A Virtual Share Option Scheme, in short VSOP, is a model for the virtual participation of employees, founders or consultants in a company’s financial success.
The beneficiaries do not receive any actual shares in the company. Instead, it is contractually agreed that, upon the occurrence of certain events, they will receive a financial payment, the amount of which is based on the company’s performance.
Typical payout events include:
- the sale of the company
- the sale of a significant stake in the company
- an initial public offering
- in some cases, other contractually defined liquidity events as well
A VSOP replicates the financial benefits of a genuine shareholding without the beneficiary employees becoming shareholders directly.
How does a VSOP work?
The company establishes a virtual share pool and allocates a specific number of virtual shares or options to individual employees.
A simplified example:
| Key figure | Example |
| Virtual participation by an employee | 0,5 % |
| Enterprise value taken into account at exit | €20 million |
| Simplified notional share | 100.000 € |
The actual payout may differ from this. For example, a specified underlying asset, certain costs, investors’ priority claims or other contractual provisions are often taken into account.
Typical components of a VSOP are:
| component | Meaning |
| Virtual participation | Specifies the extent to which a person has a financial interest. |
| Vesting | The participation rights are acquired gradually over a specified period. |
| Cliff | The minimum period after which shareholding rights first arise. |
| Payout event | Defines when a payment claim is triggered. |
| Base price or strike price | Determines the enterprise value at which the investment becomes economically viable. |
| Leaver scheme | Sets out the procedures to be followed when a person leaves the company. |
| Calculation formula | Specifies how the actual payout is calculated. |
What are the benefits of a VSOP?
For start-ups, a VSOP can offer a number of advantages:
- Employees will share in the company’s future success.
- Talented individuals can be recruited despite limited financial resources.
- This helps to retain key team members in the long term.
- There is no need to transfer any actual shares at this stage.
- The existing shareholder structure remains legally simpler.
- Motivation can be boosted by a shared economic outlook.
A VSOP can also be attractive to employees, as they can benefit financially from the company’s success without having to invest any capital themselves.
What are the disadvantages and risks?
A VSOP is not a genuine equity interest in a company. Beneficiaries do not usually have voting rights, rights to information or direct entitlements to profit distributions.
Other potential challenges include:
- Payouts are often only made upon the occurrence of a defined exit event.
- There is no guarantee that the sale of a business will be successful.
- Calculating the payout can be complex.
- Upon leaving the company, entitlements may be forfeited in part or in full.
- Subsequent funding rounds may affect the economic value of the virtual shareholding.
- Payments may place a significant strain on the company’s cash flow.
- The legal and tax implications must be carefully assessed.
Whilst VSOPs do prevent the direct transfer of actual company shares, from a financial perspective, the subsequent payouts may reduce the proceeds received by existing shareholders. For this reason, the virtual share pool should be taken into account as early as the financing and exit planning stages.
What is the difference between a VSOP and an ESOP?
| VSOP | ESOP |
| virtual participation rights | actual shares or options on actual shares |
| no direct shareholder status | potential future status as a shareholder |
| generally no voting rights | voting or participation rights, depending on the structure |
| usually a contractual claim for payment | actual stake in the company is possible |
| often easier to manage | usually more complex from a company law perspective |
Which model is more suitable depends on the company’s structure, its financing strategy and the objectives of the share scheme.
What should be clearly set out in a VSOP?
Before implementation, start-ups should, in particular, answer the following questions:
- Who is eligible to take part in the VSOP?
- How large is the total virtual share pool?
- How many virtual shares does each person receive?
- How long does the vesting period last?
- Is there a cliff?
- What events trigger a payout?
- How exactly is the payout calculated?
- What happens in the event of dismissal, illness or voluntary resignation?
- What impact do new funding rounds and share dilution have?
- What are the tax implications for the company and its employees?
A common mistake is simply to promise a percentage without explaining the exact calculation or the conditions for a subsequent payout. It should be clear to employees that virtual shares have no guaranteed monetary value and that any payout depends on the company’s future performance.
innoWerft helps founders to assess different employee share ownership models, understand their implications for the team, the cap table and future funding rounds, and develop suitable incentive structures to support the company’s growth. The specific wording of contracts, as well as the legal and tax implications, should also be reviewed by qualified legal and tax advisers.