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Frequently asked questions about ESOP and VSOP
General questions
The most important answers summarized for you.
Why should you consider an employee share ownership program?
Employee shareholdings are a suitable instrument for personnel development for several reasons. Here are the most important reasons: Firstly, they motivate employees by enabling them to identify with their company. Secondly, the employee has the chance of a potentially large financial benefit. Good employees stay longer with the company through participation programs (staff retention), also to realize their benefits through participation.
What is the difference between virtual shares, VSOP, stock options, ESOP and phantom shares?
Virtual shares are issued within a "Virtual Stock Option Plan", or VSOP for short. The Virtual Stock Option Plan (VSOP) thus forms the framework for issuing virtual shares. Terms such as phantom shares or phantom stock are often used as synonyms for virtual shares. The term ESOP, i.e. "Employee Stock Option Plan", is often used for any type of employee stock option. Often - in comparison to the VSOP - real company shares or the option for real shares are associated with the ESOP.
What is the difference between ESOP and VSOP?
With the ESOP, the employee receives an option on real shares (shares or GmbH participation). They become shareholders, have voting rights and participate in profit distributions. With the VSOP, the employee receives "only" virtual shares. Depending on the agreement, he also receives a corresponding share of the profits and any exit proceeds. However, he never becomes a shareholder and accordingly has no voting or other rights. The VSOP agreement is purely a contract under the law of obligations. The practical arrangement of ESOP and VSOP is the responsibility of the employer and employee. It is usually agreed that the employee will receive additional shares over a longer period if he or she remains with the company - up to a certain limit.
What are the advantages of a VSOP (i.e. virtual shares)?
The advantages of the VSOP lie primarily in its implementation and administration. No notary visit is required for the issuance of virtual shares. Nor does it require any change in the commercial register. The employer merely undertakes by contract to pay the employee a percentage share "X" of any profits or exit proceeds. Changes to the virtual participation quota are also possible without any problems by means of a simple contract or a supplementary agreement.
What are "Hurdle Shares"?
Hurdle shares are shares that contractually reduce the monetary benefit, which is in principle taxable. The shares are contractually provided with corresponding disadvantages (usually by way of a so-called negative liquidation preference), which first make the shares "worthless" or "value-reduced" in economic (and thus tax) terms. The background to this is usually the avoidance of disadvantages under tax law arising from the so-called dry income problem.
Questions about virtual shares
The most important answers summarized for you.
What do the terms vesting and cliff mean?
The terms "cliff" and "vesting" play an important role in both ESOPs and VSOPs: the cliff refers to the point in time at which the employee first receives the option to purchase shares or when virtual shares first vest. The "cliff" may be reached after one year with the company, for example. The "vesting period" is the period during which the shares vest if the employee is still working at the company on certain key dates. Example: Cliff period one year, vesting period three years. After one year, the employee receives one percent of the company or the corresponding shares vest. After the second year, it is two percent, and after the third year, three percent. If the employee leaves before the first year, he has not reached the cliff and is therefore not entitled to options or his shares are forfeited.
How and when are virtual shares taxed?
Virtual shares are not subject to taxation as remuneration in kind if they accrue to the employee - because the virtual share itself does not yet constitute a pecuniary benefit, as it cannot be resold. Income from virtual shares, on the other hand, is always taxable wages and is treated like a bonus. They appear accordingly on the wage or salary statement. Capital gains cannot exist due to the very nature of the investment, as the employee does not hold any "shares in corporations". The Income Tax Act always presupposes a real participation. The tax burden for virtual shares only arises when the employee receives a financial inflow from the investment, i.e. when she receives a payment of distributions or exit proceeds.
What are the advantages of virtual shares?
In principle, virtual shareholdings are a valuable instrument for binding employees to your company and for incentivizing and motivating them. Furthermore, from the company's point of view, they allow for a flexibilization of personnel costs, analogous to bonus payments, as they are only incurred in the event of success. In this way, fixed costs can be kept low. Due to their characteristics, virtual shareholdings can be used at short notice, without bureaucracy and flexibly, since they do not require any complex processes under company law do not require notarization and thus do not need to go to a notary ("flexibility and dynamics of private-written implementation") can be used immediately and individually From an economic point of view, they are advantageous because they there is no outflow of financial resources from the company when the virtual shareholding is allocated ("financing function") they are not taxed at the time of allocation, but only at the time of exit, and can therefore be used in a tax-neutral manner in all phases of the company (including later phases) ("tax neutrality at the time of allocation") do not cause any costs for additional employees can be implemented immediately and individually allow flexible retention of beneficiaries through vesting arrangements ("corrective and control element of corporate loyalty")
Do I need the consent of my shareholders to issue virtual shares?
The initial set-up of a virtual share ownership program (= VSOP) requires the consent of your shareholders. Depending on the wording of the contract and any internal requirements of the company, consent may not be required for the subsequent distribution of virtual shares to individual beneficiaries. This depends on the wording in the VSOP contract.
How can virtual shares be allocated?
Virtual shares can be issued either through an individual contract or a "Virtual Stock Option Plan" (= VSOP). The VSOP represents the framework for the virtual shares of a company for all beneficiaries. Based on the VSOP, individual subscription certificates (= allocation agreements) are issued for individual beneficiaries, which define the respective details with the beneficiaries, for example the share amount or vesting period per employee*. Issuing this individual subscription form and thus the virtual shares for new beneficiaries is unbureaucratic and quick: all that is required is a signature under the 1-2 page document.
Who is responsible for issuing virtual shares?
The management of the company. The initial establishment of a virtual stock option plan requires the approval of the shareholders' meeting. Subsequently, as soon as the VSOP has been set up and permits it, the issue of individual shares can be carried out by the management without any problems or bureaucracy. In principle, this does not require a visit to a notary public or a shareholders' meeting. However, special requirements from the company's articles of association and any existing shareholders' agreements must always be taken into account. For the issue of virtual shares to new employees, it is only necessary to hand out a subscription form, which is signed by both parties, employee and management. This subscription form contains the corresponding conditions of the virtual shares.
When and how are claims from virtual shares asserted?
At the time of the occurrence of the defined events, for example in the case of an exit or a profit distribution actually resolved by the shareholders of the Company. Usually, the payment claim is asserted by means of an exercise declaration by the beneficiaries, unless this mechanism is already directly defined in the VSOP contract itself.
How is the value of the virtual shares defined?
The calculation of the specific entitlement of the beneficiaries is based on the difference in value between the base price at the time the entitlement is granted and the value of the shares at the time the entitlement becomes due. This ensures that the beneficiaries only benefit from the increase in the value of the Company from the time they join the Company. However, this principle can also be deviated from, if desired, by defining an underlying value in the amount of the nominal value of the real shares of the Company. In this case, the beneficiaries participate in the full amount of the share value.
What are virtual shares?
By means of an agreement under the law of obligations ("virtual stock option plan", VSOP), the beneficiary employees or managers are placed in the same financial position as if they held a predefined number of shares in the company ("virtual shareholding"). As a result, the identical economic outcome is achieved, which is also the aim of complex stock option programs, but which require a great deal of effort under company law. In addition, the position of the founders or investors under company law remains unaffected.
For whom are virtual shares suitable?
Virtual shares are basically suitable for all private, non-listed companies. For start-ups, small and medium-sized enterprises in particular, they are a valuable means of attracting, retaining and incentivizing employees over the long term.
Will beneficiary employees become shareholders?
No - they are merely economically comparable with shareholders. However, they are not granted any rights under company law, i.e. they are not entitled to participate in or vote at shareholders' meetings.
What claims does the beneficiary have from the virtual shares?
The entitlements of the beneficiaries depend to a large extent on the structure of the VSOP ("Virtual Stock Option Plan"). In principle, the beneficiaries are entitled to payment from the Company. The standard case is an exit participation (participation in exit proceeds) in the event of the sale of the Company or a significant part thereof (change of control). In this case, the beneficiaries receive a fixed percentage of the exit proceeds. In addition, they can also participate in profit distributions analogous to the amount of their virtual shares or (optionally) also sell their virtual shares again as an exception (buy-out).
Questions about our offer
The most important answers summarized for you.
Can you switch from the basic package to the all-inclusive package at a later date?
Yes. As soon as you wish to include additional clauses in your Virtual Stock Option Plan ("VSOP"), we can expand your program along the lines of the all-inclusive package. This only requires a conversation to clarify additional clauses and regulations and the subsequent revision of your starter package.
Which package is right for you?
This depends largely on the situation of your company, your needs and wishes. Our basic package is the fast, cost-effective solution for early-stage companies without external financing and with low turnover. This takes care of the essential issues to get your employees virtually involved. If you are already in a more advanced phase or need clauses for your investors and other shareholders, our customized all-round carefree package is the ideal choice for you. Learn more and choose the package that suits you best.
