Swiss Startup Day 2019

[Pages:32]Swiss Startup Day 2019

Tuesday, 28 May 2019 ? Bern

Incentive Plans for Startups

Shares, options or phantom instrument ? what fits best for me?

Speakers

Agenda Employee Participation Programs Tax Implications Incentive Plans Q&A Session Appendix

Karim Maizar

Dr. iur. / Attorney at Law Partner, Head Startup Desk Kellerhals Carrard

Raemistrasse 5 P.O. Box 8024 Zurich

Tel: +41 58 200 39 42 Email: karim.maizar@kellerhals-carrard.ch

Remo Schmid

Partner Leader Compensation Consulting PwC Switzerland

Birchstrasse 160 P.O. Box 8050 Zurich

Tel: +41 58 792 46 08 Email: remo.schmid@ch.

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Agenda

Swiss Startup Day 2019

Agenda Employee Participation Programs Tax Implications Incentive Plans Q&A Session Appendix

Employee Participation Programs

4

1

Relevance for Startups

5

2

Forms of Participation

6

3

Common Instruments for Startups

7

4

ESOP and PS(O)P

10

Tax Implications

11

5

Overview

12

6

Shares

13

7

Options

15

8 Phantom Shares/Options

16

Incentive Plans

17

9

Considerations and Takeaways for Startups

18

Q&A Session

26

Appendix

27

10 Taxation Details

28

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Agenda Employee Participation Programs Tax Implications Incentive Plans Q&A Session Appendix

Employee Participation Programs

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1 Relevance for Startups

Relevance for Startups

Agenda Employee Participation Programs Tax Implications Incentive Plans Q&A Session Appendix

What are Startups' main reasons to

implement employee participation programs?

? Typical element of compensation in startups in order to attract, motivate and retain key employees (can also be used for late co-founders); particularly nowadays in times of "war for talent"

? Offering compensation schemes that are competitive with those of other (leading) startups ? Aligning employees' interests with the strategy of the startup ("skin in the game") ? Letting employees participate in the long-term success of the startup ? Startups usually do not have sufficient cash available to pay market-based salaries (let alone bonuses) ? Venture capitalists require it

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2 Forms of Participation

Forms of Participation

Agenda Employee Participation Programs Tax Implications Incentive Plans Q&A Session Appendix

Definition Considerations Examples

Real equity participation (equity-settled)

Employee will receive real shares, i.e. becoming a shareholder

? Direct link between company performance and employees' value creation

? High retention due to long-term participation ? Shares either with full or limited shareholder rights

(e.g. no voting rights) ? Real equity instruments may allow for favourable

tax treatment in Switzerland (note: valuation of non-listed shares needs careful consideration)

? Share purchase plans (discount on purchase price) ? Free allocation of shares ? Option plans ? Restricted/Performance Share Units (RSUs/PSUs)

Phantom participation (cash-settled)

Economic effects of an equity instrument are mirrored in form of a cash payment

? Employee participates in the success of the company ? No real participation is possible, potentially reducing

the employee retention factor ? Higher flexibility and simpler to administrate ? Preserves the ownership structure of the business ? Any payment is considered gross employment

income, being subject to income tax and social security contributions

? Phantom shares ? Phantom options (SARs) ? Cash deferral models

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3 Common Instruments for Startups

Common Instruments for Startups (1/3)

Agenda Employee Participation Programs Tax Implications Incentive Plans Q&A Session Appendix

Options (real equity participation)

Shares (real equity participation)

? Right, but not obligation, to subscribe (purchase) shares of the ? Free allocation of shares: no purchase price

company at a pre-agreed exercise price at any time during a determined exercise period

? No shareholder rights until the exercise of the options

? Share purchase plan: acquiring shares at beneficial conditions

? Shares can have a blocking period ("blocked shares"); tax discount for blocking period of 6 % per blocking year

? Subject to a vesting period (staggered or cliff vesting)

(maximally 10 years)

? Upon termination of employment during the vesting period, options are generally forfeited

? Employee becomes a shareholder (shareholder rights)

ESOP = Employee Stock Ownership/Option Plan

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3 Common Instruments for Startups

Common Instruments for Startups (2/3)

Agenda Employee Participation Programs Tax Implications Incentive Plans Q&A Session Appendix

Phantom shares/options (phantom participation)

? Virtual stake in the company with the aim to be treated like a shareholder when it comes to monetary gains upon an exit (or possibly other liquidity events)

? Employee can benefit either from the full value of the virtual shares granted (phantom shares) or from the value created since the date of grant (phantom options)

? Subject to a vesting period ? Upon termination of employment during the vesting period, phantom shares/options are generally forfeited

PS(O)P = Phantom Stock (Option) Plan

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