In the startup ecosystem, talent is the primary engine of growth. However, competing with the salaries of large corporations can be almost impossible, especially in the early stages.
Therefore, the ESOPs (Employee Stock Option Plans) — or employee incentive plans — have become a key tool for aligning interests, and for attracting and retaining talent: high-level professionals as well as strategic workers and collaborators.
However, its design and implementation conceal a high degree of legal, tax and corporate complexity. A poorly structured 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 key factors are for implementing them correctly
What is an ESOP and why is it essential for a startup?
A ESOP it is an alternative remuneration plan that allows an employee to acquire a part of the startup's equity in the future. Its main objective is to align the team with the company's success: if the startup grows and increases in value, the employee wins.
The ESOPs they are used for:
- Attracting early-stage talent without having to raise salaries.
- Retaining key profiles through vesting mechanisms.
- Align incentives between employees, founders and investors.
- Professionalise the cap table in anticipation of 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 it involves granting employees options over the startup's social participation units (or shares, in the case of public limited companies), with a view to allowing them to become partners or shareholders of the company.
Typically, the employee or collaborator will only formalise the acquisition of such shares if certain requirements are met, giving rise to the formula known as “vesting” (e.g. meeting targets, job performance, remaining with the company for a specified period, etc.).
2. Phantom Shares
The incentive plan structured through phantom shares is a widespread alternative, as it avoids the direct entry of the employee 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 an economic right will be settled at the time of an exit or liquidity event, as established in the ESOP itself or in the subscription document. ad hoc.
In this way, phantom shares are configured as a simpler remuneration tool from a corporate perspective, since they do not alter the cap table and do not entail the political rights associated with actual shares.
3. SARs (Stock Appreciation Rights)
SARs are an economic incentive instrument that allow the beneficiary to participate solely in the capital growth generated by the company from the time the right is granted (baseline valuation) until a specific liquidity event (an exit, sale of the company or, in some cases, a significant funding round).
Whilst 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 growth), whereas SARs only reward the gain generated since the grant date.
Therefore, 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 wish to reward only future value creation
Essential documentation: how to tie up all the loose ends
An ESOP must be integrated at three levels:
- Shareholders' agreement:
- General pool regulation.
- Drag-along and tag-along rights.
- Accelerations and good and bad leaver assumptions.
- Internal policy or ESOP regulations.
- Individual grant agreement (or plan subscription document).
Without this three-tier layer, the incentive plan will be legally unsafe. Furthermore, it will be necessary to thoroughly review the corresponding tax implications, always prior to the launch of the ESOP
Conclusion: The ESOP as a pillar of growth in startups
Ultimately, the figure of the large-scale landlord constitutes a complex element of the housing market today. Th coUn ESOP well structured is not only a compensation instrument, but a strategic tool to attract talent, retain key profiles and prepare the startup for solid growth. The company emits a clear signal of solid governance and professionalisation.
It also improves the perception among investors, organises the share capital and reinforces the professionalisation of the project.
At Busquets Law & Finance we design and implement ESOPs, stock options, phantom shares and SARs tailored to each startup or scaleup, guaranteeing legal certainty, tax efficiency and appeal to talent and investors.
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