Stock Option plan for employees?
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What is an option?
A “stock” option or “employee” option gives an employee the right to purchase shares or depositary receipts in the company at a predetermined price, the so called “exercise price”, within a predetermined period of time. In essence, options are contractual rights and will convert into shares or depositary receipts once this option is triggered due to a liquidity event, such as the sale of the company. During such an event, employees can execute their rights to purchase the underlying assets within the predetermined period.
stock option plan Advantages :
- No tax risks
- Relatively easy and low-cost to implement
- No risk for the employees
stock option plan Disadvantages:
- Employees may feel less like an owner and therefore less engaged compared to being a shareholder or depositary receipts holder
- The tax costs are probably higher for the employee in comparison to shares in case of exercising its option right
- The award is not tax deductible for the company for corporate income tax
Stocks, options, SARs, certificates, what suits you?
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How does an option work from a legal perspective?
- predefined amount of shares (or depositary receipts)
- price of the award of the option (option price)
- a predefined period of time;
- a predefined price (also called the exercise price)
Remember with options, that there are always two prices to take into account. The “option price” and the “exercise price”:
- The option price is the contribution for the awarding of the option itself, in other words: having the right to execute an option and thereby obtain shares in a company has a certain value. Common practice is that employees are rewarded with an option for free. As a result of that, there is no option price for the option on the date of granting.
- The exercise price is the predetermined price that states how much the employees must pay for the predetermined shares that they will obtain immediately after executing their option right. In most option plans, the exercise price is set to the nominal value.
So how does this work in practice?
So let's assume that an employee receives an option for purchasing shares in the company. On grant date, the valuation of the company is equal to € 0,50 per share. In the option contract it is agreed that this € 0,50 is the predetermined purchase price per share that the employee can purchase the shares for in the coming five years (exercise price).
Now let's assume that the company's value has increased rapidly in the last five years and the board decides to value the company again. Due to this new valuation the value of the company increased and therefore each individual share increased and is valued at € 5,00.
In this example, the employee is allowed to execute his option, which states that he may purchase shares for the exercise price (€ 0,50), knowing that the value of the company has increased and each individual share is valued at EUR 5,00. The upside for the employee in this simplified example is € 4,50 per share.
When can employees exercise their options?
Employees may execute their right directly prior to an exit or other liquidity event. The definition of an exit or liquidity event is always predefined in the option contract and will often be defined as when a third party purchases (partially) the shares in the company or when the company has an IPO (initial public offering). In some cases, these options will convert automatically at a given time or when a specific situation occurs.
Tax perspective
The award of options to employees will not trigger any taxation, as the award itself is not a taxable event from a Dutch tax perspective. However, if the option is exercised, this could trigger taxation under Dutch tax law. Such is the case if the value of the shares acquired exceeds the purchase price (option price) or issue price paid by the relevant employees. The difference would be considered a benefit and would be subject to income tax under ‘box 1' (income from employment) at a progressive tax rate from 37.10% to a maximum of 49.50% and, more importantly, wage withholding tax (“Loonbelasting”), the latter being due by the employer. As explained above, the employee normally does not have to pay an exercise or/and purchase price for the shares, as a result of this in almost all cases the employees benefit from exercising their options, which will be taxed with wage tax accordingly. As the employee does not invest money beforehand, they cannot lose money either, limiting the employee's downside.
The possible disadvantage, in comparison to shares or depositary receipts, is that the increase of the value of the company - between awarding options and the exit - is fully taxed against the 49.50%. Depending on the size of the shares or depositary receipts, the increase between obtaining the shares (or depositary receipts) and exit will not be not taxable (box 3) or taxed against 26.90% (box 2).
However, please keep in mind that in case of award of shares or depositary receipts the employee most likely needs to pay taxes on the award. The employee pays for the shares upfront and could lose some of its value, creating risk for the employee. Read more about Shares on this page.
Example of a calculation
The company has awarded options of 4% of the issued share capital with a vesting of four years to an employee which they may exercise if an exit takes place. The employee does not have to pay any compensation for the awarding of the option and the exercise price is set to the nominal value of the corresponding issued shares.
The possible disadvantage, in comparison to shares or depositary receipts, is that the increase of the value of the company - between awarding options and the exit - is fully taxed against the 49.50%. Depending on the size of the shares or depositary receipts, the increase between obtaining the shares (or depositary receipts) and exit will not be not taxable (box 3) or taxed against 26.90% (box 2).
However, please keep in mind that in case of award of shares or depositary receipts the employee most likely needs to pay taxes on the award. The employee pays for the shares upfront and could lose some of its value, creating risk for the employee. Read more about Shares on .
Why RoundE?
RoundE is your partner in employee participation plans. Instead of hiring expensive lawyers to set up your participation plan, we developed in-house software to streamline this process: saving you time and money
Quality
Our plans are checked by both tax and fiscal specialists. You also get a , so the contract fits your needs perfectly
Fair pricing
We besparen kosten door ons bedrijf online te runnen en het hele proces te automatiseren, waardoor we zeer concurrerende prijzen kunnen aanbieden.
Premium service
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