SINGAPORE Law and Practice Contributed by: David He, Benjamin Teo, Kinnari Sahita and Binh Vong, Gunderson Dettmer Singapore LLP
factor such terms into their ability to retain such employees after an acquisition. If employees are significantly or fully accelerated on their unvested equity, an acquirer may need to offer additional equity to such persons as part of their retention package, resulting in dilution to their stakeholders. 5.3 Taxation of Instruments ESOP Tax Considerations Singapore does not have a capital gains tax regime. However, individuals who are granted options will be taxed on any gains or profits arising from their participation in an incentive pool as part of their income tax, and Singapore applies a progressive tax rate for individuals. Tax is assessed at the point of exercise of options, and is calculated on the spread between the fair value at exercise and the strike price paid. If shares are subject to a selling restriction/ moratorium period, the gains are calculated as of the date such restrictions are lifted. Subject to certain criteria, an option holder may apply to have their payment of tax on exercised options deferred for up to five years, but interest must be paid on such a deferral. Foreign employees who terminate their employ - ment in Singapore are subject to the “deemed exercise” rule, whereby taxable gains from unex - ercised options (as well as exercised but restrict - ed options) become immediately due. Such gains are deemed as income derived on the later of one month before the cessation of employ - ment or the date of grant. Under the alternative “tracking option” , employers that satisfy certain criteria with approval from the IRAS may bear the responsibility of: • keeping track of unexercised options;
• computing and reporting gains from specified income-realisation events; and • collecting and paying taxes on such gains. 5.4 Implementation ESOP Considerations in a Financing Round Start-ups raising their first priced equity round usually adopt an ESOP prior to or concurrent with the closing. In later rounds, investors will typically require an ESOP top-up in connec - tion with the new raise. Existing shareholders and new investors will expect clarity regarding who bears the burden of the top-up dilution. An ESOP increase associated with a financing will be dilutive to either: • the existing shareholders only (in which case it is counted entirely against the pre-money fully diluted capitalisation); or • both the existing shareholders and the new shares issued in connection with the new round (in which case some or all of the increased amount is counted against the post-money fully diluted capitalisation). Investors participating in a round should be clear about what their invested capital means in terms of their post-closing fully diluted ownership per - centage. From the investors’ perspective, count - ing the ESOP increase against the post-money is tantamount to a valuation adjustment, as they will be immediately diluted by such increase after closing; thus, for simplicity, the ESOP increase is almost always counted against the pre-money capitalisation and is non-dilutive to newly issued shares. Option Pool Increases Determining the appropriate quantum of an ESOP increase is ultimately a commercial deci - sion, but a common benchmark is to increase the ESOP by an amount needed to assure new
486 CHAMBERS.COM
Powered by FlippingBook