For any Startup that is looking to generate a relevant impact in its market, is fundamental to attract talents to boost the operation of the company and increase the chances of success of the business. This blog entry from Founder Institute can help you achieve this goal by giving some advices on how to craft an effective job description.

Now, after capturing the talent is necessary to keep it, so in this sense the Stock Options can be a crucial tool.

This instrument gives the workers of the company the possibility to purchase a portion of the equity of the business, at a time already agreed upon and at a preferential price (the price should be less than the market value of the share, since otherwise the recipient will not have interest in exercising their option). This chance of owning a portion of the company, and therefore the future benefits that will be generated, is meant to create motivation and a greater compromise in the worker, by aligning his interest with the ones of the company an making him a part of the project.

One possible way to define the Stock Option is like a “Contract that materializes a employees benefit program, whereby the employee gets the faculty of exercise an option to purchase, in a predetermines time, and at a preferred price also predetermines, shares of the company, with which it is directly or indirectly related through their employment contract.” (Translation of: Schmitz Vaccaro, Las Stock Options y su introducción en Chile, en Revista Chilena de Derecho, Vol. 29 N°3, pág. 558, Sección Estudios.)

In Chile these matters began to be regulated from the year 2000 (by the Norma de Carácter General Nº 99 from Superintendencia de Valores y Seguros), only in respect of “Corporations” (Sociedades Anónimas). Later modifications where included on the conrresponding law (Ley 18.046), where are series of rules have to be taken in account when doing operation with stock options offered to the company workers. Anyway there is no obstacle for a “Simplified Corporation” (Sociedad por Acciones) to agree in a similar benefits plan for their employees while statutes expressly recognize this faculty.

The workers that benefit from the benefits plan may be directly employed by the company issuing the shares or by one of its subsidiaries.

The implementation of a benefits plan can be carried out on three different opportunities:

Issuance of subscription pending shares at the moment of incorporation: Is common to leave a portion of the shares pending of subscription when creating the “Simplifies Corporation” (Sociedad por Acciones) to be acquired by the key employees that need to be hired in the short term. This portion often goes up to a 10% from the total of the company.

Capital Increase through issuance of new Shares: Another way of implement a benefits plan is at the moment of a capital increase through issuance of new shares pending of payment. Some investors will expressly ask for this to be done in order to invest in the company. Is necessary to have in mind that in the case of Corporations (Sociedades Anónimas) there is a set of rules established in the article 24 of the Law 18.046 that must be met. This rules state that the maximum percentage that can be offered to the workers is a 10% (it has exceptions), the options must be exercised before a certain time, among other conditions.

Repurchase of own shares: At last, the Company may repurchase share of it own emission (only public traded shares in the case of Public Corporations) aiming to be offered to its workers. Once again, if the company is a Corporation (Sociedad Anónima) there are special rules in the articles 27 to 27C of the Law 18.046 to be followed.

It’s important to notice briefly what are the implications of granting stock options to the workers from the point of view of the labor and tax law. In this sense, while the exercise of the option is pending for the worker, no legal effects will be generated. Then after exercising the option, the portion corresponding to the difference between the market value of the stock and the value actually paid, has to be considered as part of the salary, with all it legal effects. In the same way this will be considered as an income for the worker and so could be subject to the Tax established in the article 42 of the Income Tax Law (Ley de la Renta).

As you can see there are many legal implication related to the process of establishing a benefits plan for the worker through stock options, but in many cases this will be the most effective way to generate the right incentives to capture and retain the appreciated talent.

Santiago Henriquez, Lawyer

Picture: Alexandre Perotto (CC0)