What aspects employees look for in VSOP contracts

Virtual Employee Stock Ownership Plans (VSOPs) are an excellent way to avoid the drawbacks—particularly in terms of administrative burden—associated with “real” stock ownership plans. VSOP agreements also offer several tax advantages. However, employees should be aware of certain clauses that could be disadvantageous to them. We provide an overview of these aspects and explain why they are important to employees.

In general, the contract is the most important—and often the only—basis for the entire VSOP. Therefore, diligence is essential here to ensure that even seemingly minor details are taken into account.

Item 1: The Amount of the Investment

The agreement (VSOP Conditions) must clearly define the extent to which the employee will hold a virtual stake in the company. Specifically, this involves the following aspects:

• Participation in ongoing profit distributions and the tax base for applying the percentage
• Share of the proceeds from the sale (“exit”) of the company and the basis of calculation (sale price, capital gain, upper limit)
• Employee buyout option after a minimum holding period, provided the company has sufficient liquidity

The employee must be able to determine at any time, based on the contract, the extent to which he or she participates in which of the company’s profits. If this is not the case, the legal requirement for transparency under the General Terms and Conditions (AGB) pursuant to Sections 305 and 307(1), second sentence, of the German Civil Code (BGB) may be violated, and the provisions may be invalid. There is then a risk that the employee would be entitled to the maximum payment provided for in the contract.

Therefore, he should be able to understand the calculation in the event of a distribution or exit. It is also important to set upper limits on payouts, such as when the company is sold to one or more investors.

Item 2: Cliff and Vesting Period

Whether it’s a real or virtual employee stock ownership plan, nearly every agreement includes provisions regarding the “cliff” and the “vesting period.” The differences: 

1. Only when the employee reaches the cliff does he or she become eligible for options or virtual shares. If, for example, a cliff period of two years was agreed upon and the employee leaves the company after 1.5 years, he or she must return any (virtual) shares already received, or the option will expire.
2. The vesting period specifies the duration and frequency with which the employee receives additional shares. Once the vesting period has expired, whether the employee remains with the company is no longer relevant, since the maximum number of options has already been granted.

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

After one year, the employee receives the first one percent of the virtual shares. If the employee leaves before then, he is not entitled to anything, even if he has already “earned” a portion of the entitlement on a mathematical basis. After the second year, the employee receives a second one percent; after the third, a third, and so on. Once the employee has been with the company for five full years, he has reached the maximum number of shares. 

Specific agreements should also be made regarding the reason for early termination. If, for example, the employer terminates the employee’s employment due to gross misconduct, it may be agreed that the shares must be returned in full, even if the cliff period has already been reached.

Conclusion: Comprehensive advice is essential when structuring VSOPs!

In the case of VSOP contracts, in addition to legal requirements, individual circumstances and preferences must also be taken into account. It is equally important to ensure that the VSOP does not result in tax or social security disadvantages—“unpleasant surprises”—that neither party to the contract anticipated.

So leave the planning and implementation of VSOP projects to experienced experts. Schedule your first consultation today!

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Disclaimer: The content provided on vsop-direkt.de does not constitute legal advice. If you need a legal review of your specific case, please contact our specialized team: beratung@esop-direkt.de