Incentives linked to shares are part of the essence of the business model of startups. The most common are stock option plans, restricted stock units (RSUs), restricted shares, phantom stock, and phantom stock options.

This article deals specifically with stock option plans, instruments through which a company gives certain employees the right to acquire part of its stock (stock options) after the expiration of a vesting period and for an exercise price potentially more advantageous than what was set at the beginning (strike price). The plans may also restrict the sale of the shares acquired (or part thereof) for a certain period (lock-up).

The vesting period is that between the beginning date and the date after which the beneficiaries may purchase the shares/exercise the options. During this period, beneficiaries may lose their options if they resign or are terminated for cause. The exercise of the options after vesting may also be conditioned on or accelerated upon the occurrence of some event (such as investment rounds that result in contributions by investors).

The strike price is the amount to be paid to exercise the option. It is set when the company grants the options and must be calculated taking into account the fair value of the company at that time.

If the company appreciates during the grace period, the beneficiary will acquire the shares. Otherwise, the options will expire and the beneficiaries will lose them. This is the risk inherent in this type of incentive.

The greater alignment of interests between employees and founders/partners, preservation of the company's cash flow, the potential to maximize gains in liquidity events, the ability to attract and retain talent and executives, the spreading of a feeling of ownership, and non-application of labor and social security charges are factors that drive the expansion of stock option plans among startups.

However, the use of this instrument requires caution, since structuring and implementing it in an incorrect manner may transform the benefit into salary, exposing startups and employees to labor, social security, and tax liabilities.

For startups, this means an additional potential cost with labor and social security charges of approximately 66%. For beneficiaries, it represents an additional potential cost with income tax of up to 12.5%.

Such care is also essential for startups in investment rounds, as labor, social security, and tax risks can negatively affect decisions by potential investors with little appetite for legal risks.

What then are the main requirements that should be observed by startups?

For labor and tax authorities, the exposure of beneficiaries to financial risk and the existence of onerousness are essential if the plan is to be deemed legal.

Financial risk may be demonstrated both by the opportunity cost (because the options will only be exercised if the value of the shares is greater than the strike price) and by the exposure to financial loss.

Onerousness requires that employees effectively disburse their own funds to exercise the options and acquire the shares, either by paying an exercise price fixed based on the value of the shares at the beginning, or by means of payment of an amount for the acquisition of the options themselves.

In this context, startups and their employees may expose themselves to risks with the implementation of stock option plans that establish exercise prices that are substantially lower than the fair value of the shares at the beginning, with financing mechanisms for the payment of the strike price, or that allow the receipt only of the difference between the value of the shares and the exercise price (cashless exercise) or, further, if they do not impose periods of restriction on the sale of shares.

In the coming weeks, we will address the other incentives linked to shares, such as RSUs, restricted shares, phantom stock, and phantom stock options.