Equity Management
For Startups

March 13, 2019

How do I set up my

participation plan?

Let’s help founder Elena to

  • Think about why she should set up a plan
  • Design pool and allocation
  • Decide on vesting
  • Understand the differences between share,
    option and phantom plans
    • Tax for employees
    • Setup cost and overhead for startup
    • What needs to be done once it’s set up
  • Decide

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Why set one up?

  • Startups biggest advantage in hiring
    • Long-term incentive in addition to cash salary
    • Get top talent despite lower salary
  • Employee profits from startup’s success
    • Aligned interest
    • Stays with the startup for a longer time
    • But: Mission alignment is more important
  • Support Swiss ecosystem
    • First employees of PayPal have since founded numerous startups (“PayPal mafia”)

3

What’s the goal?

  • Attractive to employees
    • Not “funny money”
    • Best possible tax treatment
    • Transparency and good communication
  • As little overhead for company as possible
    • Setup complexity and cost
    • Operational overhead

4

Pool size and allocation

  • How to decide
    • Depends on the skills of existing team, profile of candidate,
      potential startup upside, salaries, attitude of founders & investors
    • Common to give more to early employees, technical roles and seniority
    • Very helpful: Index Ventures Calculator
    • Beware of the option pool shuffle

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First 10 employees

10%

Next 20 employees

5%

Next 50 employees

5%

C-level / VP

1 - 10%

Lead / senior dev

0.5 - 1.5%

Junior dev / non-technical

0.25 - 0.75%

Numbers from Kellerhals-Carrard presentation at Swiss Startup Days and Index Ventures, at time of exit

Pool size and allocation

  • How to communicate to employees
    • Switch from communicating % to CHF value after first employees
    • Be conservative and transparent
  • Next steps for founder Elena
    • Create spreadsheet with hiring plan for next 12-18 months
    • Get pool and allocation approved by
      her investors / board

6

First 10 employees

10%

Next 20 employees

5%

Next 50 employees

5%

C-level / VP

1 - 10%

Lead / senior dev

0.5 - 1.5%

Junior dev / non-technical

0.25 - 0.75%

Numbers from Kellerhals-Carrard presentation at Swiss Startup Days and Index Ventures

Vesting

  • A typical vesting looks like this
  • Good / bad leaver clauses
    • From company perspective:
      Consensual termination of contract?
    • Good: Keep their vested part
    • Bad: Loose all
  • Acceleration
    • Single-trigger: Liquidity event
    • Double-trigger: Additionally employee needs to be terminated
      Why? Buyer wants to keep Important employees after sale.

7

4 years duration

1 year cliff

e.g. after 2 years

vest every month

Vesting

Most common vesting schedules of Ledgy transactions
Switzerland, first and subsequent grants

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Shares, Options or Phantom!?

And finally: What should Elena do?

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Shares

Options = Right to purchase shares at later time for a fixed (strike) price

Phantom = Cash-bonus coupled to value of common shares

Taxes

?

?

?

Cost & complexity

?

?

?

Operational overhead

?

?

?

Employee Taxes
Options with strike price

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Strike price paid by employee when exercising

CHF

Time

Grant

Exercise

Sell

Taxed as income at exercise

Market value

Tax-free capital gain

Employee Taxes
Options without strike price

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Taxed as income at exercise

Time

Grant

Exercise

Sell

Market value

Tax-free capital gain

CHF

Employee Taxes

Shares

12

Taxed as income at grant

Time

Sell

Market value

Tax-free capital gain

Grant

CHF

Employee Taxes

Tax Ruling

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Taxed as income at grant

Time

Sell

Market value

Tax-free capital gain

Grant

Taxed as income

Tax ruling value

CHF

Employee Taxes

Phantom

14

Time

Sell

Market value

Taxed as income

Grant

CHF

Setup Cost and
Complexity

  • For all types
    • Design allocation and vesting
    • Lawyer sets up contract, usually for 3-5k CHF
  • Options & shares can be backed by
    • Conditional capital
      • Approval by general assembly
      • Adjust statutes
      • Update commercial registry through notary
    • Treasury shares: Max. 10% of company
    • Founder shares
  • Tax ruling for options & shares often necessary and costs another 2-3k (to lawyer)

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Operation

  • Update commercial registry through notary if
    • Using conditional capital
    • Options were exercised
    • Deadline: 3 months after business year ends
  • Declare alongside salary statement for employees
    • Options, phantom with value 0
    • Shares, exercised options: Fair market value or tax ruling value
  • Use incentives to motivate employee
    • Engage employees by creating transparency
    • Communicate events like vesting cliff reached,
      valuation increase, ...

Shares, Options or Phantom!?

17

Shares

Options

Phantom

Taxes

Lowest taxation
At grant

Medium taxation
At exercise

Highest taxation

At liquidation

Setup Cost & Complexity

Medium: Design allocation and restrictions, create conditional capital or treasury shares, set up contracts

Low: Design allocation and restrictions, setup contracts

Operation overhead

Medium

Track vesting & termination
Need company valuation for income statement

High

Track vesting & termination

After exercise:

  • Notary once a year
  • Need valuation

Low

Track vesting & termination

Which is the most widely used?

Law firm best practices

  • Kellerhals-Carrard
    • More options, also phantoms, sometimes shares
  • Wenger-Vieli
    • More phantom than options
  • Walder-Wyss
    • Mostly Phantom

Employee pool types in Ledgy

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So, what should Elena do?

  • Tradeoff between favorable taxation and less overhead for company
  • Choice is often psychological:
    Do I want to give shares to my employees?
  • Great employees make all the difference for a startup, so prefer employee friendly solution
  • But: Still Elena should evaluate for her specific case with her lawyer of trust

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Employee Participation Plans Switzerland - Google Slides