Employee participation plans in Dutch startups and scaleups

Alternatives to classic stock options: STAK certificates, SARs, phantom equity and direct shares

Employee participation plans allow employees, management or key hires to share in the value growth of a Dutch startup or scaleup through options, STAK certificates, direct shares, SARs, phantom equity or other incentive arrangements.

For Dutch startups and scaleups, the main question is not whether employee participation is useful. The real question is which structure fits the company’s cap table, tax position, governance, investor rights and future financing or exit plans.

A classic option plan may work for some companies, but Dutch startups often consider alternatives. STAK certificates, SARs, phantom equity or direct share participation may be more practical where founders and investors want to preserve voting control, avoid a crowded cap table or create a more flexible incentive arrangement.

This article is part of the Venture Capital Insights series on Dutch BV financing, investor rights and growth company governance. For a more detailed discussion of pool sizing, pre-money and post-money dilution and investor approvals, see Option pools in Dutch startup financings.

Why employee participation needs structure

Employee participation is often introduced for commercial reasons. Startups want to attract and retain developers, commercial talent, product leaders or senior management. They may not be able to match the cash compensation offered by larger companies, but they can offer participation in future value creation.

That commercial logic is clear. The legal implementation is often more difficult. A promise that someone will “get options” or “share in the upside” is not enough. The company must decide what kind of right is granted, when it vests, what happens if the employee leaves, how the arrangement is taxed, whether investor approval is required and how the right is treated in a financing round or exit.

For founders and investors, the key is to avoid creating informal promises that later become cap table, tax or governance problems. Employee participation should be structured before commitments are made to employees, advisors or management.

Classic stock options

Options give an employee the right to acquire shares or certificates in the future, usually at a fixed exercise price and subject to vesting conditions. They are internationally recognisable and are often expected by employees familiar with US or UK startup practice.

In a Dutch BV, options can work, but they are not always the simplest solution. The tax treatment, exercise mechanics, valuation, employee communication and future share issuance must be considered carefully. If the option is exercised into shares, the company may need shareholder approvals and notarial implementation.

Options can also create practical questions at exit. Will vested options be exercised before completion? Will they be cash-settled? What happens to unvested options? Does acceleration apply? These questions should be answered in the plan documents, not negotiated under time pressure during an exit process.

A classic option plan is therefore useful only if the company is ready to manage the legal, tax and administrative consequences.

STAK certificates

A STAK structure is often used in the Netherlands to separate economic participation from voting control. A stichting administratiekantoor holds the legal shares, while employees receive certificates that represent economic rights.

For startups and scaleups, this can be attractive. Employees can participate economically without becoming direct shareholders with voting rights. The cap table remains cleaner, and founders and investors can keep governance more centralised.

STAK certificates can work well for broader employee participation, especially when the company wants to include more employees without giving each of them direct shareholder rights. The structure does require proper documentation: STAK terms, administration conditions, issue mechanics, transfer restrictions, vesting, leaver provisions and exit treatment must be clear.

The main advantage is governance simplicity. The main disadvantage is that the structure may feel less familiar to international employees or investors. Good explanation is therefore important.

SARs and phantom equity

Stock appreciation rights, or SARs, give an employee a contractual right to receive value based on the increase in company value or share value. Phantom equity is similar in economic function: the employee participates in value growth without holding actual shares or certificates.

These structures can be useful where the company wants to offer upside without changing the cap table. They can also be easier to manage if the company wants to avoid notarial share transfers, shareholder registers or voting questions.

SARs and phantom equity are not “simpler” in every respect. They require careful drafting. The documents must define the reference value, vesting, leaver treatment, payment trigger, exit treatment, tax treatment, timing of payment and whether the right can be amended or cancelled.

For companies that want economic incentives without shareholder complexity, SARs or phantom equity can be a practical alternative to options or certificates. See also the related insight on Stock Appreciation Rights as an alternative reward for employees.

SARs and phantom equity

Stock appreciation rights, or SARs, and phantom equity plans are contractual arrangements. They usually do not give employees actual shares. Instead, participants receive a cash payment based on the increase in value of the company or a notional share value.

SARs and phantom equity can be practical for Dutch startups. They keep the cap table clean and avoid employees becoming shareholders. They can also be easier to manage from a governance perspective.

But SARs are only as strong as the contract. The plan should clearly define vesting, valuation, payment triggers, exit events, leaver consequences, amendment rights and whether an asset sale, share sale or change of control triggers payment.

The distinction between SARs and actual shareholder rights is important. A SAR holder usually has no voting rights, no meeting rights, no dividend rights and no direct right to exit proceeds. For more on that distinction, see the related insight on advisor shares, SARs and minority shareholder rights in Dutch startups.

Direct shares

Direct share participation gives employees actual shares in the company. This can be appropriate for senior management, key hires or employees who are expected to operate more like long-term business partners than ordinary employees.

The advantage is clarity: the employee becomes a shareholder and participates directly in dividends and exit proceeds. The disadvantage is that direct shareholding can make the cap table more complex. It may also give employees rights under the articles of association, shareholders’ agreement or Dutch corporate law that founders and investors did not intend to extend broadly.

Direct shares therefore require careful use. They are often better suited for a small group of senior participants than for a broad employee plan. If direct shares are used, the shareholder documentation should address voting, information rights, transfer restrictions, leaver provisions, drag-along, tag-along and exit obligations.

Choosing the right structure

The right employee participation structure depends on the company’s stage, cap table, investor base, tax advice, hiring plan and exit expectations.

A classic option plan may be attractive where employees expect option-style economics and the company is willing to manage exercise and tax mechanics. STAK certificates may be better where the company wants employees to participate economically while keeping voting control centralised. SARs or phantom equity may be more practical where the company wants a contractual upside plan without actual share ownership. Direct shares may fit senior management or strategic hires, but are usually less suitable for broad participation.

The decision should not be made only by looking at what is common internationally. Dutch BV mechanics, tax treatment, notarial implementation, investor consent rights and future financing rounds all matter.

Vesting and leaver provisions

Employee participation should usually vest over time. Vesting protects the company if an employee leaves shortly after receiving participation rights. It also supports retention and long-term alignment.

Leaver provisions determine what happens when an employee resigns, is dismissed, becomes disabled, dies or leaves in connection with a reorganisation. Good leaver and bad leaver concepts are often used, but they should be drafted carefully. Overly broad bad leaver language can create disputes. Overly soft leaver treatment may leave the company with passive participants who no longer contribute.

The leaver mechanics must fit the instrument. Options can lapse. Certificates or shares may need to be transferred. SARs or phantom rights may be cancelled, reduced or paid out. Direct share transfers in a Dutch BV require notarial implementation.

For related founder-specific issues, see also Founder vesting and leaver provisions in Dutch startups.

Cap table and investor approvals

Employee participation affects the cap table and is therefore relevant in VC financing rounds. Investors will usually want to know the size of the pool, existing grants, promised grants, vesting terms, exercise price, leaver rules and expected dilution.

A key negotiation point is whether the employee pool is created before or after the investment. If the pool is included in the pre-money valuation, founders effectively bear more dilution. If it is created after the investment, dilution is shared with the new investors.

Investor approvals may also be required. Shareholders’ agreements often include consent rights for new share issues, option pools, employee incentive plans, amendments to participation arrangements or grants to senior employees. The plan must therefore be checked against the investment agreement, shareholders’ agreement and articles of association.

Exit treatment

Employee participation should be exit-ready. A buyer will want to know who holds rights, whether those rights are vested, whether they must be exercised, whether they are cash-settled and whether participants can block or delay completion.

The documentation should address what happens on a share sale, asset sale, merger, liquidation or other exit event. It should also cover deferred consideration, earn-outs and escrow arrangements where relevant.

If the plan is unclear, employee participation can become a transaction issue. Instead of supporting alignment, it creates uncertainty in the sale process. Clear exit treatment protects the company, investors and participants.

Tax and valuation coordination

Employee participation should always be coordinated with tax advisers. Options, certificates, direct shares, SARs and phantom equity can have different tax consequences. The timing of grant, vesting, exercise, settlement or exit may matter.

Valuation is also important. If employees receive rights at a discount or for limited consideration, the tax position must be understood. The legal documents should match the tax analysis. If the tax advice assumes one structure but the legal plan documents describe another, implementation risk increases.

This is particularly relevant for international teams. Dutch startups and scaleups often employ people in multiple jurisdictions. Participation arrangements may need to account for employees who live or work outside the Netherlands.

Common mistakes

A common mistake is using US-style option documentation without adapting it to a Dutch BV. The commercial terms may be familiar, but Dutch law, tax, STAK mechanics and notarial implementation require a different approach.

Another mistake is making informal promises before the plan is approved. Employees may believe they have a right to participate, while the company still needs investor consent, shareholder approval, tax advice or notarial steps.

A third mistake is choosing the structure too late. If employee participation is only addressed during a VC round or exit process, there is little room to design a clean structure. Existing promises, undocumented grants and unclear vesting can then become diligence issues.

Practical conclusion

Employee participation can help Dutch startups and scaleups attract and retain talent, but the structure must fit the company’s legal and commercial reality.

Options, STAK certificates, SARs, phantom equity and direct shares each have different consequences for tax, governance, cap table management, employee communication, investor approvals and exit treatment. There is no one-size-fits-all model.

For founders and investors, the key question is not simply how much upside employees should receive. The more important question is which structure gives employees meaningful alignment without creating unnecessary complexity for the Dutch BV, future financing rounds or an exit.

FAQ

What is an employee participation plan in a Dutch startup?

An employee participation plan allows employees, management or key hires to share in the value growth of a startup or scaleup, for example through options, STAK certificates, direct shares, SARs or phantom equity.

Are stock options the best structure for Dutch startups?

Not always. Options are internationally recognisable, but STAK certificates, SARs, phantom equity or direct shares may be more practical depending on tax, governance, cap table and investor considerations.

Why do Dutch startups use STAK certificates?

A STAK can separate voting rights from economic rights. Employees receive certificates with economic exposure, while voting control remains centralised through the STAK.

What is the difference between SARs and options?

Options give a right to acquire shares or certificates. SARs usually give a contractual right to receive value based on the increase in company value or share value, without actual share ownership.

Why does employee participation matter in VC financing rounds?

Investors review employee participation because it affects dilution, cap table structure, promised grants, option pools, governance and exit readiness.

About Dirk de Waard

Dirk de Waard is a Dutch corporate and venture capital lawyer, partner at Venture Lawyers in Amsterdam focusing on Dutch BV financing rounds, startup governance, shareholder arrangements and employee participation structures. He advises founders, startups, scaleups, investors and international counsel on incentive plans, option structures, STAK certificates, SARs, phantom equity, shareholders’ agreements and Dutch BV implementation.

Preparing an employee participation plan for a Dutch startup or scaleup?

Dirk de Waard advises founders and investors on the choice between options, STAK certificates, SARs, phantom equity and direct shares, including vesting, leaver provisions, cap table impact, investor approvals, tax coordination and exit treatment. Contact dirk.dewaard@viottalaw.com to structure employee participation in a way that works for the Dutch BV, the team, investors and future financing rounds.