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Subscription rights as a weapon for start-ups in the war for talent (Koan Law Firm)

Author: Koan Law Firm

Publication date: 16/07/2020

Start-ups often have a hard time attracting, maintaining and motivating their most talented employees, given that most start-ups are funded with limited resources. Particularly in times of great uncertainty, start-ups tend to think outside of the box and look for new ways in order to let their businesses thrive. And as once stated by Albert Einstein: “In the middle of difficulty lies opportunity”.

A powerful tool for start-up companies to onboard top performers, and keep them motivated, is by way of subscription rights.

A subscription right is a derivate that gives the holder the right, not the obligation, to acquire new shares in the company at a fixed price, and before a certain expiration date. After having exercised its subscription rights, the beneficiary will have acquired newly issued shares in the company.

One of the key advantages of issuing subscription rights is that it makes up a very cost efficient way to attract talented, highly qualified employees and/or independent consultants and as to make them (feel like a) part of the company. Moreover, it has been established that employees who are shareholders of the company feel more connected to the business and make up better performers. As a consequence, the issuance of subscription rights not only leads to an increase of equity over time, it also improves the loyalty of the company’s employees.

An important side note to be made, is that the issuance of subscription rights is still subject to certain legal formalities, but such formalities do not outweigh the numerous benefits of the use of subscription rights within start-up companies.

Another new feature that was introduced by the new Belgian Companies and Associations’ Code is the fact that limited liability companies are now given the possibility to delegate the power to issue subscription rights, to their management body. As a result, subscription rights can now be issued not only by the general meeting of limited liability companies but also by their management bodies, subject evidently to such power having been assigned to them by the general meeting within the framework of the authorized capital.

Furthermore, the new Belgian Companies and Associations’ Code has clarified the notion of ‘personnel’ who are eligible for long-term employee stock option plans (ESOP’s) as to include not only employees, but also independent service providers (provided that they work with management agreements) and their management companies.. In addition to the foregoing, subscription rights’ plans may set out various conditions for the granting and exercise of subscription rights, making it a tailor-made instrument for the company.

The ESOP’s, and as a consequence their corresponding subscription rights, can be set up for a period up to ten years. However, the maximum exercise period shall be limited to five years if the issuance of subscription rights has one or more specific persons who do not qualify as ‘personnel’ as its main target audience, or in the event where not all existing shareholders have waived their preferential subscription rights.

Last but not least, the Belgian tax regime of granting stock options is very attractive for the beneficiaries since they are only taxed on a lump sum representing a percentage of the fair market value of the underlying share at the moment they are granted the stock options, while the capital gain realized on resale of such share is in principle exempt from personal income tax.

Read the original article here

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