On 27 February, SeedBlink together with Mavers Tax Advisers and Andronic x Partners organized the online webinar "Implement ESOP in your startup - how to build and execute in 3 easy steps. The event featured: Andrei Dudoiu, Managing Partner of SeedBlink, Andreea Cosmănescu, Managing Partner, Mavers Tax Advisers and Ana Maria Andronic, Partner of Andronic x Partners.

This event aimed to create an in-depth and personalized perspective on the implementation and management of an Employee Stock Ownership Plan - ESOP, adapted to the legal and tax specificities in Romania.

How to implement an ESOP in Romania?

An employee stock option plan is a program whereby founders can provide a way to allocate the purchase of employee stock from the company. This purchase is made at a discounted price, along with several conditions and a time in which it can be made.

The main purpose of ESOP is to increase the retention and motivation of key employees in a company.

Tax framework of the ESOP in Romania.

Employee Stock Ownership Plan in Romania is regulated in the 2017 tax legislation and starts from the basis of a plan.

The requirements of the ESOP from a financial perspective follow several points that ensure that the implementation of the program can run smoothly in all respects and can be classified into three areas.

• One of the requirements concerns eligible persons such as employees, administrators, and directors.
• A second requirement concerns a maturity period of 12 months from enrolment in the scheme until individuals become shareholders.
• The third requirement is the price, which must be a preferential, below-market price.

These are the important elements of the tax definition of ESOP in Romania, and from a tax point of view, we also have a substance over form clause. This means that regardless of the form in which the ESOP is set up, you must make sure that you also look at that transaction's substance.

Phantom stock option vs. real stock option.

There are two ways of implementing ESOPs in Romania and beyond, namely phantom stock option and real stock option models.

The difference between the two is that under the phantom ESOP model, the employee only receives financial benefits, while under the real ESOP system, the employee becomes a formal shareholder in the company.

Next, we go through what it means to implement a real stock option plan and what you need to know about it.

Tax efficiency.

From a tax point of view, the phantom ESOP is on par with an employee bonus and attracts a 43% tax.

With the real ESOP system, which is what Nimity wants to implement, we have significant tax efficiency. In terms of gross cash given to the employee, the efficiency is 2%, but the efficiency is visible in the net received by the employee.

This turns the income from employee income into investment income, and from a tax point of view, only 10% is paid on the "capital gain", which is paid at the time the shares are sold. Thus, tax efficiency ranges from a minimum of 25% to a maximum of 37%.

Tax obligations of participants and founders.

For Romanian LLCs, the ESOP program is easy but complex and has three significant moments that trigger or not certain obligations. These are:

• The grant - enrolment in the program.
• Vesting - maturing within the program.
• Exercise - the person becomes a shareholder or associate.

For participants, there are no tax liabilities between the Grant and Vesting, and these only arise on Exit or at the time of sale of shares. At that time, they file the Single Declaration reporting additional income by 25 May of the following year.

For founders, it depends on how the transaction is structured. If he buys back shares or stock from the participant, then he will have to have tax reporting formalities depending on the transaction price.

ESOP for third parties.

In Romania, there is a prevalent trend in the technology industry of granting shares to collaborators who can operate under various legal forms.

When you carry out a transaction with a third party, you must comply with several tax obligations. For that substance over form clause to be respected in this case, at least 4 of the 7 tax rules must be respected. Things can get complicated when the substance of the clause does not reflect reality and then the ESOP can be reclassified as a hypothetical tax audit.

It is recommended that third parties know what they can benefit from, and how things should be done so that the tax risk is very low, and when they are part of an ESOP they know how to report their taxes. The reporting arrangements are different depending on the legal form of the consultant.

Legal framework of ESOP in Romania.

The legal form and the necessary obligations have a simple form in Romania, and the thing that deserves the most attention from this point of view is the plan behind the ESOP.

Tax regulations require this option plan, so we must reach out to more eligible people. It has a flexible legal form and can be as simple or as busy as the company implementing it wants.

However, the document should not be seen as a legal document, but rather as a commercial one, a guide to help the company in implementing the ESOP further.

3 important elements for the ESOP plan.

Purpose.

It should reflect that we want to motivate or retain key people in the company.

Plan conditions.

This section includes issues such as the total number of shares offered, eligible persons, vesting conditions of the plan or other customised conditions desired by the company.

Duration.

This should state how long the plan lasts and when it expires or reaches completion.

How to legally protect your ESOP?

One of the important clauses you should include in your ESOP implementation plan is some clauses for the disposal of these shares. For example, what you can do with the shares once you have acquired them or to whom you can sell them.

The implementation of the ESOP is often left to the board and they set the conditions for its operation. Thus, when shares are granted, there must also be an approval of the general meeting - AGM, because new shares will be issued.

Implement ESOP in your startup.

ESOP Design is an all-in-one solution created for the first time in Romania for startups that want to integrate employee rewards through social shares or shares in their growth strategy. This program is developed in collaboration with Mavers Tax Advisory and Andronic x Partners.

This partnership aims to simplify the process of creating and managing Employee Stock Option Plans (ESOPs) for Romanian companies, providing founders with the tools and expertise needed to implement effective ESOPs tailored to the specific legal and tax environment in Romania.

What exactly does ESOP Design offer?

• Dedicated consultancy services with experts, advisors and tax experts;
• Full documentation for ESOP;
• Tax guidance and compliance;
• A platform for efficient program management for companies and employees.

The ESOP Design partnership aligns with SeedBlink's strategic commitment to promote the growth of share ownership in Romania and Europe. It also complements the financial services that SeedBlink and Nimity already offer.

Implement ESOP

Learn more about ESOP.

If you want to learn more about an employee stock option plan, how to align expectations and improve relationships with board members, and how to deliver stock in an effective way, read the SeedBlink blog.

We have prepared a series of guides and educational articles to help you every step of the way.

Also on SeedBlink you will find an easy-to-use platform to help you implement an ESOP, as well as manage your company's actions efficiently and effectively.