In the startup ecosystem, talent is the main driver of growth. However, competing with the salaries offered by large corporations can be almost impossible, especially in the early stages.
For this reason, ESOPs (Employee Stock Option Plans)—or employee incentive plans—have become a key tool in aligning interests and attracting and retaining talent: high-level professionals and strategic workers and collaborators.
However, its design and implementation involve significant legal, tax, and corporate complexity. A poorly configured ESOP can become a risk for the startup, affect future investment rounds, or generate direct conflict between founders, investors, and the team.
In this Startup News, we will explain what ESOPs are, how they work, what legal options exist, and what the keys are to implementing them correctly.
What is an ESOP and why is it essential for a startup?
An ESOP is an alternative compensation plan that allows an employee to acquire a share of the startup's capital in the future. Its main objective is to align the team with the success of the company: if the startup grows and increases in value, the employee wins.
ESOPs are used to:
- Attract talent in the early stages without having to raise salaries.
- Retain key profiles through vesting mechanisms.
- Align incentives between employees, founders, and investors.
- Professionalize the cap table in preparation for future funding rounds.
Equity incentive schemes
In Spain, ESOPs can be structured in various ways, with the following being the most common:
1. Stock options
This is the best-known model, and consists of granting employees options on the startup's shares (or stock, in the case of corporations), with a view to allowing them to become shareholders or partners in the company.
Normally, the employee or collaborator will only formalize the acquisition of these shares if certain requirements are met, giving rise to the formula known as "vesting" (e.g., achievement of objectives, work performance, permanence in the company for a certain period, etc.).
2. Phantom Shares
The incentive plan structured through phantom shares is a very widespread alternative, as it avoids the employee's direct entry into the share capital.
In this regard, no actual shares would be granted, but rather an economic right linked to the valuation of the company. Such economic right shall be settled at the time of an exit or liquidity event, as established in the ESOP itself or in the ad hoc subscription document.
In this way, phantom shares are configured as a simpler remuneration tool from a corporate perspective, since they do not alter the captable and do not give rise to the political rights associated with real shares.
3. SARs (Stock Appreciation Rights)
SARs are an economic incentive instrument that allows the beneficiary to participate only in the capital gains generated by the company from the moment the right is granted (baseline valuation) until a specific liquidity event (exit, sale of the company or, in some cases, a significant round).
Although they are similar to phantom shares, the main difference is that the latter replicate the total value of a share (including the initial value and subsequent capital gains), while SARs only pay out the gains generated since the grant.
Thus, SARs can be particularly interesting if the startup already has a significant valuation, if you want to prevent the beneficiary from participating in the historical value generated by the founders, or if you want to reward only the creation of future value.
Essential documentation: how to leave everything properly closed
An ESOP must be integrated at three levels:
- Agreement between partners:
- General regulation of the pool.
- Towing and escort rights.
- Accelerations and assumptions of good and bad leavers.
- Internal policy or ESOP regulations.
- Individual concession agreement (or plan subscription document).
Without this triple layer, the incentive plan will be legally uncertain. In addition, it will be necessary to thoroughly review the corresponding tax implications, always prior to the launch of the ESOP.
Conclusion: ESOPs as a pillar of growth in startups
In short, the figure of the large shareholder is now a complex element of the housing market. A well-structured ESOP is not only a compensation tool, but also a strategic tool for attracting talent, retaining key profiles, and preparing the startup for solid growth. The company sends a clear signal of solid governance and professionalization.
It also improves investor perception, organizes share capital, and reinforces the professionalization of the project.
At Busquets Law & Finance, we design and implement ESOPs, stock options, phantom shares, and SARs tailored to each startup or scaleup, ensuring legal certainty, tax efficiency, and attractiveness for talent and investors.
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