Companies often experience difficulties in attracting and retaining talented employees. In addition, start-ups and scale-ups are often unable to offer high salaries due to liquidity requirements. Entrepreneurs have various alternatives for rewarding their employers and thus binding them to the company. The best known form is salary. Nowadays, however, talent is no longer always satisfied with salary alone and a future-oriented reward is often expected. For these reasons, more and more companies are offering alternative rewards, such as Stock Appreciation Rights (SARs).
What are Stock Appreciation Rights?
With SARs, the employee does not receive shares, but a receivable on the growth in value of a share in a company.
When granting SARs, the shares are valued at a specific point in time using a contractually agreed method. When an employee exercises his SARs at a later time, the shares are again valued using the same method. The difference between the two valuation points will be paid out.
The exercise moment can be a departure on amicable grounds (‘good leaver’), a sale of the company or an IPO. It is often also agreed that ‘vesting’ takes place. In that case, the employer builds up its SARs over a number of years to 100% of the SARs.
As an example: an employee receives SARs that correspond to 1% of the shares. At the time of receipt, the company is valued at EUR 5,000,000. Ten years after receipt, the employee decides to exercise his SARs. In accordance with the same valuation method, the company is valued at EUR 10,000,000. Where 1% of the shares used to be worth EUR 50,000, it is now worth EUR 100,000.
Advantages of Stock Appreciation Rights
Stock Appreciation Rights have a number of clear advantages:
- limited costs of issuance: SARs are arranged through a private contract, so no notary needs to be involved;
- flexibility: contractual conditions can be freely included;
- no voting rights for employees;
- fiscally attractive for the employer: the cash benefit is deductible from the profit.
Disadvantages of shares and certificates
In addition to paying out SARs, companies can also choose similar rewards. The best known form is the issuance of shares to employees. However, there are drawbacks to this.
It gives employees the right to vote at the general meeting, which is often undesirable for the board.
Shares without voting rights deprive the employee of the right to vote at the general meeting, but do not deprive the employee of the right to attend the meeting and speak there.
Issuing certificates through a foundation limits the above rights and only provides the employees with financial participation in the company. Nevertheless, many formalities and costs are involved, such as establishing a trust office foundation and drawing up trust conditions. As a result, certificates are often unattractive to employers.
In addition, the trust office foundation is not a known legal concept outside the Dutch legal system, and potential foreign buyers are often wary of unknown structures.
Legal advice on SARs
All in all, the payment of Stock Appreciation Rights is a tax-efficient option for companies to reward and retain their employees without loss of control. At Viotta we specialise in agreements such as Stock Appreciation Rights. We will gladly advise you.
