Hot topic on the agenda of Brazilian startups and established companies is the implementation of talent retention plans, through vesting contracts and stock options.
Because they were imported from the United States model (which has a different legal system from Brazil), talent retention plans in Brazil, and their vesting and stock option contracts, must be structured carefully, taking into account corporate aspects and contractual requirements, but specifically tax and labor requirements, so as not to generate relevant liabilities for companies.
See below 5 key points for companies that want to create talent retention plans and their vesting and stock options contracts in Brazil:
1. What is a Talent Retention Plan with Vesting and Stock Option? It is a program (like a bylaws) created by the startup or consolidated company containing terms and conditions so that employees can acquire, over time, the option to acquire equity interest in the company.
These programs define, among other points, (i) which employees/executives are eligible, (ii) the number of stock options to be granted, (iii) the “cliff” period (minimum initial period of stay at the company to be entitled to vesting), (iv) the vesting period (periods of time, after the cliff, that the employee may choose to acquire stocks in the company, (v) the acquisition price of the stocks, among others relevant provisions.
2. Employee Must Have the Right to Choose Whether or Not to Participate in the Plan: Talent retention plans with vesting and stock options in Brazil must give the beneficiary executive the option of whether or not to participate in it and, when they have met the requirements to have an option purchase of quotas/shares, whether or not to exercise such an option. The employee must be given the option to choose to participate or not, to buy or not;
3. Stock Option Onerosity and Risk Requirement: Upon satisfying the conditions of the retention plan and vesting contract, the beneficiary must effectively invest its own financial resources to acquire the stocks at a price based on an effective valuation metric (e.g. last funding round or other internal formula for valuing equity) or “market” (for publicly traded companies).
Furthermore, the beneficiary must be exposed to the same risks that a common partner of the company is also exposed to, such as uncertainty of future earnings. Onerosity and risk are fundamental requirements from a tax and labor perspective.
4. Observe the Customary Granting of Stock Options: From a Brazilian labor laws perspective, talent retention programs with vesting and stock options should not constitute a replacement for the employee/executive’s salary. Its habituality must consider the requirements of being optional, costly, containing risk, among others; It is
5. Be Careful With Setting Goals Linked to Vesting and Stock Option: Companies must establish the conditions required of their employees/executives to adhere to and benefit from their retention plans with vesting and stock options so that any goals are not confused with compensation for work and achievements made.
If necessary care is taken, talent retention programs with vesting and stock options are very efficient mechanisms for the HR area of startups and established companies.