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Opinions From Startup Changemakers
You Can Set Up a Sensible Equity Incentive Scheme in the Netherlands, But You Have to Know What You Want

Sjoerd Mol is an attorney-at-law and partner at Benvalor. He is also the co-author of the book ‘Venture Capital Deal Terms: a guide to negotiating and structuring venture capital transactions’.  Find out what equity incentive schemes he has seen in the Netherlands and what kind of scheme he would typically recommend.
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1. Hi Sjoerd, thank you for agreeing to do the interview. Could you tell us a bit about your background, your job and your role in the Dutch startup ecosystem?

Hi, I am a lawyer advising startups and investors with financing rounds and other legal work such as setting up employee incentive plans. I am a partner at Benvalor, a law firm that is very active in the Dutch startup and VC scene. We are partnering with several incubators and accelerator programs.  I am also co-founder of Capital Waters, a platform for open source early stage deal documentation and co-author of a book called Venture Capital Deal Terms.

2. What equity incentive schemes have you seen in your experience in the Netherlands. (Options, Sar, or a combination, etc.) What are the basic features of each?

Most commonly used in the Netherlands are Stock Appreciation Rights (SARs) and depository receipts of shares. When a company is scaling up and active internationally, options are also used. In short, a SAR Plan entitles the holder of a SAR to a payment at the time of an exit based on the difference between the share price at the time of granting the SAR right and the share price at the time of the exit. It’s a contractual right, no shares are issued, therefore SARs are also called phantom shares. Depository receipts of shares are created by incorporating a Stichting Administratiekantoor (STAK). Shares are issued to the STAK that grants on his turn depository receipts of these shares to the employees. The legal rights and voting rights connected to the shares stay with the STAK and the economic rights connected to the shares (so the pro-rata rights on the exit proceeds and dividend rights) vest with the employee. A share option is internationally the most commonly used form of employee participation. The employee is granted a right to buy shares at a certain pre-determined price (exercise price) during a certain period of time (exercise period). 

3. What are the tax implications of each, for the team member and for the startup?

The tax implications vary a lot with the three different employee incentive plans set out above. Payments under a SAR plan are treated as salary. There is no taxation at the time the SARs are granted, only at the time of the exit. Not very favourable for the employee, but deductible as a cost for the employer. A share option plan is treated similarly. The difference between the exercise price and the fair market value of the share at the time of the exit is treated as salary. Many option plans for startups are exit based: the entitlements of the option holders are paid off at the time of the exit and the employee receives directly his/her pro rata part of the exit proceeds without becoming a shareholder. 

Depository receipts plans are treated differently. Employees need to purchase the depository receipts for the fair market value when they are granted to them. In many cases, this forms an obstacle because the employees do not have or do not want to pay any money for this. If they don’t pay the fair market value at the time of granting the depository receipts, this benefit will be taxed as salary. The flip side is that at the time of an exit the pro rata part of the exit proceeds that the depository receipt holder receives will be taxed very mildly or not at all depending on the case.

4. When building an equity incentive scheme: what other choices do you have? So how about vesting, accelerated vesting on exit, good leaver/bad leaver, strike price? Could you explain each of them?

Vesting is very common and makes sense. You want to retain your talented people and a vesting schedule is one way of doing this (apart from several others). What we mostly see is a vesting period of 3 to 4 years with a 1 year cliff, meaning that after the first year one third or fourth of the rights will vest at once and after that pro rata for each month that the employee works for the company. Accelerated vesting on exit is quite common. The same goes for good/bad leaver clauses. If you leave as a bad leaver both your unvested and vested rights will vanish. Strike price or exercise price is only relevant for option plans. The strike prices are related to the equity value of the company at the time of granting of the options.  

5. What kind of scheme would you typically recommend?

If you are a very early-stage startup, a depository receipts plan is the best choice because it is still relatively easy to implement. If you are a later stage startup, implementing a depository receipts plan is probably too burdensome since the equity value of your company will be substantial and therefore employees need to pay large amounts of money to acquire very small stakes. In such a case the set up of a SAR plan makes more sense or if you are scaling-up and recruiting internationally an option plan.

In some cases where later stage startups insist on having a depository receipt plan due to the favourable taxation, we advise implementing so-called hurdle structures. Under a hurdle structure, a different class of employee shares is created that entitles the holder of such a share to the exit proceeds after an amount X is distributed to the other shareholders. X is equal to the value of the company at the time the hurdle shares are issued to the employees. By doing this, the holders of these shares only benefit from future value increases and therefore the tax authority accepts that the purchase price of these shares can be nil or something close to nil.

In any event, whatever the phase you are in, start on time with setting up your employee incentive plan. Due to taxation rules in the Netherlands (and most other countries), you cannot grant any rights with retrospective effect. So involve your startup lawyer early on. 

Thank you very much for the interview Sjoerd! We wish you the best of luck in your future endeavours.

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