Incentivising employees in start-ups through SARs

Attracting and keeping talented employees in start-ups is challenging and employee participation often is a main topic for start-up founders who not only want to attach skilled employees but also want to offer their employees the opportunity to participate in their start-up company and reward them for their contributions.

Employee participation plans can take different forms. The best known form would probably be an equity based plan whereby the employees and/or other persons participating in the employee participation plan (the Participants) acquire (depository receipts of) shares or options to acquire (depository receipts of) shares. It is noted that if a company chooses to set up an equity plan, ordinarily as foundation (stichting administratiekantoor, or STAK) is set up; the STAK holds the shares in the company and the Participant obtains (options to acquire) depository receipt of shares, entitling them to the economic rights (such as dividends) attached to the shares but not the legal rights (such as the voting rights) which remain with the STAK.

Another option which is getting more and more attention, is to offer Participants so called Stock Appreciation Rights (SARs). Start-ups are (normally) not in the position to pay high salaries or bonuses to (key) employees; to achieve sustainable growth there are often other financial priorities such as product- and business development, patent research and registration, marketing, market survey etc. However, we see that investing in talented and skilled personnel is also deemed of great importance to start-up founders and offering SARs could be an effective instrument to attract such personnel without having to pay (up-front) large salaries and bonuses.

SARs are contractual rights entitling the Participants to a payment in cash (or in kind (shares)) equal to the appreciation the shares in the start-up company over a certain period of time, without actually acquiring (depository receipt of) shares. A big advantage of SARs for the Participant is that no exercise price is payable upon granting of the SARs and the fact that the Participant is entitled to receive a payment linked to the increase in value of the shares in the start-up company without being required to actually buy shares.

Please note that any tax implication (for both the Participant and the employer (the start-up company)) remain undiscussed here.

What are SARs?

As mentioned, a SAR is a contractual right entitling the Participant to receive a cash amount equal to the appreciation (increase of value) of a certain number of shares in the start-up company, without actually acquiring (depository receipt of) shares. In the Stock Appreciation Rights Agreement (the SARs Agreement) a fixed grant price (the Grant Price) is being set as of the moment the SAR is being granted by the start-up company to the Participant. The difference between the Grant Price and fair market value of the start-up company's shares (the FMV) is the amount payable to the Participant. Ordinarily, the FMV will be determined as per the moment a vesting event occurs (e.g. an acquisition of the start-up company, a financing round or an exit arrangement (a Vesting Event).


On 1 May 2017 (the Grant Date), a start-up in the IT sector grants 500 SARs to a senior data analyst. Each SAR corresponds with one ordinary share of the company. The Grant Price per share as at the Grant Date is set at EUR 20. On 1 May 2020, the start-up attracts its first major financing from a strategic investor, who agrees to invest a certain amount in the start-up based on a share price of EUR 6o per share (being the FMV). This Vesting Event entitles the Participant to a payment of 500 (the number of SARs) X EUR 40 per share (i.e. the FMV per share minus the Grant Price) = EUR 20,000.

This example is clear and rarely leads to discussions. However, it is not uncommon that the parties also agree that a Vesting Event occurs after a certain period of time (e.g. 2 years after the Grant Date) or when the Participant leaves the start-up company, quite often distinguishing between so-called 'good lever' and bad leaver' situations. In these cases, it is difficult to establish the FMV of the shares (and corresponding payment amount) as there is no external valuation by an investor. In addition, there is no cash coming in, which could be used to pay out the SARs; this could lead to discussions between the Participant and the start-up founders.

In order to avoid, as much as possible, discussions on vesting events and payment obligations, it is advisable to include specific provisions in the SARs Agreement relating to the occurrence of Vesting Events and the calculation of the amount payable upon the occurrence of a Vesting Event and cash payment. In a number of situations the Dutch courts had to judge on (unclear) arrangements in SARs Agreements, not only in relation to the question whether a Vesting Event had occurred 1 but also on the appreciation of the SARs and the calculation of the payment amount 2.

Furthermore, when granting SARs to Participants, the following should be taken into consideration:

  • The company, as a good employer within the meaning of article 7:655 Dutch Civil Code), has the obligation to sufficiently inform the Participant about the SARs, consequences and risks as a good employer (article 7:655 Dutch Civil Code).
  • The Participant needs to sign a granting form, acknowledging that he/she agreed with the terms and conditions in relation to the granting and exercising of the SARs.
  • It should be explicitly clear that awarding SARs will not be taken into account for the purposes of calculating any severance whatsoever for the Participant.
  • Good leaver/Bad leaver provisions in the SARs Agreement are most recommendable; when the Participant leaves the start-up company as a 'bad leaver' (to be defined in the SARs Agreement), he/she is no longer entitled to any payment in relation to the SARs and any unvested SARs shall expire immediately.
  • Any and all tax and social security premiums will be for the account of the employee.

  1. Court Utrecht, 18 May 2011, (ECLI:NL:RBUTR:2011:BQ6333).
  2. Court The Hague 7 November 2016 (ECLI:NLRBDHA:2016:14226) and the Court of appeal Arnhem, 22 January 2013 (LNJ BZ0379). In last-mentioned case, the court had to render a judgment on the question whether the start-up in question could rightfully deduct a loan in order to finance acquisitions from the EBIT (on the basis of which (inter alia) the payment amount was based). The answer was yes, resulting in an appreciation of the shares of nil and no payment obligation towards the relevant Participant. 

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