The following thing happened to the client. The company had issued “crisp” employee stock awards to key executives.

The following thing happened to the client. The company had issued “crisp” employee stock awards to key executives. These, in addition to a share of any exits, also entitle the executives to a dividend. One of the top executives, the director of sales, stopped delivering after the shares were announced. Technically, he was not in breach of any duty fulfilling the definition of a bad leaver, but he remained significantly passive and came to be seen as a “dead” equity from an investor’s perspective. The Option Plan did not contemplate such a situation. ❌ If the firm had triggered a bad leaver, the manager would have had to convert his entire interest in the firm at par, and the situation would have resulted in litigation;
❌ if the firm ran a good leaver, the manager would be entitled to redeem his entire stake at market value, which the investor did not agree to. ✅ How to get out of this? One fair solution in such cases may be for the manager to retain (part of) the stake until the eventual exit, but without the right to a dividend, which should in principle be conditional on active participation in the firm’s future growth. 🔜 There is also currently an amendment on the table that could bring relatively positive changes to the taxation of ESOPs. Those changes should ensure that the vesting of interests in the firm to employees as well as contractors should not be taxable for certain types of firms. Since this exemption does not apply to all companies that give ESOPs, and since it is another exception in an already “pre-empted” income tax law, this creates additional room for creative legal and tax solutions not only in setting up ESOPs, but in general. 🔔 We will also talk about dealing with bad leaver scenarios, valuation of companies when issuing shares and tax-efficient ESOP plans with Peter Varga at our next ESOP conference on 21.6.2023 in Bratislava, where Daniel Gaspar from Crowdberry, Jan Cifra from Dedoles and Miroslav Mulica from Axelero Capital Advisors /AxCap/ will also share their experience with setting up ESOP plans (not only) in Slovak companies. More info about the conference in the link.