BRAZIL Law and Practice Contributed by: Fernanda Levy, Aline Bauermeister, Rodrigo Menezes and Fabiana Fagundes, FM/Derraik
Other clauses Formal employment agreements executed with founders and key employees often include other clauses designed to ensure or protect their long- term involvement, including non-compete and non-solicitation clauses. 5.3 Taxation of Instruments Taxation for Long-Term Incentives Brazilian legislation still does not have specif - ic regulations regarding an incentive pool for founders and employees. However, labour and tax jurisprudence has tried to introduce relevant definitions. So far, key decisions have related to companies in the traditional economy, with a high level of maturity and consolidated in the market, and whose main objective was to bring prestige to their employees or top executives. Based on the foregoing, the key tax factors to The legal nature of the incentives will determine the tax burden levied on it. Depending on the characteristics of the incentive plan, it may be of a mercantile or compensation nature. In the start-up ecosystem, incentive plans have the purpose of attracting and retaining people who have been important for the company’s development since the beginning of the compa - ny, with little market exposure and low revenue. Therefore, an incentive plan becomes a mecha - nism whereby the beneficiary assumes the risk of the start-up’s business. As such, a start-up’s incentive plan would offer more subsidies and characterise them as contracts of an effectively mercantile legal nature. consider are as follows. Nature of incentive plans
Tax rates If the incentive plan is of a mercantile legal nature, the income tax levied will be a progres - sive levy of between 15% and 22.5%. If it is of a salary nature, income tax will be levied based on the progressive personal income tax table, up to 27.5%, as well as a social security contribution of at least 20%. Tax basis One difficulty that is encountered is establishing the tax base – whether this is the value paid/ assigned to the founder/employee at the time of the grant, or the value after vesting. The latter is particularly difficult where it is hard to establish the market value of a start-up’s share at the time of granting, or even for the vesting exercise. 5.4 Implementation Option Pool The processes for implementation of an invest - ment round and the setting up of an employee incentive programme are intrinsically related. During the negotiations of an investment round, the parties evaluate the company’s needs, including how much equity is expected to be allocated for employee incentives (for both cur - rent and future employees). From the investors’ perspective, a robust employee incentive pro - gramme is valuable for driving the company’s growth. The size of the employee stock option pool is typically negotiated as part of the investment terms. If the existing pool size is not sufficient to meet future hiring needs, investors may require an increase of the pool size, with dilution effects on the shareholders immediately prior the com - pletion of the investment.
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