A long-term and personal commitment for employees can be expected to increase the motivation in the future work, stimulate greater interest for the business and the profit performance and increase sense of connection with the company. For this purpose companies usually establishes stock option programs where current and future employees of the company are offered an opportunity to take part of the company’s future value growth. Employees are offered the opportunity to subscribe for warrants in the company, hence giving them a right to subscribe for shares in the company at a predetermined subscription price. There are different kinds of stock option programs of which we will clarify employee warrants and securities warrants. It may be noted that an incorrectly made stock option program may result in unexpected and in some cases very severe tax consequences.
(i) Securities warrants establishes a tax effective instrument to reward employees for past services and also motivate them to work in order to increase the company value. Securities options must be transferable and hence the transferability is usually regulated in separate warrant holder agreements, containing provisions regarding bad and good leaver, vesting and similar regulations.
(ii) Employee warrants are an effective way to retain key employees and to tie them closer to the company. Employee warrants typically implies that the employee has no right to transfer its employee warrants and that they expire if and when the employment is terminated, which implies higher tax for both the employee and employer. Note that the employee warrants usually are transferred to the employees free of charge or at price beneath market value.
Regardless stock option program is it essential that the program implemented is properly designed and that both the employer and the employees are clear about what the program actually implicates, such as how the tax, transferability and termination of employment should be regulated.
For further information, please contact Ian Slettengren.