There are many exotic options, but no one has met the classic ESOP under Russian law. At the same time, granting options is a common practice abroad and an important tool for motivating the best workers.
Having faced this repeatedly, we decided to make standard documentation for the implementation of option programs in Russia. We immediately draw your attention to the fact that the proposed documents and scheme & ndash; this is a preliminary concept and will be updated based on your comments on this article as well. So welcome to the comments if you have any constructive criticism.
The article turned out to be large, but we wanted to explain our logic in as much detail as possible and to get the topic off the ground, which, in our opinion, is really important for the development of entrepreneurship. If you just need documents, then you can download them from these links:
Better yet, read the entire article, which consists of the following sections:
Even if you think this is a trivial question, it will not be superfluous to mention the main drivers of the popularity of option programs.
Contrary to common misconception, the & ndash; they are not shares in the company, but the right to buy these shares at a predetermined price. Usually this right must be exercised within a certain period, otherwise it will end.
The option program implies that the company has allocated (reserved) part of its shares for the issue of options. This part is called the option pool and is taken into account when calculating the share of each shareholder of the company from the total number of issued shares. This is convenient because it allows you to avoid recalculating shares every time new options are allocated.
The presence of an option program also implies that it is officially approved by the company's management, and is not a product of the spontaneous issuance of options to various persons on different terms. For more information on the steps to take to formally establish a US stock option plan, see the next section.
In a world where the role of talent comes first, the employees involved are & ndash; this is the most important competitive advantage. It is not enough to provide a beautiful office with a full refrigerator and corporate parties abroad. People want to be financially motivated.
It is difficult to compete with large corporations in terms of salaries alone. No startup can afford the salaries that the biggest tech companies offer talented employees. This is true both for the United States and for any other market, including Russia.
Therefore, in Silicon Valley, issuing options & ndash; this is not just additional motivation, but a real salary. Which explains the fact that the size of the option is often tied to the annual salary and is calculated from its size.
We are not sure how to translate this beautifully into Russian, but it seems that this is one of the most underestimated advantages of options in countries with a post-Soviet mentality. If you want to really interest a person, make him a business owner so that he thinks about the success of the company even on Friday nights, spending time at a bar with friends.
In addition to the above advantages of option programs, there are two more factors in the United States that determine the popularity of options. First, the allocation of an option pool is almost always a requirement of American investors when financing a company. This way they can be sure that the company will strengthen the team with talented people and motivate them to stay with the company for the long term. Second, there is a favorable taxation regime for stocks repurchased under options.
Options are in the vast majority of cases allocated by corporations (C-corporation), and not by limited liability companies (LLC). This is mainly due to the difference in taxation of these structures, which you can read about in more detail in this article .
In order to create an option program in a company, the company must do the following:
Only after completing these actions will it be possible to say with confidence that the company has an option program.
The vesting mechanism deserves special attention. Vesting & ndash; it is a gradual transfer of options to the recipient when certain conditions are met. As a rule, such a condition is one & ndash; continue to work in the company (temporary vesting). The traditional vesting format in this case is & ndash; it is a 'four-year vesting with a one-year cliff' (`` four-year vesting with a one-year cliff ''). This means that in the first year of his work for the company, the employee does not receive options, and in the remaining three years he gradually receives them in equal proportions every month. If an employee works in the company for 4 years without interruption, he receives all the options allocated to him. If he leaves earlier, he receives only those whose vesting has taken place, while the rest are returned to the company's option pool.
There is also performance-based vesting. For example, if an employee is engaged in sales, the criterion for vesting might be a certain number of sales per year. Mixed vesting is also possible, which takes into account both the length of work in the company and the achievement of indicators.
In general, option programs provide companies with greater flexibility in the choice of tools for financial motivation of employees. For example, in addition to options, there are also Restricted Stock Units, for which the employee receives net shares in the company, and Stock Appreciation Rights -; the right to receive monetary compensation in the event of an increase in the value of the company's shares. The main difference between these instruments and options is that they do not need to be redeemed.
Thus, having a set of different tools for providing employees with a share in the company along with almost any vesting conditions, American corporations are essentially limited only by their imagination in developing an option program suitable for them.
We often receive requests on how to make option programs for employees in Russia. But one of the last arguments that you need to spend time on this was a joint report of Rusbase and EY a> from the distant 2014. There were three key numbers for us:
The conclusion was the following: many are thinking, but difficult to do, including because LLC is really very bad for this.
Firstly, the LLC itself cannot own its shares for more than one year. This means that it is impossible to simply allocate a pool from the authorized capital of an LLC for options, by analogy with the allocation of a pool of shares in the American C-corp. Even if you think that you will have time to distribute all the options within a year, then you need to understand that there are exceptional circumstances when an LLC can generally acquire shares in its own authorized capital.
Secondly, minority participants in Russian LLCs have rather broad powers, which discourages founders and investors from any desire to have employees among equal participants.
Third, the preemptive right and consent to the alienation of shares & ndash; instruments that limit the attractiveness of a stake in an LLC for the minority participants themselves.
There are several more reasons, but these are key ones, and they can be corrected with the help of a corporate agreement. This is a document that allows the participants of an LLC to agree on almost any conditions in relations with each other. In one of our notes, we wrote just about the benefits of corporate agreement when entering the capital of a minority investor.
That is why the documentation we offer is & ndash; it is a corporate agreement with very specific conditions for a certain circle of participants.
Now let's take a closer look at the mechanism that we propose. In fact, this is just a specific corporate agreement, which involves an increase in the authorized capital of an LLC in favor of key employees on certain conditions. & Nbsp;
The proposed agreement also contains provisions that are designed to neutralize the shortcomings of Russian corporate law and bring it closer to the terms of option programs accepted in international practice.
Now let's describe all the mechanics point by point ( download link just in case).
Program . An option program in the form of a corporate agreement is initially concluded by all the existing members of the company, which are likely to include founders and investors. The main obligation of the participants is & ndash; vote to increase the share capital on certain conditions in favor of employees.
Join . Employees join the stock option program by signing an affiliation agreement that contains individual terms and conditions. If there are 4 recipients of the option, then there will be 4 corporate agreements, each of which will consist of uniform general conditions and individual parameters for each employee.
Optional pool . Provided in the amount of 1,000 rubles or 10% of the standard authorized capital of 10,000 rubles. This nominal figure is, rather, for the convenience of investors, in order to calculate fully diluted capital (`` fully diluted capital ''). Society has no obligation to allocate that much.
Employee Terms . The accession agreement contains the key terms of the options: the size of the share, the vesting schedule, the size of the contribution (the cost of redemption of shares, because this is an option, and not a gratuitous allocation of shares).
Westing . The vesting schedule is stipulated in the accession agreement. Now there is 25% of the total for each year of continuous activity, but this should be adapted to specific needs, including taking into account the accepted practices (`` four-year vesting with a one-year cliff '').
Beat allocation procedure . The provision of shares in LLC is implemented through the procedure for increasing the authorized capital. In order not to have to do this every month, it is stipulated that employees have the right to apply to the company with an application for an increase in the authorized capital no more often than once a year during a certain period of the year.
Restriction of Employee Rights . The program provides for a number of restrictions on the corporate rights of employees. This is precisely intended to mitigate some of the angularities of the Russian LLC legislation in relation to the rights of minority shareholders.
Going concern . This is a fundamental condition for any option program. If an employee leaves the company earlier than the stipulated period, then he loses the right to receive shares in the company. If he leaves through his own fault, then one of the participants has the right to redeem all shares at the market price and return them to the option pool. If an employee leaves through no fault of his own, he retains the right to receive shares in the amount that he is entitled to count on according to the vesting schedule.
Beat blur . The program provides some protection against unfair dilution of shares that employees are entitled to count on. The program itself provides several examples to illustrate different scenarios.
As already mentioned, the proposed option program for LLC & ndash; experimental product and so far 'work in progress' in many aspects. Let's label them.
We will definitely correct these and other nuances that readers will pay attention to in the next iterations.
If you think that the proposed option with a corporate agreement is too complicated, then especially for you, alternative options for structuring option programs are described below. We consider them imperfect, but in each case for different reasons.
Behind this attractive name from the world of high technologies, there is nothing more than an ordinary bonus program, where the conditions and amount of payment are formulated in such a way as if a person was actually given a real option.
In general, this is a working tool for financial motivation of employees. We see only two drawbacks. First, for any payments from a legal entity in favor of an individual, contributions to social funds are subject to accrual, which increases the price of such payments for companies by a third. Secondly, the employee does not actually become a participant in the business, and both parties are well aware of this. At the very least, the effect of `` ownership mentality '', which was mentioned at the beginning of this article, is not achieved. In the worst case, offering these options to employees can backfire and create an atmosphere of distrust in which team members are cynical about such motivation.
But everyone chooses for himself. We have personally encountered phantom options several times in our legal practice.
In addition to phantom options, there is also a common story when one of the founders nominally allocates a pool in its share for issuing options. This can be formalized as a legal obligation through a call option, or simply put in words.
What are the disadvantages of such a scheme?
First, it turns out that the founder is diluted disproportionately to other participants, since all options / shares are allocated only from his package. This is not entirely logical, because motivated employees & ndash; this is in the interests of the entire company and all shareholders, but it turns out that the founder actually pays for it out of his own pocket.
Secondly, such a scheme scales very poorly. You can give 2-3 options to the first key employees, but it will be more difficult with others.
This is perhaps the most difficult option that consultants sometimes offer, but almost never occurs in the wild.
Works as follows. The holding company creates a special subsidiary (' SPV ') in a foreign jurisdiction. In this SPV, a share in the authorized capital of the holding is alienated (for example, this share can be invested in the authorized capital of the SPV upon establishment). Then the newly created SPV enters into option agreements with the employees of the holding under foreign law.
Main disadvantages & ndash; it is expensive to realize tax risks. Plus, it's not entirely transparent for employees. What is there in the capital of this SPV, who manages it and what will happen when the option is to be exercised?
You can just immediately create a company abroad and conduct business through it in Russia. For example, if an American startup has its head office in the United States and a development office in St. Petersburg, employees of the St. Petersburg office can obtain options under American law. Here you just need to pay attention to taxes & ndash; read more about tax obligations of Russian founders .
The main drawback is & ndash; not everyone is ready to do this. And it doesn't make much sense if the business is purely local.
If you've read this sentence, you're really curious about how option programs work. In this case, we highly recommend Index Ventures fund material about all the nuances and best practices of option programs in the USA and Europe. If you have questions about Russian or American law, write to us at the general mail email@example.com and subscribe to us at Facebook .