GERMANY Law and Practice Contributed by: Carsten Berrar, Florian Späth and Heiko Blaut, Sullivan & Cromwell LLP
In addition, a company may option for hurdle shares as means of incentivisation – ie, compa - ny shares with “negative liquidation preference” ensuring that employees only participate in future value increases. Hurdle shares are physi - cal shares which may require an implementation of the negative liquidation preference as part of a company’s (GmbH) articles. 5.2 Securities Through participation programmes such as ESOP/VSOP, employees financially engage in the start-up’s success via physical or virtual equity incentives. The exercise of the right is typically subject to several conditions – eg, duration of employment (vesting), performance of the company/employee or acquisition of the company. Non-compete and non-solicitation agreements are widespread as part of shareholders’ agree - ments. This is to safeguard the company’s inter - ests and prevent founders and key employees from engaging in competitive activities or solicit - ing customers, employees, or business partners upon leaving the venture. Vesting conditions ensure that employees have only access to their shares after a certain period of time. This vesting period is typically between two and five years, with a one-year cliff vest - ing period. If employees depart before the end of the vesting period, they cannot exercise the unvested part of their stock option, nor do they receive payments from the unvested part of their VSOPs which are forfeited. Vesting conditions can be used for all of the previously mentioned instruments. Additionally, employee participation pro - grammes like ESOP/VSOP or hurdle shares may include good leaver/bad leaver clauses which
permit the company to reclaim equity granted to an employee upon departure (typically, a reverse vesting call option at nominal value). Bad leaver qualifications tend to be limited to gross mis - conduct or criminal activity, as well as volun - tarily terminations on the part of the employee – making Germany an instrument holder-friendly jurisdiction. In practice, reverse vesting, which consists of the granting of a call option over the shares obtained in favour of the venture or the other shareholders, is often agreed upon for founder vesting. The founders are initially allocated their full shares and, at the end of the vesting period, all shares become vested and secured. How - ever, premature departure from the company during the vesting period results in the loss of the unvested portion, potentially compensated for only partly or at a discount. The decision between a VSOP agreement with vesting or a submission of previously held founder shares to a reverse vesting mechanism should always be Tax-effective structuring of incentive schemes targets: (i) the avoidance of dry income events for an employee; and (ii) the receipt of capital gains tax treatment for any future increase in company valuation at a preferred tax rate of 25% (plus 5.5% solidarity surcharge thereon, result - ing in an aggregate tax rate of 26.375% plus church tax, if applicable) ( “Capital Gains Tax” ). ESOP Almost all ESOP agreements stipulate that employees can acquire shares free of charge or at a discounted price which leads to a non- cash benefit ( geldwerter Vorteil ) and is, there - fore, subject to income tax. However, a financial benefit in the form of a discount is only consid - analysed from a tax perspective. 5.3 Taxation of Instruments
226 CHAMBERS.COM
Powered by FlippingBook