How Dutch Founders Can Retain Their Key Talent: An Alternative To Shares

How Dutch Founders Can Retain Their Key Talent: An Alternative To Shares

21-Jul-2016 by Rick Schmitz

One of the biggest fears of startup founders is losing their key talent. Google, Facebook, LinkedIn, as well as many other tech companies, have struggled with the same challenge. Excellent software developers, magnificent marketing professionals and sales guru who close deal after deal, – they are all indispensable to the success of these companies.

How can Dutch founders retain the strongest performers and high potentials within their startups?

The rise of participation plans

Employees desire the best of everything – competitive salaries, comfortable and aspirational lifestyles, job security, career enhancement options, work-life balance, and so on. A competing salary and fringe benefits, such as a company car, iPhone and iPad are still great ways to attract employees. But to retain key talent there is definitely a trend visible towards rewarding those employees in the critical position with shares.

Have you wanted to include employees in your company’s growth, but don’t want to include them as shareholders? Perhaps a participation plan would meet your needs.

A participation plan allows employees to share in the future growth of your organization. There are no shares involved in a participation plan; rather, the employee is being rewarded a percentage of the profits. The voting rights can be brought into a Trust Foundation (in the Netherlands, Stichting administratiekantoor or STAK), of which you or your holding company is appointed as director. As a result, you keep 100% of the voting rights, while the employees can see their relative value increase as the value of the company increases.

The following figure shows the structure of a company with a participation plan for employees:

participation plan

Benefits of a participation plan

A few benefits of this structure:

  • The participations can be issued without a visit to the notary.
  • Any additional condition (such as a Good leaver / Bad leaver clause) can be included in the administrative terms of the STAK.
  • You keep the formal control over your company.
  • The employees will be more involved in your organization and you will give them an extra incentive to boost their performance.

Tax considerations participations

The tax treatment of participations can be really tricky. If participations are issued below “fair market value”, the Dutch tax authorities would qualify the issuance as part of the salary. Taxed to the max, as more than 50% of the value of the participations would go to the tax authorities.

In order to prevent this certificates must be purchased at fair market value. Most startup employees do not have a lot of cash, so they can get a (limited recourse) loan from the startup. No cash needed to circle around. Just paperwork.

If structured well, the participations are not considered as salary. After jumping this hurdle, the participations qualify as substantial interest or an investment. A substantial interest is present when an employee holds more than 5% in the nominal capital of the startup (via its participations). Dividends or exit proceeds are taxed at 25% (box 2 regime). When the employee holds less than 5% he is taxed at 1.2% (box 3 regime).

Conclusion

Retaining key talent through an employee participation plan is a good option. As a startup founder, you keep 100% of the control of your company and create a “natural” lock-in for talented employees. If the startup is a rising star, they would never leave despite better offers with higher salaries from other companies.

Tax-wise, there are some points of attention, but nothing to worry about when you have a tax lawyer taking care of this.

If you want to learn more about participation plans or in general the incorporation of a Dutch company like a BV or holding structure check our knowledge base.

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Rick is a Co-founder at FIRM24. He has over 6 years experience as a tax expert (PWC and Deloitte) in the area of ​​corporate tax, transfer tax and VAT, and supports Startupbootcamp Smart City & Living and E-commerce alumni based in Amsterdam with their finances.