SNS #3
Substandard progression
- 2024
- 2023
Stock Options (SO) refer to a kind of equity compensation a company grants its employees and/or executives. It bears benefits for employees, founders, and the overall startup ecosystem. SO have emerged as an appealing mechanism for employee accountability and engagement, designed to motivate and reward workers for their performance while attracting talent. Each country has a unique legal framework and tax code, resulting in variations in SO depending on when taxation incurs – upon grant, exercise of rights, and/or sale of SO.
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Substandard 3.1 — Taxation
Taxation of Stock Options may occur during three different moments: moment of grant, moment of exercise, and moment of sale. In order to establish a favourable system and encourage this practice in Europe, it is recommended to implement a tax framework which entails only one moment of taxation and treats SO as capital gains instead of income.
Substandard 3.2 — Non-voting rights
Ownership of shares is usually tied to voting rights. However, with regards to employee SO, this custom may become an impediment. Having shares associated with voting rights can lead to entropies such as an excessive number of people involved in core decision-making processes, potentially interfering with the company’s smooth management and governance. It is therefore advised to offer SO without voting rights to mitigate potential management problems in the company.
Substandard 3.3 — SO Scheme
This Substandard addresses the fundamental principle of the existence of a national scheme or legal regime that regulates and allows the issuance of SO. Developing a dedicated legal framework for employee SO is fundamental to enabling startups to leverage this mechanism, sustaining national innovation ecosystems, and fostering entrepreneurial endeavours.