An employee share offering is a directed share offering in which an employer offers new shares of its own to its staff for subscription. The aim of a rights issue is to engage and encourage staff.
From the beginning of 2021, it became possible to organise staff buyouts on more favourable terms than before.
The new rules will clarify and facilitate employee engagement, for example when you want to engage the whole team of a start-up company at once. The new rules are not suitable for the retention of a limited number of key staff.
The main conditions, all of which must be met
- Employee share offering is targeted at the majority of employees
- The person subscribing for shares must be employed by the company
- In addition, a person subscribing for shares may not own, directly or indirectly, more than 10% of the company’s shares, alone or together with a family member.
- The employer company must be registered in the Prepayment Register and the Register of Employers
- The employer company is engaged in a so-called “business activity” and its assets consist mainly of funds used for the business activity.
- The employer company is an unlisted limited company
- An employee cannot subscribe for shares in the name of his holding company
- The maximum subscription period for shares in an employee share issue is three months
In addition, it must be remembered that the external board member is not employed by the company, i.e. an employee bonus cannot be offered to reward external board members. Also, an advisor who charges through his own company for his work is not employed by the company. In this case, the conditions for a staff offering are also not met.
How is the staff incentive decided?
The Extraordinary General Meeting or the Annual General Meeting decides on the organisation of the gift. A qualified majority vote is required, i.e. at least 2/3 of the votes cast and of the shares represented at the meeting. A unanimous decision of the shareholders can also handle the necessary bureaucracy.
Also remember to document the reasons for the decision on the allocation of shares, if the number of shares to be allocated differs from person to person.
Can a different number of shares per person be allocated for subscription?
Yes, you can, as long as the criteria are objective. For example, according to the government’s proposal, gross salary could be a criterion for determining whether shares are offered for subscription.
However, gross wages may not be a very good basis for determining the amount in all situations. Especially in early-stage start-ups, the salaries of the whole team can be very low and there is no difference in pay. The government’s proposal therefore states that the conditions should be objectively and equally defined for all those entitled to the bonus. For example, one option could be the length of employment.
Staff recruitment and taxation
The employee share offering may be underpriced, for example, compared to trades in the company’s shares. When the subscription price of the share is at least equal to the mathematical value for tax purposes, the employee share offering does not give rise to a taxable advantage. The mathematical value can be seen in the company’s tax assessment and is confirmed annually.
For example, the accounts are closed on 31 March and the net assets in the accounts are EUR 200 00. The company held a financing round in March, which raised EUR 100 000 in new capital. A staff buy-out will take place in April, the above-mentioned capital from the financing round should be added to the net assets. In other words, the company’s net assets are considered to be EUR 400 000 per person.
Staffing a start-up company – an example
In practice, start-ups that have raised external funding will benefit most from the change. Employees can be rewarded and retained at a price significantly below the market rate, without any tax advantage.
For example, a company has received an investment of EUR 200 000 with a leverage of EUR 1 200 000 towards the end of the financial year. In this case, the so-called “reference price” and the fair value at a currency translation of EUR 1 200 000 are established.
For example, the company’s net assets in the financial statements are EUR 150 000.
There are 100 000 shares outstanding.
In this case, the mathematical value of one share for tax purposes is EUR 1.50.
The company may arrange an employee share offering with a minimum offering price of EUR 1.50 per share in the middle of the next financial year, after the financial statements have been approved. In this case, no taxable benefit will accrue to the employees when the subscription price is at least EUR 1.50 per share.
If you wanted to engage a few key people in the company, for example through an option scheme, you would use the above valuation of EUR 1 200 000 as a valuation, which would make one share worth EUR 12. The difference between these options can therefore be significant.
For companies in more traditional industries with strong balance sheets, the change may not be as beneficial as for start-ups. The net assets of the company may be close to the fair value of the company, in which case there will be no difference in valuation compared to the fair value.
Other things to note in the staff pledge
- Draw up a shareholders’ agreement to be signed when subscribing for shares.
- There can be several share agreements between different groups of owners.
- Consider “bad leaver” and “good leaver” situations in the shareholders’ agreement.
- For example, the employee’s right to keep his shares even if the employment relationship ends can be staggered according to the duration of the employment relationship: i.e. after the recruitment, for example, during the next five years, the employee always earns 20% of the shares each year. If the employment relationship ends after five years, the employee is entitled to keep all the shares he has subscribed for.
- Of course, the ownership of shares can also be linked to employment in the company, i.e. all shares must be sold if the employment relationship ends for one reason or another.
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