Best practices for ESOP launch in the Netherlands

Published on
August 14, 2023

Introduction

Fast-growing companies across the globe are embracing ESOP (employee stock ownership plans) to share the company's success with their team.

ESOP offers many benefits for both the company and its employees. It helps founders attract top talent and share the company’s long-term goals and vision with the team. On the other hand, the team gets a unique opportunity to invest in a company they know and understand.

Let's explore how to set up your ESOP in the Netherlands.

Dutch ESOP on the rise

ESOP has become increasingly popular with Dutch startups. According to the State of European Tech Report for 2022, there are close to 10,000 startups located in the Netherlands and almost every one of them is considering or has already adopted ESOP.

Recently, there has been a shift in the timing of ESOP implementation. Previously, ESOP was typically introduced after product launch but now it’s more common to implement it at the very beginning of a startup's journey.

What’s the right ESOP pool size?

The percentage of equity allocated through ESOP can vary depending on the company and its stage of growth. At the seed stage, ESOP is traditionally set at around 10 % and startups often increase the pool to 15 % at Series A. This is a common practice for startups located in Europe. In the US, the ESOP pool can go up to 20-25 % at Series D. In Europe, the ESOP pool often stays at 10-15 % during the whole funding journey, although the trend is changing.

Types of ESOP in the Netherlands

There are several types of ESOP plans that companies in the Netherlands implement. Each plan has its pros and cons. Let’s dive into each plan, one by one.

Phantom (virtual) plan

Summary: Phantom plan is a cash-based incentive allowing companies to motivate their team without equity transfer. The cash bonus amount is derived from value of company shares (either full value or appreciation over time).

Best for: Early-stage startups that want to motivate their people without actual equity transfer.

Pros:

  • Easy and inexpensive setup
  • Works with any corporate structure
  • It’s easy to switch to another ESOP plan

Cons:

  • High taxation on payout (typically exit)
  • Secondary market doesn’t work
  • Employees don’t own equity, which can affect their motivation

Implementation steps: Add a clause to the employment contract or draft a side letter or a separate agreement. Define the number of phantom shares, payment conditions and terms. Sign.

Complexity of implementation: Low

STAK

Summary: STAK (Stichting administratiekantoor plan) is a trust set up by the company that allows employees to own the so-called depository receipts (DRs). Put simply, DR-holders have financial rights of a shareholder without the decision-making powers.

Best for: Growth-stage and mature startups with headquarters in the Netherlands that want to give their people company shares but want to keep the decision-making rights with the company.

Pros:

  • DRs are taxed as company shares
  • Employees don’t have decision-making powers
  • Internationally recognized

Cons:

  • Proper stock valuation is needed
  • Complex setup and maintenance
  • Difficult to switch to another ESOP plan

Implementation steps: The company needs to set up the STAK, adopt the trust bylaws and sign Depository Shareholders’ Agreements with the employees (this agreement contains all the classic requirements like eligibility, vesting rules, leaver scenarios etc.).

Complexity of implementation: High

SAR

Summary: SAR (Share Appreciation Rights) is a cash bonus based on the increase in the value of company’s shares over a set period. Unlike virtual shares, SARs are exercisable.

Best for: Startups that want to engage people in the company's growth without actual equity transfer.

Pros:

  • Easy and inexpensive setup
  • Employees don’t have to pay exercise price
  • (Usually) tax deductible for the business

Cons:

  • Employees don’t directly own shares, which may affect motivation
  • High taxation on payout
  • Employees can’t receive the bonus once they leave the company

Implementation steps: Create a SAR plan with rules on bonus calculation, vesting parameters and payment terms. Add a bonus clause to the employment contract or draft a separate agreement. Sign.

Complexity of implementation: Low

Stock option plan

Summary: Stock option plan allows employees to buy company shares at a predetermined price (exercise price) within a specified period.

Best for: Smaller businesses that want their team to own company shares (after exercise).

Pros:

  • Taxed by employees once shares become tradable
  • Lets people decide if they want to exercise options or not
  • Employees don't need to pay until exercise

Cons:

  • Employees become shareholders after exercise
  • Administration can become complex
  • Not tax deductible for businesses

Implementation steps: You can grant stock options through an option clause in the employment contract or through a separate agreement. After exercise, the stock option owners become shareholders, so you should sign shareholder agreements in advance.

Complexity of implementation: Medium

Selecting the perfect ESOP plan is crucial for your company's success. Consider factors like your company's stage, growth goals, tax sensitivity and employees' preferences. Our ESOP experts are ready to guide you on your journey to finding the best plan for your business. Schedule a call here.

ESOP management

Managing an ESOP requires ongoing admin and legal work. It covers issuing new awards, updating company valuation, managing newcomers and leavers and much more. To streamline this process, many companies rely on ESOP management platforms. Learn how the Eldison ESOP platform can help you automate tasks, simplify management and streamline communication with your team. Learn more about our platform here.

Conclusion

  • ESOP helps companies attract and retain top talent and create an ownership culture.
  • The new tax legislation in the Netherlands makes granting stock options easier for startups.
  • Several types of ESOP are relevant in the Netherlands and each comes with benefits and downsides.
  • Managing ESOP can get complicated. Take advantage of ESOP management platforms like Eldison to simplify the process and ensure compliance.

If you want to learn how the Eldison platform can help you set up and manage your ESOP, visit our platform page here. Our ESOP platform covers all major milestones from plan setup and management to employee communication so that creating and operating an ESOP becomes a walk in the park.

Content

1. Introduction

2. Dutch ESOP on the rise

3. What’s the right ESOP pool size?

4. Types of ESOP in the Netherlands (Phantom, STAK, SAR, Stock option plan)

5. ESOP management

6. Conclusion

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