An alternative employee incentive for Dutch startups and scale-ups
Attracting and retaining key employees is one of the biggest challenges for startups, scale-ups and growth companies. High salaries are not always possible, especially in early-stage companies where cash is needed for product development, hiring and growth.
Stock Appreciation Rights, or SARs, can be an attractive alternative. With SARs, an employee does not receive actual shares, but a contractual right to benefit from the increase in value of the company.
For Dutch startups, scale-ups and investor-backed companies, SARs can be useful because they create economic alignment without giving employees voting rights or direct share ownership. They are often considered alongside option plans, phantom shares, STAK structures and other employee participation arrangements in Dutch venture capital and growth financing contexts.
What are Stock Appreciation Rights?
A Stock Appreciation Right gives the employee a contractual claim linked to the increase in value of the company’s shares.
At the grant date, the company is valued using an agreed valuation method. At a later exercise or exit moment, the company is valued again using the same or another agreed method. The employee receives a cash payment based on the increase in value.
For example, an employee receives SARs linked to 1% of the company. At the grant date, the company is valued at EUR 5 million. If the company is later valued at EUR 10 million, the increase in value linked to that 1% position is EUR 50,000. Depending on the plan rules, that amount may become payable on an exit, good leaver event or another agreed trigger.
SARs are usually documented in a private agreement or plan rules. No shares are issued, and no notarial deed is required for the grant itself.
Why companies use SARs
SARs are often used when a company wants to reward and retain key employees, management or advisers without changing the cap table.
Because SARs are contractual rights, they are flexible. The plan can include vesting, good leaver and bad leaver provisions, exit-only payment, performance conditions, forfeiture provisions, transfer restrictions and valuation mechanics.
For founders and investors, a major advantage is that SARs do not give employees voting rights or shareholder meeting rights. This can be important where the company wants to preserve a clean governance structure and avoid adding multiple small shareholders to the cap table.
SARs can also be easier to understand for international investors than some Dutch-specific structures, although the tax and accounting treatment should always be confirmed with specialist advisers.
SARs compared to shares, options and STAK structures
Employee participation can be structured in different ways. A company may issue actual shares, grant options, use a STAK structure with depositary receipts or create a contractual incentive plan such as SARs or phantom shares.
Actual shares give employees direct ownership and may create voting, meeting and transfer issues. Options can be attractive, but require careful tax, exercise price and share issuance planning. A STAK structure can separate economic rights from voting rights, but is a Dutch-specific structure and may feel unfamiliar to foreign investors or buyers.
SARs are different because they do not create direct share ownership. The employee receives a contractual economic right, usually payable in cash. This can make SARs attractive for companies that want economic alignment without issuing shares.
The right instrument depends on the company’s stage, cap table, tax position, investor expectations and future exit strategy.
Legal points to consider
A SAR plan should be carefully drafted. The agreement should make clear who is eligible, how SARs vest, when they can be exercised, how the company is valued, what happens if the employee leaves and when payment is due.
Key issues include vesting, good leaver and bad leaver treatment, exit triggers, valuation methodology, information rights, payment timing, amendment rights, termination, confidentiality and interaction with employment or management agreements.
For investor-backed companies, the SAR plan should also be aligned with the shareholders’ agreement, articles of association, investor consent rights and future financing rounds. In some cases, investor approval may be required before implementing or amending an incentive plan.
Tax and employment law
The tax treatment of SARs is important and should be assessed before the plan is implemented. Depending on the structure, timing and circumstances, payments under a SAR plan may be treated as employment income and may require payroll withholding.
Employment law should also be considered. The SAR documentation should be aligned with the employment agreement, management agreement or consultancy agreement. It should be clear what happens on resignation, dismissal, illness, garden leave, change of control or termination for cause.
I advise on the Dutch corporate law implementation of SAR structures and coordinate with tax and employment specialists where required.
Why SARs matter in transactions
SARs are especially relevant in investment rounds and M&A transactions. Investors and buyers will want to understand the economic impact of existing incentive arrangements.
A SAR plan can affect enterprise value, purchase price negotiations, leakage, management incentives, employee retention and post-closing obligations. In an acquisition, the treatment of SARs should be addressed clearly in the transaction documents.
This is relevant for M&A transactions, private equity investments and venture-backed exits.
Need advice on Stock Appreciation Rights?
Dirk de Waard advises founders, startups, scale-ups, investors and companies on Dutch corporate law aspects of SARs, employee participation plans, management incentives and equity-linked arrangements.
He assists with structuring, drafting and reviewing SAR plans and aligning them with the company’s shareholders’ agreement, governance structure, investment round or M&A transaction.
Contact Dirk de Waard at dirk.dewaard@viottalaw.com to discuss a SAR plan or employee incentive structure for a Dutch company.
