Startups and stock options: what will change in 2022?

Stock options as salary

As an employer, you can choose to pay part of your salary in stock options. This option is particularly popular with start-ups and scale-ups, because companies at this stage often do not have enough money to pay a salary in line with the market. Stock options are a godsend if you want to attract talent but don’t have enough money to pay for them yet. But many start-ups run into problems when the stock options are converted into shares. What’s up with that?

Explanation of stock options

It works like this: In addition to salary, the employer gives his employee a stock option right of, for example, €10,000. This is the strike price at which he can convert stock options into shares. In other words, he is allowed to buy a predetermined number of shares at a predetermined price. If the shares are worth €40,000 at the time of exercise, the employee must pay income tax directly on the benefit according to current tax rules: 49.5%.

This can be a problem, especially with start-ups. Often, someone cannot sell the shares immediately after the options are converted to shares because the shares are not yet tradable. However, tax must be paid immediately. In short, it often happens that someone does not have enough money to cough up the tax immediately.

Startups and stock options

Especially start-up companies are ‘burdened’ by this tax rule. And while stock options are an excellent solution for this group of young companies: after all, there is still too little cash on hand to attract skilled employees with high salaries. But the current rules on the timing of taxation of stock option rights do not make it easy for start-ups. All this has made the Ministry of Finance think. Hence a proposal to relax the scheme for share options.

What changes

The proposal is that from 1 January you can choose when you pay the tax on share option rights:

  • The moment the options are converted into shares (current situation).
  • When the shares are negotiable (new situation).

The rationale for this change is clear: to prevent start-ups or their employees from getting into trouble when stock options are converted into shares. We will elaborate on both tax points below.

Option 1: Pay the tax immediately

This option is useful if you believe that the shares will increase strongly in value and if you have the money to pay off the tax immediately. Any increase in value is no longer taxed as salary after payment. This often means that you pay less tax in total.

Option 2: Pay transferability tax

You only pay the tax if you can trade the shares. You can then sell part of the shares so that you have money to pay this tax. The disadvantage of this option is that you have to pay more in tax when the value increases. See the example below. If a company is listed or listed on the stock exchange, the taxation of the shares can also be deferred for a maximum of 5 years.

Example of stock option rights

Jim, a talented programmer, goes to work for a start-up, New IT. He is paid part of his salary in a stock option of €10,000. The contract states that he may not sell the shares until two years after conversion of the options. After three years, Jim decides to convert the options into shares and pays the exercise price of €10,000. At that time the shares are worth €25,000. Jim has no cash in reserve, so he waits to pay the tax until the shares are tradable. The shares are tradable two years after conversion. The value has increased to €35,000. Jim then has to pay income tax on the benefit: €25,000.

Exercise of stock options

Are you planning to exercise your stock options and would rather not pay the tax right away? Then it is wise to wait until after 1 January 2022. Then you can immediately use the new scheme for share options.

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