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Frequently Asked Questions (FAQ)

ESOP stands for Employee Stock Ownership Plan or Employee Stock Option Plan. An ESOP is a plan that will incentives employees with an (possible) interest in the company. ESOP is often used within companies who have insufficient liquidity or cash flow to pay employees a competitive salary or remuneration package. Another compelling reason for installing an ESOP is that companies would like to tie high potential employees or key employees to the company considering that nearly all ESOP is combined with a vesting schedule.
EPP stands for Employee Participation Plan. This can be considered as a synonym for ESOP (Employee Stock Ownership Plan).

Vesting is a legal term that means that the employee is entitled to the incentive shares, depositary receipt or options over a period of time (Time based vesting) or once the goals are met (Milestone based vesting). Every calendar year or once a goal is met, a part of the asset is ‘vested'. An common example in a four years vesting scheme, is that the employee will vest 25% of the asset per year.

In most circumstances, vesting is combined with a cliff and once the cliff has passed the allocation of the assets occurs. Typically vesting schemes are four years, but depending on the employees who will benefit from the vesting, the vesting period can ramp up to ten years.

Time-based vesting is a specific form of vesting through which an employee earns its assets over a predefined period of time. This predefined vesting period can be set on a monthly, quarterly or yearly basis.

Milestone vesting, is a specific form of vesting through which the employee earns its assets based on specific milestones, such as achieving specific (individual) objectives (KPI's) or (successfully) finalising a project that has been assigned to the employee.

Hybrid vesting is a combination of Time-based vesting and Milestone-based vesting. The combination of these two vesting types is obvious, an employee must work within the company for a predefined period of time and during that period the employee must obtain specific predefined milestones (goals) to be eligible for the assets.

Reverse vesting can be considered as a practical solution for Time based vesting. With Reverse vesting, assets (in this case depositary receipts or shares) will be issued or transferred to the employee all at once. In a separate agreement - shareholders or certificaathouders overeenkomst - employees and the employer agrees that rights attached to these assets will vest over time, despite the fact that the already own the underlying assets. During a vesting period of four years, rights such as dividend will vest gradually (i.e. 25% per year) according to the agreed vesting scheme. Reverse vesting is often used in the Dutch situations where employees are incentivized with depositary receipts or shares, in order to avoid costs for transferring these assets to the employee.

If the employee will leave the company before the complete vesting period is completed, the employee has the obligation to transfer all non vested assets back to the company, or in other words: the company has the right to repurchase the assets if the employee has not been fully vested. The price for the assets will be determined by the underlying agreement and the fact if a good or bad leaver will apply and the event

A cliff can be considered as a “probation period” before the actual vesting scheme kicks in. Once the cliff is met, the first year of vesting starts or is considered as fulfilled after which the employee is eligible for the (rest of) vesting scheme. In the Netherlands the cliff is often set to one year, in which year the employer has the ability to evaluate the performance of the employee as nowadays under Dutch law the first contract is considered as an extended probation period. If the employer decides to terminate or not to extend the employment agreement of the employee, the vesting scheme hasn't started and therefore prevents the company from granting assets to employees it doesn't want to proceed with and thereby prevent making high expenses.

All ESOP plans contain a clause which defines a liquidity event. A liquidity event is an event that is triggered once all or a substantial part (>50%) of the company's shares is sold. In some occasions this will be a private acquisition and in some occasions this will be an initial public offering (IPO). In most ESOP, a liquidity event triggers the vesting period, in such a way that all shares or depositary receipts are considered to be fully vested and/or options can be exercised immediately in order to fully participate in the liquidity event. By connecting the liquidity event to the fully vested definition, the employee can benefit in full from this event.

The aforementioned liquidity event is also referred to as single trigger acceleration, as there is basically one event that triggers the liquidity event followed by the conversion. In some cases employers choose for a so-called double trigger conversion, which means that besides the first trigger, a second trigger has to occur before the employee may exercise his right to benefit from the liquidity event. It is noted that a double trigger conversion is considered not employee friendly.

Fully vested means that the employee has gone through its entire vesting period and/or achieved its milestones. Depending on the assets, this means that the employee has the right to sell or exercise his right to benefit from the value increase of the company.
A clawback is a clause that forces the employee to repay already received proceeds to the company, in some cases with interest or a penalty. These clauses are adopted to prevent or avoid employees to misbehave.

depositary receipts are issued to employees (normally by a STAK) after the STAK receives shares in the company that enable the employees to benefit from an ESOP. The specific thing about this situation is, that the most important rights connected to shares - legal rights (such as: voting rights, attending the meeting, inspection of the annual accounts et cetera) and economic rights (dividend rights) - are separated from each other with this construction. The STAK is the legal entity that holds the shares in the company and is therefore entitled to all legal rights (such as voting rights and attending rights). The economic rights (dividends) on the other hand, are transferred to the employee. If the company issues proceeds, the STAK has the obligation to distribute the proceeds directly to the employees who are eligible for the proceeds.

In this paragraph is still mentioned the voting rights, but nowadays you often see that shares held by the STAK are non voting rights in order to avoid issues with voting in the (general) meeting of the shareholders.

A drag along is a clause that forces remaining shareholders to offer their shares together with the (majority) shareholders to a third buying party.
A tag along is a clause that forces the selling shareholder to include the shares of the (most often) minority shareholders that are still in the company in his offer to a third party. In this case the minority shareholders have the right to 'tag' or 'hold on' to the offer that the larger shareholder is negotiating.
Leavers arrangements can be divided in (roughly) two types. Good leaver and bad leaver arrangements. These arrangement are included in ESOP to avoid discussions about the actual price of the offered assets in the company if an event occurs when the employer and employee decide to part ways regardless of the situation.

Bad leaver clauses are included in ESOP to avoid that, when an employee misbehaves, the employee receives the full amount of his incentive, regardless if the employee is fully vested. One of the most striking examples of a bad leaver, is the employee breaching a competition clause or committing fraudulent acts.

The catch of the bad leaver is that, once the employee is considered to be a bad leaver, the employee has the obligation to offer his shares to the other shareholders or depositary receipt holders against the nominal value or a predefined discount of the market value of the company.

Good leaver clauses should always be read with a bad leaver clause and vice versa. If done so, one will notice that nearly every situation that will not qualify as a bad leaver, must qualify as a good leaver. One can think of the death of an employee or chronic illness.

STAK stands for “Stichting Administratie Kantoor”, and is according to Dutch law a legal entity (a foundation) which is incorporated with one purpose: collect and distribute dividends to holders of depositary receipts. Once the STAK is incorporated, the company will transfer a part of its shares - most often non voting shares - to the STAK.

Legal rights (such as meeting and voting rights) - one of the essential rights attached to shares - will remain with the STAK, the economic rights are transferred to the employee.

If the company distributes dividend, the STAK has the obligation to distribute the proceeds directly to the employees who are eligible for the proceeds.

So in regard with employee participation, the STAK has three purposes:
  • separate the legal and economic rights which are attached to the shares;
  • holding and administering shares in consideration for which the STAK (foundation) will issue depositary receipts to exercise the rights attached to those shares;
  • collect dividends and pass those on to the holders of depositary receipts
If you "exercise" your option, you are using your right to convert your option into the underlying shares or depositary receipt in the company against the exercise right. Once your option is "exercised", the option lapsed by law and you are the owner of shares or depositary receipts.