Stock Appreciation Rights: Benefits for Dutch Startups and Scale-Ups

Why SARs can be attractive for founders, employers and investors

Stock Appreciation Rights, or SARs, can be an attractive incentive tool for Dutch startups and scale-ups that want employees, management or advisers to share in value growth without issuing actual shares.

The participant does not become a shareholder. Instead, the participant receives a contractual right to a cash payment linked to the increase in value of the company. This allows the company to offer equity-like upside while keeping the cap table, shareholder base and governance structure relatively clean.

For founders and employers, the main benefits are flexibility and control. For investors, SARs can be useful because key people are economically aligned with value creation without immediately creating new shareholders, voting rights or notarial share issuances.

Dutch version: Stock Appreciation Rights: voordelen voor Nederlandse startups en scale-ups. For a broader explanation of how SARs work, see Stock Appreciation Rights (SARs) in Dutch Companies.

This article also connects to Dutch Venture Capital Insights, Employee Participation Plans in Dutch Startups and Scaleups and Cap Table Adjustments in Dutch Startups and Scale-Ups.

1. Economic upside without creating new shareholders

The main benefit of SARs is that employees or management can participate economically in value growth without becoming shareholders.

That is especially relevant for startups and scale-ups that want to attract and retain talent, but do not want to create a large group of minority shareholders. Actual shares can raise questions about voting rights, meeting rights, information rights, transfer restrictions, shareholder register updates, governance and Dutch notarial implementation.

With SARs, the participant usually remains a contractual participant. He or she receives no shares, no voting rights and no position in the general meeting. The company can therefore offer an equity-like incentive without expanding the formal shareholder base.

For investors, this is often attractive. A SAR plan can help retain key people while avoiding unnecessary cap table fragmentation.

2. More flexibility than actual shares

SARs are usually created through a contractual plan. That gives the company flexibility to design the arrangement around its own commercial and financing needs.

The plan can determine who participates, how many SARs are granted, how value appreciation is calculated, when SARs vest, when they can be exercised, what happens if a participant leaves and what happens on a sale of the company.

This flexibility is useful, but it must be documented carefully. A SAR plan should not simply say that participants share in value growth. It must explain how the payout is calculated and when the participant becomes entitled to payment.

The company can use time-based vesting, milestone-based vesting or a payout only on an exit or other liquidity event. It can also distinguish between good leavers, bad leavers and intermediate leaver situations.

3. Talent retention without immediately increasing salary costs

Startups and scale-ups often cannot compete with larger companies on salary alone. SARs can help create a more attractive total compensation package.

For key employees, senior managers, technical specialists, commercial leaders and advisers, the possibility of sharing in future value can be a strong incentive. They benefit not only from salary or bonus, but also from the value they help create.

For the company, the benefit is that the reward is linked to long-term value creation. If the company does not increase in value, there may be no or only limited payout. If the company grows significantly or is sold successfully, participants can share in that success.

SARs can therefore help align the interests of the company, founders, investors and key people.

4. A cleaner cap table for future investors

A SAR plan can be useful before a financing round.

New investors will review the cap table carefully. They want to know who the shareholders are, which rights exist, which options or other instruments are outstanding and which claims on future value have been granted.

Actual shares or options can make the cap table more complicated. SARs do not immediately create new shares and do not directly dilute shareholders in the same way as share issuances or options. The formal ownership structure can therefore remain cleaner.

That does not mean SARs are invisible to investors. The economic impact should be clearly modeled and disclosed. A large SAR plan can create a significant cash payment obligation on exit or another liquidity event.

A good SAR plan keeps the cap table clean, but not unclear.

5. No Dutch notarial share issuance at grant

In a Dutch BV, issuing or transferring shares usually requires Dutch notarial involvement. That can make actual equity participation more formal and more burdensome.

SARs are different. Because no shares are issued or transferred when SARs are granted, a Dutch notarial deed is usually not required at the grant stage. The arrangement is contractual.

This makes SARs practical for larger groups of employees, managers or advisers. The company does not need to arrange a share transfer or shareholder register update for each participant.

However, the SAR plan should still be checked against the company’s governance documents. The shareholders’ agreement, investment agreement or reserved matters may require approval for the adoption or amendment of an incentive plan, especially if the plan may create a material financial obligation.

6. Tax and payroll treatment can be more manageable, but must be checked

SARs are sometimes described as tax-efficient or administratively simple. That may be true in specific circumstances, but it should not be assumed.

SARs usually result in a cash payment to the participant. For employees or management, that can raise wage tax, social security, payroll and reporting questions. For the company, the accounting and tax treatment of the obligation should be reviewed.

The practical lesson is that tax should not be the only reason for choosing SARs. SARs should be selected because they fit the legal, commercial and governance structure. The tax and payroll consequences should then be checked with tax and accounting advisers before implementation.

What should companies be careful about?

SARs are flexible, but they are not risk-free.

The first risk is valuation uncertainty. If the plan does not clearly define the base value, exit value, debt, transaction costs, preferred shares, liquidation preferences, option pool and other economic rights, disputes may arise when the company is sold.

The second risk is cash impact. SARs do not directly dilute shareholders, but they can create a substantial payment obligation at exit or another liquidity event.

The third risk is unclear leaver treatment. If the plan does not explain what happens on resignation, dismissal, disability, death, good leaver or bad leaver events, discussions are likely to arise at exactly the wrong moment.

The fourth risk is investor consent. If existing investors have approval rights over incentive plans, remuneration arrangements or material obligations, the company may not be able to adopt or amend a SAR plan without consent.

Practical conclusion

SARs can be an attractive tool for Dutch startups and scale-ups that want employees, management and advisers to share in value growth without issuing actual shares.

The main benefits are clear: economic upside without shareholder rights, flexibility in plan design, talent retention, a cleaner cap table, no notarial share issuance at grant and more control over governance.

Those benefits only work if the SAR plan is properly drafted. The company should be clear on valuation, vesting, leaver treatment, payment triggers, investor consent, tax coordination and cash impact.

A good SAR plan is not an informal bonus promise. It is a legal and financial instrument that should fit the company’s cap table, financing strategy and exit plans.

FAQ

Why do Dutch startups use SARs?
Because SARs allow employees, management or advisers to share in value growth without becoming shareholders.

Do SAR participants receive voting rights?
No. SAR participants normally do not receive voting rights, meeting rights or a position in the shareholder register.

Are SARs better than options or shares?
Not always. SARs are useful where the company wants economic participation without issuing actual shares. Options, certificates or shares may be better in other situations.

Does a SAR plan require investor approval?
That depends on the shareholders’ agreement and investment documentation. In investor-backed companies, investor consent is often an important point.

What is the main risk of SARs?
Unclear valuation, leaver treatment or cash impact. These points should be agreed before the plan is implemented.

About Dirk de Waard

Dirk de Waard is a Dutch corporate, M&A and venture capital lawyer and partner at Venture Lawyers in Amsterdam. He advises founders, startups, scale-ups, investors and management teams on Dutch venture capital, employee participation, SARs, option plans, shareholders’ agreements, cap table structuring and Dutch BV implementation.

ViottaLaw is Dirk’s personal insights platform. Legal services are provided through Venture Lawyers.

Need to implement or review a SAR plan?

SARs can be an effective incentive tool, but only if valuation, vesting, leaver treatment, payment triggers, investor consent and tax coordination are properly addressed.

Dirk de Waard advises Dutch startups, scale-ups and investors on SAR plans, employee participation and management incentives. Contact Dirk at dirk.dewaard@viottalaw.com to structure or review a SAR plan before implementation or a financing round.