Value Drivers #1: Should You Give Shares to Your Key Employees?

As an advisor in mergers and acquisitions, I regularly sit down with potential buyers of companies. A frequently asked question to the selling entrepreneur is: "How dependent is the company on you as a person?" Or: "Who are the key people within your organization and how have you tied them to the company?"

A buyer asks this question for a reason. They want to know how the continuity of the business operations is ensured in the near future. It is not always the case that the buyer has an immediate successor ready for the so-called key positions.

Therefore, the selling shareholder would do well to bind key employees to the company in a timely manner; this is part of making a company 'ready for sale'. Even though an employee in the Netherlands always has the right to do something else, this binding is enhanced. Below, I briefly explain two options, including the pros and cons for the employer and employee.

1. Stock Appreciation Right (SAR)

A Stock Appreciation Right (SAR) is a bonus linked to the value development of the company. It is a 'virtual' share. When the employee exercises the SAR, they receive that value in cash. The amount of the payout can be based on, for example, the result or the value of the shares.

Advantages for Employer	Advantages for Employee
Individual and non-transferable right	Share in the company's success
Flexible (criteria, duration, exercise date)	No notary needed for setup
Costs are tax-deductible	No downside risk
Binding talents	Loyalty and commitment

 

Disadvantages for Employer	Disadvantages for Employee
Not suitable as a succession instrument	No shares with associated voting rights
One-time payout affecting liquidity	Progressively taxed on benefit receipt

 

2. Management Participation Plan (MPP)

The name says it all with the Management Participation Plan (MPP): the management actually participates in the share capital, shares in the dividend, and in the results upon possible sale. It is a long-term instrument where the degree of participation has tax consequences. It must also be determined whether or not voting rights are attached to the shares. The MPP requires customization, and the agreements are laid down in a shareholders' agreement.

Advantages for Employer	Advantages for Employee
Binding key management	Share in the success
Increase in productivity	Participate in thinking and decision-making (if voting rights are given)
No ongoing impact on financial results	Mutual long-term commitment

 

Disadvantages for Employer	Disadvantages for Employee
Determination of value and price necessary	Downside risk on share value
Possibly pre-financing the employee	Own money and/or financing needed

 

The options explained generally create the strongest binding of employees. There are also other ways to bind employees, such as bonus and/or option schemes. Each arrangement has its own purpose, form, and tax aspects; it is always a matter of customization.

Want to know more? At Schuiteman M&A – Corporate Finance, we help with the most suitable form for your situation. Contact me: Annuska Wolff, via +31 6 55 81 66 26 or via email awolff@schuitemanmacf.com