Among the Private Equity instruments, the Stock Option mechanism is one of the most efficient in the so-called managerial and employee incentives.
There are some companies whose main problem consists in the lack of collaboration of employees or even in the lack of interest of managers in carrying out management activities.
Through the tool of Stock Options, it is possible to incentivize the collaborators of a company to use the maximum commitment for greater productivity of the same company.
The vocabulary you need to know to start on the stock options will allow you to see more clearly.
What are Stock options?
Stock Option means the option right on the purchase of a certain number of shares that the company recognizes in the hands of its employees and/or managers.
Employees are allowed to purchase or assign to others, previously issued shares of the same company.
In doing so, employees become an integral part of the company also from an economic point of view, and, becoming shareholders, they will be more interested in its efficient functioning.
Greater commitment and productivity of employees will lead the company to have a greater market value, with consequent purchase of value of the related shares.
The incentive mechanism can be triggered at the time of choosing the event that will produce the possibility of exercising the right. Furthermore, the exercise of the right to purchase can be subject to the achievement of specific objectives.
Anyone interested in buying the shares will have an interest in being more productive right away, to quickly reach the set objectives.
Similarly, the share price is established at the time the purchase right is configured, based on the value of the company.
A productive and efficient company will have a greater market value and, consequently, the same employees will have a significant return in terms of shares.
The phases of the Stock Option plans
The objective of the Stock Option plans is to increase employee productivity by tying a part of their salary to the performance of the stock on the market.
This is an option right, so the employee/manager is free to choose whether to join it or not.
First of all, these occur in three phases:
- Granting: At this stage, the company has already decided that it wishes to guarantee the right to purchase shares to employees and/or managers at a predetermined time;
- Vesting: Intermediate time between the granting of the right and its effective exercise;
- Exercising: Exercising the option right;
If in the period between the first and the last phase there is an increase in the share value (determined by higher company productivity), the employee will have the advantage of buying the shares (of higher value) at their original price.
The real incentive of the employee, therefore, is the so-called capital gain that is produced at the time of purchase. The employee buys the shares at a much lower price than the real market value, which has increased thanks to his greater contribution to the company.
In any case, to make this instrument operational, the company must take action by arranging the shares available to employees, through the so-called Stock Option plans.
Preliminary phase and legal aspects
To give life to the so-called Stock Option plans, a preliminary phase must be carried out which also includes the intervention of the notary.
What occurs, when the Stock Option instrument is used, can be defined as the transfer of shares.
The shareholders, owners of the shares, decide to sell part of them to the company which, subsequently, they will employ within an incentive plan for employees.
This is possible through recourse to the notary, for the performance of two acts:
- Transfer of shares by shareholders to the company: with this operation, there is a consequent capital increase of the same company. In fact, with the sale of part of the shares by the shareholders to the company, there will be an increase in its capital and it will be necessary to carry it out in compliance with all the formalities prescribed by law. It is an act to be carried out preliminarily, at the time of drawing up the Stock Option plan;
- Distribution of shares to collaborators: following the exercise of one’s right, and therefore after having achieved certain objectives in terms of productivity or after a certain period has passed, the shares are distributed. It is a transfer that will occur later when the right is exercised.
As this is a particularly complex instrument, which recalls a series of legal, economic-financial, and fiscal disciplines, it is advisable to contact a professional who knows how to present the mechanism in all its facets.
As we have seen, this is not a simple transfer of shares to employees, but an increase in the company’s capital is required with recourse to the notary; moreover, the allocation of shares must also take place in compliance with the formalities prescribed by law.
Often a company is not very productive or competitive due to the lack of commitment used by the employees or by the managers themselves in business management.
This happens because they feel little involved in the functioning of the company and, consequently, are not interested in the real fate of the company.
Stock Options can represent the solution to this problem that occurs above all in numerous companies, far from family-run ones.
Thanks to the use of this tool, the employees themselves are allowed to become shareholders, acquiring a part of the company shares.
Employees are given a concrete reason to guarantee maximum commitment in carrying out their duties. Their maximum commitment will result in a greater market value of the company and, consequently, a greater value of the shares they can then hold.
In any case, we are dealing with a very complex tool since there are many aspects to consider.
First of all, legally speaking, it is necessary to carry out a series of acts that imply compliance with certain requirements and formalities.
Secondly, the economic aspect should also not be underestimated, since it is necessary to assess the distribution of shares by the shareholders to the company.
Finally, it is very important to carry out a preventive analysis also of the fiscal implications, given the various interventions on the subject.