How to draw up employee motivation programs - option programs

Elena Mashina

One of the issues facing the startup is employee motivation. One way is to give them a stake in the startup. This tends to be reflected in the employee's perception of their involvement in the company. In addition, the ratio of startup participants is changing very quickly: new investors come and acquire shares, and employees may become one of the categories of participants. Option programs can only attract potential employees. You can read about how to implement the option program in our article.

Contents:

What is an option?

An option allows you to buy stocks at a pre-fixed strike price, defined in the option itself. In foreign practice, American or European, conditions are usually standardized. American practice has adopted this procedure for the exercise of options:

1 year - cliff, when the employee is not eligible to receive stocks;
The next 4 years - the employee every year is entitled to receive 25% of a predetermined number of shares at the end of each year. However, this rule is optional. For example, Facebook and Snap sell 10% in the first year, then 20%, 30% and 40% in the last year.

To make it profitable for the employee, he exercises the options if their current share price exceeds the fixed value in the option. In addition, the option for startups is also beneficial due to special taxation. n European countries, the order differs depending on the country: in some options programs prevail, in others - alternative instruments.

The key document for the option program is ESOP (employee stock option plan). It must be approved by the board of directors. ESOP is approved in the USA, usually after the sowing round, and in Europe - after round A.

Option programs in Russia

In Russia, option programs are implemented much less frequently. Russian law provides for an option and an option agreement in the Civil Code. These constructions describe the same instrument as in foreign law. However, when exercising an option, special attention must be paid to several aspects.

Increase of authorized capital to allocate stocks/shares for employees

If all the shares or stocks are held by investors and founders, and the organization does not have its own, then it will be necessary to increase the authorized capital of the company. This is a separate decision that needs to be made, and the rest of the participants should be willing to share their share. It is also worth remembering that stocks and shares cannot be owned by the company itself for more than one year.

Conclusion of a corporate agreement for the implementation of the option program

A corporate agreement, as a rule, regulates the rights and obligations of company participants. It is in a corporate agreement that it is possible to provide for obligations for participants to vote in a certain way. Therefore, if you implement an option program, it is necessary to affirm in the corporate agreement of the participants the obligation to vote for an increase in the authorized capital and all other consequences that may arise when purchasing stocks by employees.

However, Russia lacks detailed regulation at the legislative and practice levels. Therefore, the startup can structure the option program in various ways. However, you should not choose those forms that are not options. For example, the transfer of shares or stocks by the founder to his employees. This transaction will be a regular sale, and in LLC there may be some restrictions, for example, the pre-emptive right of other participants.

Risks of option programs

The implementation of option programs is 5 years. During this period, a large number of circumstances can occur. For example, an employee might quit a startup. The consequences in this case will need to be provided for in a corporate contract or agreement with employees. So, you can set the period during which the employee will be able to redeem shares. In the USA, it is usually 90 days.

What if the startup does not want to distribute options to employees?

In this case, phantom options can be handed out. Their essence lies in the issuance of a certain bonus when the KPI is reached, but employees will not receive the real share of the startup. In this connection, this is not a full-fledged option.

Thus, an option program can solve several problems at once: attract employees, provide the right motivation, and help the entire startup succeed.

However, in order to achieve these goals, it is very important to formalize the process correctly. Legal issues arise at each stage of the program, from the approval of a plan or the conclusion of a corporate contract, to an increase in capital in 4 years. If you have questions or need assistance with completing an option program, please contact A4 Law Firm lawyers.