage for newcomers, employees or active shareholders.

Taxation

In Belgium, capital gains on shares are not taxed.

Nevertheless, if the granting of shares to a worker is in fact remuneration for his services, a corresponding income tax is normally payable, regardless of whether the worker is an employed person or a self-employed person. In many cases, the allocation of shares to a company’s employee is therefore subject to taxation.

Under Belgian law, plans for the granting of stock options or stock options on the occasion of or because of the beneficiary’s professional activity may be subject to a specific tax regime, referred to in the Law of 26 March 1999.

The tax regime for stock options has two important advantages:

• advantageous tax treatment to the extent that, where the conditions are met, the flat-rate value is 18 % of the underlying value and may even be 9 % (The conditions for benefiting from the most favourable tax regime are that the option can be exercised between the third and tenth years). However, tax is immediately payable, regardless of the success or failure of the company’s project.
• legal certainty (because the taxation system is known from the outset and there is no risk of an unpleasant surprise).

Taxation must be examined in the light of individual circumstances, including double taxation agreements.

Virtual shares are normally subject to taxation as compensation.

Formalities

Stock option plans require specific documentation, usually quite complex.

Proportion of the profit-sharing plan in the worker’s total remuneration

For functions that may fall within the remit of self-employed workers, it is possible to use the allocation of shares as a form of substantial alternative remuneration. For employees, this is also possible, but only incidentally because the remuneration of salaried workers must obey principles regulated in a mandatory law.

For self-employed workers, it is also possible to vary the consultant’s remuneration in an evolutionary way according to contractually agreed criteria (evolutionary fee with reduced remuneration during the start-up period, variable remuneration based on performance, etc.).

Implementation

In all cases, it is necessary to define:

• what we want to encourage (who? for what? etc.), with regard to the company’s business plan.
• basic parameters (is there a subscription price / share value / timing / identification of the decision-maker on the plan and majority rules, etc.).