Why should startups launch Virtual Employee Stock Ownership Plan (VESOP)?
Recognising the value of employee leadership and the sense of community, many companies such as Google, Microsoft and others are implementing an employee stock ownership plan. The program gives employees the benefit of being a shareholder of the company and therefore increases their motivation to reach goals in their job.
Hiring qualified employees, attracting experienced advisors, or building a community of partners is crucial for the growth and success of startups, yet it proves to be a challenge. In a survey, over 84% of respondents said that “the participation programs are essential for the success of start-ups” and “for 77%, employee participation means recognition of personal performance,” (while) 66% see it as a strong identification with start-ups and its goals” (Handelsblatt, 2020).
Therefore, an employee stock option plan gives startups an additional tool in getting and keeping best people on board. However, traditional stock option plans are not always the best solution for startups. Implementing ESOP can have challenges, such as high costs, a complex legal process, and wage taxation for employees. An alternative is a virtual stock option plan.
VESOP, employee stock option plan for startups
Virtual Employee Stock Option Plan (VESOP) is an alternative stock option plan, which is well-suited for startups. Also known as "phantom stock", VESOP is one of the employee participation models implemented over blockchain technology.
Especially in the growth stage, startups are usually still limited on resources. VESOP contributes to attracting employees and other stakeholders without enduring financial pressure.
As the name indicates, employers can "virtually" give out company shares. This means that employees can benefit from company success once the payout conditions are met (e.g., company sale, IPO, etc.). Virtual shares are “phantom shares” meaning that employees are only involved in an "abstract" way, and it is uncertain whether the goal of employee engagement can really be achieved in this way. However, startup business leaders looking to align company growth with employee interests could use virtual shares as a recognition of personal performance and an incentive for new projects.
In comparison to other share option programs, some advantages of VESOP are:
• low costs
• simple setup
• less complex legal and tax structure for employees and employers
Examples of VESOP
In Germany, the employee stock ownership program is not that common because of its complexity, especially in taxation. Companies like Penta, a German business banking startup, have opted for an alternative solution by going virtual: “It’s a great place to develop professionally and personally and by awarding virtual shares it also means it can be very rewarding financially too”, said Dan Hardaker, the Head of People and Culture. Convinced by the importance of employee involvement for the company’s success, they decided to give out company shares without compromising the cash flow, thus avoiding all the administrative and fiscal complexities.
VESOP is also popular outside of Germany. Casafari, a startup in Lisbon launched virtual shares as well. Mila Suharev, the founder of Casafari, pointed out that the program allows each team member to think and act like an owner, “allowing them to pursue their boldest dreams without worrying about financial issues”.
Of course, at iVE.ONE, we also have started to give out company shares since the beginning of this year. Talk to us about VESOP.