What aspects employees look for in VSOP contracts

Virtual employee stock ownership plans (VSOPs) are an excellent way of circumventing the disadvantages - particularly in terms of administrative effort - of "real" stock ownership plans. VSOP contracts also have some tax advantages. However, employees should pay attention to certain clauses that may be disadvantageous to them. We provide an overview of these aspects and explain why they are important for employees.

In general, the contract is the most important and often the only basis for the entire VSOP. Care is therefore the be-all and end-all here, in order to take into account even supposed trivialities.

Point 1: The amount of participation

The contract (VSOP Conditions) must clearly regulate the extent to which the employee will participate virtually in the company. Specifically, the following aspects are affected:

• Participation in current profit distributions and basis of assessment for the application of the percentage rate
• Participation in the proceeds on sale ("exit") of the company and assessment basis (sales price, sales profit, upper limit) for the calculation
• Buy-out option of the employee after expiry of a minimum holding period if the company has sufficient liquidity

The employee must have the opportunity to understand at any time on the basis of the contract to what extent he will participate in which performance of the company. If this is not the case, the requirement of transparency under the law on general terms and conditions pursuant to sections 305 and 307 (1) sentence 2 of the German Civil Code may be violated and the provisions may be invalid. There is then a risk that the employee would be entitled to the maximum payment resulting from the contract.

Therefore, he should be able to understand the calculation in the event of a distribution or exit. It is also relevant to set upper limits for the payout, for example when the company is sold to one or more investors.

Point 2: Cliff and vesting period

Whether real or virtual employee participation: In almost every agreement, there are specifications around the "cliff" and the "vesting period". The differences: 

1. Only when the employee reaches the cliff is he entitled to options/virtual shares. If a cliff period of two years has been agreed and the employee leaves the company after 1.5 years, he or she must return any (virtual) shares already received or the option lapses.
2. The vesting period specifies the duration and intervals at which the employee receives further shares. Once the vesting period has expired, the employee's continued employment with the company is no longer relevant, as the maximum number of options has already been vested.

Example: Cliff period one year, vesting period five years, maximum shares five percent.

After one year, the employee receives the first percent of the virtual shares. If he or she leaves before then, he or she is not entitled to anything, even if he or she has already "earned" part of the entitlement. After the second year, the employee receives a second percent, after the third a third, and so on. If the employee has been with the company for five full years, he or she has reached the maximum of the shares. 

Concrete agreements should also be made with regard to the reason for an early departure. If the employer terminates the employee's employment, for example due to gross misconduct, it can be agreed that the shares must be returned in full, even if the cliff has already been reached.

Conclusion: Comprehensive advice for VSOP designs indispensable!

In addition to legal requirements, individual circumstances and wishes must also be taken into account in VSOP contracts. At the same time, it is important to avoid tax and social security disadvantages - "nasty surprises" - that neither of the two contracting parties had anticipated.

Therefore, leave the planning and implementation of VSOP projects to experienced experts. Arrange your first consultation appointment now!

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Disclaimer: The contents of the information offered at vsop-direkt.de do not constitute legal advice. If you need a legal examination of your individual case, please contact our specialized team: beratung@esop-direkt.de