01 / Overview
When an option programme is used
An option programme makes it possible to link the long-term incentives of partners, executives and key employees to the company's results and growth in the value of the business. The specific model depends on the owners' objective and the nature of their relationship with the programme participants.
- Retaining key employeesA participant's economic interest may be linked to length of service with the company, the achievement of specified results or the delivery of a particular project.
- Attracting executives and expertsParticipation in the future value of the business may supplement fixed remuneration and serve as a long-term incentive for a key specialist.
- Building a relationship with a partnerA stake or other economic interest may be acquired immediately or gradually, as agreed conditions are met and specified results are achieved.
- Preparing the company for investment or a change of ownerA formalized programme makes it possible to determine in advance the rights of the key team and how they change on the arrival of an investor, a change of control or a change of owner of the business.
- Formalizing existing arrangementsIf partners or employees have already been promised an equity interest or remuneration linked to the value of the company, the programme makes it possible to set out clear terms on which the relevant rights arise and are exercised.
- Revising an existing programmeA programme may need to be changed as the business develops, when the participants change, when investment is raised or in other circumstances in which the original model no longer fits the objective.
Equity interests and phantom options
The mechanics of a programme can vary considerably. The same incentive objective can be achieved through an equity interest, a right to receive one in the future, or a cash equivalent linked to the value of the business.
- An actual interest or a cash equivalentA participant may become a co-owner of the company or receive an economic return without acquiring the rights of a participant in the company. The choice of model depends on the owners' objectives and on how far equity participation by a particular person fits the way the business is organized.
- Immediate or future participationAn interest may be granted when the programme is launched or acquired later once agreed conditions are met. Models are possible under which a participant's rights arise or are secured gradually.
- Conditions of participationA participant's rights may depend on length of service, the achievement of financial or operational targets, the delivery of particular projects, the arrival of an investor, a change of owner of the business or a combination of several conditions.
- Different structuresA programme is built using option mechanisms, arrangements between participants, a separate participation structure or a phantom model without the transfer of an interest; a combination of instruments is possible.
Acquisition of rights and exit from the programme
The programme determines who grants the interest or pays the remuneration, whose stake is used to form the programme and how the economic return is calculated. For actual equity participation, the rights of the other owners and the necessary company resolutions are taken into account.
The gradual securing of rights may depend on the length of participation or the achievement of targets. Such conditions are often referred to as vesting. The documents set out the targets themselves, how their achievement is confirmed and the consequences of early termination of participation.
The consequences of termination of employment, a change of role, a change of owner of the business or the arrival of an investor are also agreed. A change in the employment relationship does not in itself result in the loss of an interest held by the participant; the terms for returning or buying back the stake are documented separately.
The labels ESOP and VSOP describe the economic model of a programme but are no substitute for documenting it: a programme with actual equity participation and a phantom cash payment programme involve different rights and documents.