ESOPs in Slovakia? More creativity than clear rules

Employee Stock Ownership Plans and Company Shares. Today, Slovak companies often have to improvise when motivating employees, caught between unclear tax legislation and inflexible commercial law rules. During a panel discussion at our Highgate Business Brunch, Peter Varga and Tomáš Demo openly demonstrated how ESOP structures are set up in practice in Slovakia today, where the greatest risks arise, and why many solutions are the result of pragmatism rather than well-designed legislation.

Why Slovak Companies Are Flying by the Seat of Their Pants When It Comes to ESOPs

ESOPs have become one of the most talked-about topics among startups, tech companies, and even established Slovak businesses. The reason is simple: companies want to motivate and retain top talent, but at the same time they face a high tax and social security burden, inflexible legislation, and unclear rules regarding the taxation of employee stock options.

These were precisely the topics addressed by Peter Varga and Tomáš Demo during a panel discussion on ESOPs, where they openly discussed how Slovak companies currently set up incentive schemes in practice, what legal and tax constraints they face, and why many solutions are the result of pragmatism rather than sound legislation.

At Highgate Group, we have long specialized in designing ESOP schemes, incentive plans, and equity-based compensation structures for key personnel at startups, technology companies, and traditional businesses. It is precisely our practical experience in implementing various models that shows us that the reality in Slovakia often requires a combination of legal creativity, tax pragmatism, and well-defined rules among company partners (corporate governance).

The Slovak Problem: ESOP Legislation Exists, but It Doesn’t Work Perfectly

One of the main topics of discussion was the 2023 amendment to the Slovak ESOP Act. Although it was intended to provide greater legal and tax certainty, the participants noted that many questions remain unanswered.

The problem is not only the wording of the legislation itself, but also the fact that the Slovak legal environment still does not allow for the flexibility that is standard practice abroad. A typical example is the Slovak s.r.o., which still does not allow for the issuance of shares with different types of rights, as is possible, for example, in the Czech Republic.

In practice, this means that companies must employ complex combinations of asymmetrical voting rights, dividend entitlements, and various contractual mechanisms just to come close to modern ESOP models.

Another factor comes into play here: the high tax and social security burden on labor. Companies are therefore naturally seeking alternative ways to motivate employees, contractors, and managers that are both more cost-effective and legally sound.

Shadow Shares, SPVs, and “ManCo” Companies: How It Works in Practice

The discussion then turned to the practical models that Slovak companies use most frequently.

The first level typically consists of so-called phantom or shadow shares. These do not constitute formal ownership of a business interest or shares in the company, but rather a contractual obligation under which an employee or contractor is entitled to receive a certain economic benefit from the company, such as a share of profits or proceeds from a future sale of the company.

The advantage of this model is that it is relatively easy to implement. A company can set up an incentive system through an addendum to an employment contract or a collaboration agreement without needing to change the company’s ownership structure.

The second level consists of “actual” equity interests, that is, actual shares or business interests. However, this is where further complications arise. If the company were to distribute shares directly to dozens of employees, it would significantly complicate the company’s operations, decision-making at shareholder meetings, and future investment rounds.

This is one reason why, in practice, a so-called SPV or “ManCo”—a special-purpose vehicle through which employees indirectly hold an interest in the target company—is often used. This model helps founders maintain control over the company while creating a more flexible framework for paying out ESOP benefits to beneficiaries.

Good Leaver, Bad Leaver, and the Problem of Enforceability of Law in Slovakia

One of the most practical topics was the distinction between “good leavers” and “bad leavers”—that is, situations in which an employee or manager leaves the company.

Abroad, this is a standard part of ESOP documentation. However, the reality in Slovakia presents complications. For example, if a company wants to reclaim a share due to a “bad leaver” situation and the former employee refuses to cooperate, the dispute may end up in court. The panelists openly acknowledged that enforcing such rights can take months or even years, which can be problematic for the company both in terms of reputation and in practical terms.

This is one reason why companies are looking for legal structures that offer greater flexibility. One interesting solution that has been suggested, for example, is a cooperative or a simple joint-stock company, which are better equipped to handle different classes of rights, voting structures, and economic benefits.

ESOP as a Path to a Management Buyout

Another interesting aspect of the discussion was the idea of a gradual transition from holding shares behind the scenes to actual co-ownership of the company.

In practice, an ESOP need not serve merely as an incentive bonus. If structured properly, it can lead to a gradual management buyout—that is, a situation in which management gradually acquires a significant stake in the company and becomes a genuine co-owner.

It is precisely in such situations that it is extremely important to properly structure tax, legal, and corporate mechanisms. The difference between a well-structured ESOP and a problematic scheme can have significant tax and regulatory implications.

Slovak ESOPs today are primarily about pragmatism

The discussion revealed one key point: the Slovak ESOP environment is still not mature or flexible enough to accommodate the modern incentive schemes that are common abroad.

Companies therefore often combine phantom equity, SPV structures, option mechanisms, and individual contractual arrangements to achieve a result that is both economically and legally sound.

That is precisely why it is important to take a combination of legal, tax, and practical perspectives into account when setting up ESOPs. At Highgate Group, we focus intensively on this area, from structures for early-stage startups to complex management buyouts and compensation schemes for established companies.

We are the Highgate Group, modern advisors for your law, tax and accounting under one roof.

If you are interested in this topic, please do not hesitate to contact us:

• Tomas Demo, e-mail: tomas.demo@highgate.sk

For more information on venture capital, M&A, and the Švarc system, please visit this section of our website: Venture Capital, Private Equity, and M&A; “Employment” of Self-Employed Individuals (Švarc System)

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