Option programs in Russia: how to implement

Table of content:

• Option programs in Russia: how to implement
• What is an option program and what is it for?
• Methods for implementing option programs in the Russian Federation
  1. Virtual (phantom) options
  2. Personal promises of the founder
  3. Formation of an SPV in a foreign jurisdiction
  4. Initial incorporation abroad

The heads of Russian companies who needed to implement an option program for key employees are well aware of all the complexities of this process. According to Russian law, the standard ESOP option will not work here. Therefore, now we will analyze the alternatives.

What is an option program and what is it for?

An option is not a share in a company, but the right to purchase shares at a strictly fixed value. And this right must be realized within a clear time frame, otherwise it will be canceled.

An option program should be understood as the fact that the company has reserved (or allocated) a share of the shares for the payment of options. This share is referred to as the option pool, and it will be taken into account when calculating the shares of all shareholders of the company (based on the total volume of shares). The convenience of this approach is that there is no need to recalculate the shares again when new options are reserved.

If a company has an option plan, it must be approved by senior management and not be considered a “giveaway” of options to employees on appropriate terms. Why implement option programs:

1. Provide incentives for employees. Employee involvement in business processes is an important competitive advantage. And today it is no longer enough just to put a person at a beautiful table with a modern PC in a cozy office with a microwave.
2. Reach a new level of competition. It is unrealistic to compete with market leaders simply by raising the salaries of their employees, and no startup can afford that. Therefore, in America, option programs are considered not only an excellent motivation for staff, but also equated to a salary (after all, the size of an option is usually tied to it).
3. Ownership Mentality. If the manager wants to interest the employee and increase the efficiency of his work, it is worth making him a co-owner of the business. In our situation, it is necessary to implement an option program so that the employee thinks about the future of the company all the time.

Methods for implementing option programs in the Russian Federation

Let's consider the 4 most common options for implementing an option program in an average domestic company.

1. Virtual (phantom) options

In fact, this is a program for issuing premiums, where the size and conditions for receiving these premiums are formed in the same way as when issuing an option. By and large, this method is really effective, but there are 2 drawbacks:

1. Any deductions of a legal entity in favor of an individual are contributions to various social funds, which increases the size of such "options" by almost ?.
2. In reality, an employee does not become a co-owner of a business, and he understands this very well. That is, the "Ownership Mentality" effect is not achieved.

Moreover, the distribution of virtual options can sometimes lead to a completely opposite effect - an atmosphere of mistrust will develop among employees.

2. Personal promises of the founder

A common situation is when one of the founders allocates a pool for options to employees. It is all formalized as a legally binding obligation using call options or is recorded orally.

Minuses:

• in fact, it turns out that the profit is distributed disproportionately in relation to other participants and this is completely illogical;
• this scheme is almost impossible to scale, because you can give 3-4 options to the main employees, but with the rest everything will be much more complicated.

3. Formation of an SPV in a foreign jurisdiction

The most time-consuming option which the holding forms an SPV (subsidiary) in a foreign jurisdiction. A share of the authorized capital is alienated in this enterprise, after which the most valuable employees are given options, in accordance with the foreign legal framework.

The main disadvantage is high tax risks and high implementation costs. And for the company's employees, the scheme does not look transparent, because they do not know and do not understand what is in the SPV's capital, who manages it, when you can sell your option, etc.

4. Initial incorporation abroad

The company is initially registered under foreign law, after which its branches are opened in Russia. The most important thing here is to carefully study all tax issues, and especially the obligations of Russian founders. The main disadvantage of the scheme is that not every company is ready to implement this. And it makes no sense for a local business.

In general, the implementation of option programs has not yet found widespread use in Russia. One of the reasons is that such an organizational and legal form as LLC is not very well adapted for this. In addition, certain provisions of the document on the allocation of options may violate the norms of corporate law, and there has not yet been a sufficient volume of judicial practice on options in the Russian Federation.

Our team of lawyers will help you with the implementation of option programs in Russia, advise on difficult issues, and give recommendations on how to maximize profits.