_(1)/w=3840,quality=90,fit=scale-down)
Talk led by Alexandre Leger, ex Tax Lawyer and CEO of Equify a collaborative equity and shareholders management platform for Executive, Finance, and Legal teams that smartly centralises all the documents in one place.
Need a legal counsel to help you set up your employee equity scheme? 👇
- Why set up a employee equity?
- To whom should you grant equity?
- How much should you grant?
- Option Plan size
- How frequently?
- When to grant employee equity?
- Typology of vesting plans
- How much should I discount my stock options (BSPCE)?
- The 15% max discount
- Why? Preferred vs Ordinary shares
- Is it possible to discount more than 15%?
- Is there a discount strategy to adopt?
- How to set your exercise price?
- When the employee leaves?
- How does the exercise work and how can it be financed?
- What about liquidity?
- Selling on secondary market: New liquidity initiatives
- Buyback by the company itself
- 🇩🇪 Sharing value creation with German employees for 🇫🇷 companies
- 📰News around ESOP allocation through “Zukunftsfinanizerungsgesetz“ (”Future financing Act”)
- Case studies, Examples and Employee Equity plan templates
- Lucca
- Alan
- Shine
- Equify
- Figures
- Index Venture’s calculation Matrix EU Seed Startups
- Examples of share allocation mechanisms
- Consistency & Communication are key
- 🛠 BSPCE Tool Box
The replay of the talk (held in French):
The slides (in English):
Why set up a employee equity?
- Attract and retain new talents: Salary packages become more attractive.
- Instill a corporate culture: Everybody is aligned and working toward the same goal.
- For motivation: Employees become directly concerned by the company’s success.
To whom should you grant equity?
The company is free to choose whether to open it up to all or some of its employees.
In younger companies, it is common to opt for an allocation targeting all employees.
As the company grows, the pattern shifts to an allocation to specific categories of beneficiaries (managers, key people, etc.).
How much should you grant?
EUROPE 🇪🇺
There are no rules on the subject and practices in France are still very different from one company to another.
Index venture’s recommendation for ‘default’ grant sizes in Europe:
US 🇺🇸
We usually find equity packages ranging from 20 to 25% of the salary for a manager and up to 75% for C-levels.
"If the Employee Equity has to be valued in line with the salary, I advise not to include the amount in the employment contract because, in the event of litigation, the possible gain will be included in the basis of damages. It is more important to include an eligibility clause.” - Alexandre, CEO of Equify
The idea behind an Employee Equity plan is to encourage the employees to stay. Therefore, the overall package offer (including equity) must be really attractive and competitive.
Some companies set up a bonus policy around equity. Granting is based on a predetermined grid taking into account the impact of each employees’ work and/or the years of working experience.
Option Plan size
According to Alexandre from Equify:
Stage | % of Capital |
(Pre) Seed | ≈ 5% |
Series A + | ≈ 10% |
Calculate your Option Plan w/ Index Ventures tool:
On average, the percentage of capital open to ESOPs depends on the company's allocation policy and its objectives regarding its stage of development. For companies in Seed, Series A, the pool generally represents between 5 and 10% of the capital. For Series C+ companies it can rise to over 15% *Based on market practice.
How frequently?
The sooner the better when setting up your employee equity scheme:
✅ | ❌ |
“Associate” employees from the start: they will get lower prices, so it’s more attractive for them. | Balance things between old and new employees: get harder the longer you wait (especially in case of a new fundraising). |
"The important thing is to be in line with the company's development." - Alexandre, CEO of Equify
2 operating modes:
Regularly
→ Systematic grants (e.g. every year).
→ Triggered by the end of the vesting period of the previous plan.
Also called “Refresher” in public companies: not relevant for startups because no regular liquidity windows.
One shot
Many companies don’t think of it as a strategic asset.
→ They grant it once and that’s all.
When to grant employee equity?
There are several time conditions associated with a BSPCE plan:
Attribution Date There are two possible approaches:
1) Upon recruitment with individualized attributions at the time of recruitment. 2) Throughout the employee's stay in the company, thanks to one or more grouped allocations per year, by adjusting the vesting start date for each beneficiary.
Vesting Period You can define a vesting start date based on employee seniority.
Typology of vesting plans
For the vast majority of companies, vesting is based solely on the time spent in the company.
Another option companies choose is adding a performance component to it.
A small minority have in place a performance based vesting.
If performance is taken into account, it’s either based on:
- Individual performance
- A mix of Individual + Collective performance
"At most XAnge-funded companies, the earliest an employee can be eligible is 1 year with vesting occurring monthly or quarterly in most cases. The most common vesting period is 4 years." - Pauline, Head of Startup Success @ XAnge
How much should I discount my stock options (BSPCE)?
BSPCE are generally issued with a discount on the strike price, aiming to give employees additional financial benefit – and stronger motivation – per option granted. It also recognizes the fact that stock options convert into ordinary shares, which are marginally less valuable than the preferred shares that investors generally hold.
The 15% max discount
How much can you discount the strike price of BSPCE (which by definition convert in ordinary shares)? We recommend anywhere between 0% to 15%, but not beyond 15%. A specific report needs to be written by an independent advisor to articulate the rationale behind the specific level of discount.
Why? Preferred vs Ordinary shares
Today, about 80% of XAnge portfolio startups define the rights of the preferred (vs ordinary) shares in the Shareholder agreement (“Pacte”). This makes paperwork lighter and cheaper while delivering a perfectly water proof legal framework (recommended by reputable legal counsels such as Jones Day etc). As the company grows, this could create a risk of opposability with the French tax authorities.
However the rest of our startups (20%) do it rather in the Articles (“Statuts”). It is heavier and costlier but sometimes considered safer by US/UK funds.
Is it possible to discount more than 15%?
Yes, it is… BUT! You can only discount stock options more than 15% if the shares are defined in the company articles (in French, les statuts de l’entreprise), not in the shareholder’s agreement.
In France, there are two main ways to set that discount on paper: 1) Including the rights of the preferred shares in the startup’s articles of incorporation (“statuts de l’entreprise”) (preferred ordinary), or 2) into the shareholders’ agreement (preferred preferred).
Each of these has its pros and cons, and the major criteria you should focus on here would be the discount you want to give to your employees.
Is there a discount strategy to adopt?
No law regulates the discount you can allocate to your employees’ stock options, and there is no hard limit. The number generally comes from both the advice of an independent valuator and using market practices.
To attract the best talent, experience shows that, in general, with a pool of around 10% of the capital, needs are well covered up to series A, or even B. In the later phases of growth, this pool can rise to 15%, sometimes even more if we consider BSPCEs already allocated and those still to be allocated.
Alan, for example, uses them to incentivize employees and reward the risk they have taken: Their 15th hire got 35% less BSPCE than their first one.
One thing to keep in mind is that setting the discount price in the Shareholder’s Agreement is not market practice in the United States. Therefore, American funds that are not used to investing in the French startups may ask you to move them from your Shareholder’s Agreement to your articles when investing in your company.
Disclaimer: This recommendation is provided on an "as is" basis with no guarantees of completeness, accuracy, usefulness, or timelines – you should refer to your legal counsel for advice.
How to set your exercise price?
At what price? In some European countries, strike prices are to be set based on the latest fundraising valuation.
FRANCE 🇫🇷
Historically, the strike price was set based on the latest fundraising valuation.
However, we see a trend towards strike price with discount - up to 40-50% - backed by a valuation report or legal advice.
US 🇺🇸 & UK 🇬🇧
We usually find equity packages ranging from 20 to 25% of the salary for a manager and up to 75% for C-levels.
When the employee leaves?
FRANCE 🇫🇷
In France, the practice consists in providing that in case of departure, an employee has a 30-day delay (6 months in case of death) to exercise his BSPCE. Otherwise, the employee loses the benefit of the BSPCE (this is referred to as expiration)
Index Venture’s European ESOP survey
Their choice: Window to exercise employee rights equivalent to vesting period.
This is a way to make the positive impact of the employee during his 3 years in the company more concrete and fair.
Example: An employee started his vesting period on 1/1/2018. He leaves the company on 1/1/2021. He secured 3 years of his vesting. He has until 1/1/2024 to exercise his rights.
How does the exercise work and how can it be financed?
The right to exercise is often paid for by the employee. Employee Equity offers the right to buy shares at an agreed price. For the employee, this may represent an investment, for which there may be problems in financing.
→ Bank financing: Some banks offer loans but they are generally reserved for top management.
Some plans provide for an "acceleration clause" that allows for a faster exercise of the option than the period initially foreseen:
This clause occurs either according to a single trigger mechanism ( = automatically in the event of a company change of ownership operation (e.g. buyout)), or according to a double trigger mechanism (= company change of ownership operation + layoff of the employee within 12 months of the operation).
What about liquidity?
In the market, we see that Employee Equity is liquid in the following cases:
- Fundraising
- Exit/Company selling
- IPO
- On secondary markets
Apart from these cases...?
Legally, it is possible to provide for liquidity windows.
→ For example, the company can set up liquidity windows that can be activated in case of personal events in the life of the beneficiary (marriage, acquisition of a main residence, etc).
→ Some companies also choose to set up an internal market (through a dedicated interface or, if smaller, through the definition of resale rights under conditions). So employees are able to buy other employees’ shares if they are leaving or just want a quick cash out.
Liquidity is the company responsibility:
→ Former employees become ambassadors.
→ You may consider to include certain contractual provision (e.g. lock up) to avoid having shares sold via secondary market platforms.
→ Option Plan are here to reward their contribution.
→ Very few employees stay until IPO (or even exit) and it is not always a problem.
Selling on secondary market: New liquidity initiatives
Over the last few months, we have seen new platforms such as caption.market, EquityBee, FairShares allowing employees to list their BSPCE and be able to sell them to a third party. These have pros and cons depending on where you are seeing them from: a startup, a shareholder, an employee or an external investor.
Pros | Cons | |
Startup/founder | → Being able to cash out without waiting for a new fundraising round<br/>→ Using it as a competitive advantage to hire new talents | → Not being able to track and vet who is on the captable |
Employee | → Being able to cash out without waiting for a new fundraising round | → Seeing the value of their shares dropping because of too many options on offer across different platforms |
Shareholder | → Having a secondary market for their shares and being able to see how liquid they are | → Not having control over the value of their shares which could go down if someone decides to sell with a discount |
External buyer/investor | → Owning shares of shiny companies but investing only “small” amounts of money | N/A |
Some startups such as Ledger even took the lead and are organizing sales themselves using these platforms. This helps them track their market value by setting a unique price on each of the two or three sales they announce each year.
At Ledger, we have a huge hiring plan. Caption gives us the possibility to differentiate the company from others, attract the best talent and make equity a reality for employees. - Quentin Ricomard, CFO @ Ledger
However, the downsides are mostly for startups, and they are generally not in favor of these platforms.
“However, most startups responded by taking the opposite approach, and nowadays in many of the "mini-pacte" agreements that are written, employees are prohibited from selling on those platforms.” - Morgan HUNAULT-BERRET, Partner @ Villechenon
Buyback by the company itself
This is usually seen in companies with positive EBITDA.
The company may want to buy back employees' shares, either as a part of the HR strategy or for financial gain.
If the company’s cash is used, all shareholders must agree to this and the company must balance the decision against investing the cash into the core business.
This may result in:
- A capital decrease,
- A free shares allocation.
Be careful not to have a fixed-price promise, otherwise there is a tax and social security risk, as the beneficiary is no longer taking a shareholder risk.
🇩🇪 Sharing value creation with German employees for 🇫🇷 companies
In France, in addition to base salary and bonuses, startups often grant BSPCE to their employees which benefit from a favourable tax regime. Unfortunately, the German tax system does not offer the same benefits (exactly as the French tax regime in the opposite direction). French startups hiring senior profiles in Germany must therefore propose an alternative.
There are three possibilities but not perfect one:
- Create a local branch and allocate its shares to German employees, then work out an equation linking the local subsidiary and the parent company.
Pros: This option creates a climate of trust as both parties know exactly what will happen when exit comes. German employees are incentivized in a German company, which they fully understand.
Cons: At the time of an exit (sale of the French parent company), it is difficult to reflect the contribution of a subsidiary to the total value of a company. It may seem unfair when R&D, Marketing and Support are in the same place (usually in France). Also, creating a local entity is a heavy burden when only one employee is concerned – which is often the case at the beginning.
- Giving BSA to foreigners within the French entity:
- Opening holdings, loading them with the appropriate amount of cash to purchase shares in the mother company and ascribing the property of those holdings to the foreign employees. It's a much heavier scheme, usually used by larger companies (CAC40 size).
Pros: This is the quick and dirty solution – it works well for small allocations.
Cons: It is not optimal because of the uncertainty of tax treatment: benefits will probably be taxed at the standard income rate (which is often the case for German start-ups as well, so it might not be all bad news for a new employee).
Pros: This generally works very well.
Cons: Requires a massive amount of paperwork and legal counsels.
Share allocation is a burden you face not only during an expansion in Germany but in any other new geography.
📰News around ESOP allocation through “Zukunftsfinanizerungsgesetz“ (”Future financing Act”)
Case studies, Examples and Employee Equity plan templates
Lucca
What for? To promote transparency and employee involvement.
For whom? Employees who are "co-opted" by the employee shareholders' colleague.
How it works? Employees purchase their shares on a co-investment model.
How much? The price and number of shares are determined according to market trends and the company's valuation at the time the employees wish to purchase their shares.
Alan
What for? Involve employees in the success of the company and attract new talent.
For whom? Everyone can be eligible by doing the extra mile.
How it works? Employees get BSPCEs when they join the company and each time they are promoted. Technically, BSPCEs are granted during the board meeting following new hires.
How much? The number is justified according to the equity grid prevailing at the date of acceptance of the offer/promotion.
Shine
What for? Motivate employees to have a real impact on the company and adopt an agile and fair model.
For whom? All employees are eligible.
How it works? Employee Equity is issued to each employee upon hiring.
How much? The number is relative to the stage of development of the company at the time of hiring. The percentage allocated decreases proportionally to the increase in the value of the company.
Today, approximately 70% of the gross annual salary at the time of hiring is allocated in Employee Equity.
Equify
When? Every year.
Figures
What for? Involve employees in the success of the company and attract new talent.
For whom? Everyone upon arrival.
How it works? Employees get BSPCEs when they join the company based on seniority level and salary. Vesting period = 4 years. Exercice period = time spent in the company.
How much? The number is determined by the “equity factor” based on the seniority level: a factor multiplied by the salary to obtain the target amount (€) allocated to the employee.
Index Venture’s calculation Matrix EU Seed Startups
Example of an initial grant for a Tech Junior at a startups with a €6M valuation:
55k (salary) x 20% (% of salary) = €11k 6 000 000 (valuation) / 0.18% (FDE) = €10.8k
Examples of share allocation mechanisms
Company 1 | Company 2 | Company 3 | Company 4 | Company 5 | ||
Mecanism type | By management level | By management level | By management level | By management level | Depending on current year salary, with an exponential formula: | |
Allocation ratio
100% =
Max number of BSPCE shares | CEO | 100% | 100% | N/A | N/A | (2/12) x (Salary / 1000)
Amount mini: value of one average month - 300 BSPCE x XX€ = XXXX€
Amount maxi: value = 50% fix salary
+ Special award to be chosen by CODIR for 20% |
C-level | 100% | 50% | 100% | 100% | ||
VP | 80% | 25% | 50% | 27% | ||
Director | 67% | N/A | N/A | 10% | ||
Head of | 33% | N/A | N/A | 3% | ||
Managers / Team Lead / Expert | 12% | 15% | 11% | 1.5% | ||
Senior | 3% | 5% | 0% | 0.2% | ||
Junior | 0% | 5% | 0% | 0% |
Consistency & Communication are key
Here are some best practices to communicate your Equity plan:
- Communicate in accordance with the company's culture: If compensation is on an individual basis, then Employee Equity, being part of the compensation package, should be considered as confidential. If you’re fully transparent on your salary grids: the same should apply for equity.
- Tailor communication to the maturity of the employee: Think about making this topic accessible, which is not necessarily a given for all employees.
- Propose a clear, transparent and easy-to-read plan for everyone: Most importantly, candidates and current employees need to understand how it works and how it is part of their compensation package.
- Do not over-value/over-promise: It’e not a promise of wealth, it’s above all a “loyalty tool”.
👉 At Alan, they communicate very early in the recruitment process on the granting of BSPCEs. Indeed, the candidate must be able to project himself, and the opportunity must be taken to explain the risk of the Employee Equity as well as the process. This explanation takes place after the initial introductory call. The hiring offer is also another moment to talk about it again and explain the points that were less clear.
👉 At Payfit, communication is also key: workshops are organized to explain how BSPCEs work.
BSPCEs are often, wrongly, much less valued than cash compensation. It's a great tool that would benefit from being better understood.Arnaud De La Taille, CEO @Assoconnect
🛠 BSPCE Tool Box
Templates
![[Template] BSPCE - Simulator by Gauthier Casanova](https://lh6.googleusercontent.com/bDKib95ALqOJo2RVraSARJtLVcMnTo9-ZdoaFzn0l7cTTnHKh4lYkcBY-fkQJBego1uZRN2MiHkx5w=w1200-h630-p)
Podcast
Playbooks
Index Ventures Simulator
Balderton’s guide to Employee Equity
French Tech’s best practices on Employee Equity 2023
2021
Shared corporate policies
Tools
/w=32,quality=90,fit=scale-down){kind=small}
or
XAnge Resources
You’ll find below our Captable Management tool benchmark:
| Features | Equify | Ledgy | Uplaw | Carta (US only) |
|---|---|---|---|---|
During onboarding we would have a dedicated rep, post onboarding would have access to help desk. | Yes, will be assigned an Account Manager for ongoing support | Will be assigned an Account Rep. for continued assistance post implementation | ||
Yes, through HiBob | Yes, HRIS integrations supported (API connection can be setup for HiBob) | SFTP can be setup to automate users provisionning | ||
Handle automatically following the calendar | Have to manually enter leavers forfeitures; the process will become automatic in few months | Leavers can flow via integration with HRIS, but will need to confirm forfeiture amounts in system before processing | ||
Equify team has specific slots for implementation, the import last days, depending on your size | Ledgy Team does end to end data migration; 4-5 weeks to import | All import done by Carta team; 2 to 3 months on average | ||
Get 20% discount 1st year | Get 50% discount coaching program | No | No | No | |
Good intermediary between the two other solutions | Inexpensive and sufficient solution to gather all equity information in one place | The must, but you have to pay for it... | Be fully compliant with US regulations in terms of captable | |
No | No | Yes | Yes | |
*Pack Starter (<20 stakeholders): 500€ excl taxes *Pack Essential (21-50 stakeholders): 1900€ excl taxe *Pack Business (51-100 stakeholders) : 5500€ excl taxe *Pack Enterprise (>100 stakeholders) : on demand | 2€/month/stakeholder | From 250€/month | ||
300 - 2 000€ (depending on funding round) | Yes, on quotation | Included | Free with XAnge Special Deal | |
Yes | No | Yes | Yes | |
Yes | Yes | Yes | Yes | |
BackMarket, Doctolib, Botify, Sigfox In XAnge Portfolio : Evaneos, Le Collectionist | Frontify, Wefox, Taxfix, Raisin, Unu, Nakd In XAnge Portfolio : Welcome To The Jungle | ManoMano, Contentsquare, Swile, Spendesk, Payfit, In XAnge Portfolio : Prestashop, Believe | Robinhood, Intercom | |
Yes | Yes | Yes | Yes | |
Yes | Yes | Yes | Yes | |
Yes | Yes | Yes | Yes | |
Yes (Europe) | Yes | Yes | Yes (global) | |
Yes | Yes | Yes | Yes |
