How do stock options work in a Startup?

On 22 December 2022, Law 28/2022 of 21 December on the promotion of the startup ecosystem was published in the Official State Gazette. Popularly known as the Startup Law, it entered into force the day after its publication.

This regulation is part of the Spanish Recovery, Transformation and Resilience Plan, which aims to strengthen the entrepreneurial ecosystem in Spain, focusing on innovation and knowledge.

The Startup Law recognises the distinct features of startups and acknowledges the difficulties they face in navigating the conventional regulatory framework. The Law considers that these innovative companies, particularly in their early stages, confront numerous hurdles, including the difficulty of securing funding to support the business growth before it generates revenues.

• Securing funding to finance the growth of the business before it begins to generate revenue.
• Attracting and retaining highly skilled and productive employees in the early stages of the business when there is not sufficient revenue stream to reward them with traditional payment instruments.

To address this second challenge, a corporate measure has been approved allowing these companies to reward their employees, managers and key personnel with stock options.

Definition and purpose of stock options

Stock options are a form of remuneration that allows employees, managers and key personnel to acquire shares in the company for which they work at a price usually fixed in advance and lower than the market price.

The main objective of stock options is to align the interests of employees with those of the company, as both parties benefit when the share price rises. In addition, stock options are an excellent mechanism for retaining key employees and collaborators by providing them with a variable remuneration linked to the company’s performance.

Requirements for the application of the stock option scheme

The Law on startups in Spain lays down several conditions for limited liability startups to benefit from the possibility of acquiring their shares (treasury shares). These requirements are:

• The number of own shares held by the startup company may not exceed 20% of the share capital
• The articles of association must provide for the possibility to reward employees and directors through shares of the company
• The general meeting must approve the remuneration system based on stock options by a resolution that specifies:
  • The maximum number of shares that may be granted in each financial year
  • The value of the shares to be granted in each financial year
  • The value of the shares to be used as a reference
  • A time limit for the implementation of the plan.
• The shares subject to variable remuneration must be fully paid up
• The net assets after the acquisition may not be less than the amount of the share capital plus unavailable legal or statutory reserves
• The acquisition must take place within five years of the authorisation agreement.

If the above conditions are not met, the provisions of Article 139 of the Spanish Companies Act shall apply.

The Startup Law also provides for tax amendments to improve the taxation of employees’ remuneration under this concept.

If you need additional information on stock options or startups in Spain,