Looking for the simplest and fastest way to let an employee participate financially in the growth of a company in the Netherlands (and any other place in Europe)? Then you arrive at Stock Appreciation Rights (SARs). In fact, this is nothing more than promising an employee that he or she will get money when the value of the company’s stock rises. Often the promise is that someone will get as much money as the share’s jump in value. Unfortunately, in practice, this form of employee participation mainly works to the advantage of the employer.
At start-ups and scale-ups, the value jump is often only measured when there is an ‘exit’ moment. This means that the employee receives compensation for the increase in the value of the share when the company is sold. In other cases (often with management), the same jump in value is measured annually and the payment is also made annually.
Suppose an employee joins scale-up X on January 1, 2016. At that time, the company has 1,000 shares for 10 euros each (so the company is worth 10,000 euros). With the employment contract, the employee receives 20 SARs. This means that the employee is rewarded for the increase in value of 40 of the 1,000 shares (4% of the share capital). This applies when the business is sold. If the company is sold on December 31, 2019, for 1,000 euros per share (total sales value is therefore 1 million euros), the employee can expect a payout of 40 x 990 euros (the increase in value per share). This is equal to 39,600 euros.
Fig. 1: Taxes on Options & SAR
When SARs do work
Investopedia has a nice article about the use of SARs in the USA. This also explains – in my view well – when SARs do work for both parties. This is the case when SARs are set up alongside a shareholding plan to enable the employee to pay for the shares through the SARs scheme. In this case, a lot of tax still has to be paid on the SARs scheme, but the ‘little man’ can also get the chance to participate.
Precise documentation pays off!
If you do decide to choose for a SARs scheme, keep the following in mind: although the implementation of SARs is relatively simple, the conditions must be formulated carefully. SARs are not laid down in law and there are no fixed rights and obligations. This all has to be arranged separately. The following applies to both the employer and the employee: keep a close eye on this to avoid having to pay wage tax when the SARs are awarded. Also prevent that agreements are ultimately too long-winded, so that the finish line can never be reached.
How can our platform help you?
Share Council’s participation platform ensures that, after setting up the structure and selecting the contracts, there is no need to think about administration. Everything is arranged and maintained for you in the background. We have a range of payment plans available, so no matter what your budget is or how much time you have to spend on participation, we have a plan that will work for you.
To find out more about employee ownership, participation plans and how this can benefit your situation? Book a demo with our product & design manager.