Stock options plans and their regulation
On this post we will talk about stock options plans and their regulation. In recent years, the market has witnessed the exponential growth in the number of companies, as the result of an improvement in economic conditions, that has promoted an optimal panorama that has multiplied the number of entrepreneurs. Now there are new profiles who want to gain a foothold in the business world.
In previous articles we talked about the importance of financing rounds in the future of a Startup, as a decisive factor in its consolidation. However, loosing control is another of the factors that must be considered when you raise funds.
What are Stock Options?
It is clear that the destiny of a newly created company depends, to a greater or lesser extent, on its ability to establish an expense structuring program, in relation to its income structure.
In this sense, the Stock Options, or “Options on Participations”, constitute an incentive plan in favor of managers or workers through which the company (through its corporate bodies) grants the possibility for these ones to participate in the capital of the company.
In this way, the worker or manager acquires the right to consolidate, in a present or future period, a number of shares or participations of the company, as long as it meets a series of predefined milestones, criteria or requirements.
What are the benefits?
As we have previously pointed out, this incentive mechanism is implemented as a complement to the salary of the manager or worker, considering the low payment capacity that a company has in the earliest stages of its constitution. But, furthermore, this type of incentive becomes a factor that fosters the worker’s commitment to the future and evolution of the company.
Let’s see it this way, by offering a worker the possibility of acquiring participations or shares in the company, he will be more involved in the functions that need to be assumed, since the future of his shares or participations, from the point of view of the value of these, will be closely connected with the success of the company, and therefore with the performance of the worker or manager in it. In this way, the commitment and retention of talent in the company will be favored.
How is a Stock Option structured?
- At the time of consolidation: Vesting is a concept that defines the time in which the stock options or shares are executed by the employee or manager and therefore those Stock options or shares are acquired. In this sense, we can find a scenario in which the company grants a normal vesting. That is, workers are given stock options or shares and these are consolidated in a specific time line (usually from year to year). On the other hand, we have the reverse vesting, in which, contrary to the normal one, what is delivered are not options on the shares or shares but rather the shares or shares are delivered at the beginning. However, the worker or The manager will have to return them (a mandatory purchase option is usually configured in favor of the company) in case it does not meet the milestones defined by the company.
- Price: Since Stock Options are defined as an incentive plan in favor of managers and workers, the price for the present or future transfer of the shares or shares is set at a lower value than the market value, normally coinciding with the value nominal.
- Conditions to be met: As we have previously observed, regardless of whether the vesting is normal or inverse, the worker must meet a series of milestones or requirements to consolidate the participations or shares. In this sense, the company usually set a series of requirements such as the minimum permanence in the company by the worker or manager (normally about 4 years of permanence) or, the fulfillment of a series of turnover targets, increase of the portfolio, etc.
- Commercial procedure: As this incentive plan is granted by the company, the participations or shares must necessarily come from the company, either through participation or own shares of the company´s treasury stock, or through the corresponding execution of a capital increase.
What legislation regulates them?
Considering that the granting of purchase options on participations or shares depends entirely on the will of the company, the configuration of an incentive plan of this nature will depend on the contractual freedom between the company and the worker. The Stock Options not being regulated per I know in our legislation.
In Letslaw we are convinced of the importance of human capital for the growth of your company, therefore we help you to enhance it. We have professionals in our team who can advise on the best formula to encourage and improve relations between workers or managers and society, through the implementation of a Stock Options plan.
Our specialization and experience in the sector allow us to provide you with innovative, efficient responses that fit your needs. Contact us to develop a motivating plan for the strategic staff in the company and achieve the growth objectives of your company
Letslaw es una firma de abogados internacionales especializada en el derecho de los negocios.