Since the beginning of the year, after hard work on drafting the offering documents, roadshows and many hours of work, 19 companies went public through initial public offerings (IPOs) and, until this date, more than 30 are waiting to be analyzed by the Brazilian Securities and Exchange Commission (CVM) to go public. In this team formed by banks, auditors, lawyers and advisors, the executives of the companies occupy a prominent place with regard to the success of the IPO. The role of the executives in presenting the company and guiding the advisors throughout the process must be recognized by the companies. Another importante task is to ensure that they remain in the company and guarantee that the expectations of the IPO are fulfilled. In this respect the Stock Option comes into play.
In Brazil, although there is no specific legislation on Stock Option, they are used by companies as a form of long-term incentive for executives, by giving them the right to acquire, for a predetermined price, shares the company they work for or that are part of same economic group. This right may be exercised by complying with time or performance requirements, or even a combination of the two.
The venture capital market, which has been growing exponentially in Brazil, uses Stock Option Plans in amost all start-up companies. For these companies, which are still unable to pay the salaries of large corporations, stock options are an effective way to attract and retain talent.
In addition to Stock Options, there are other forms of incentives such as restricted stock units (commonly called RSUs), which are promises to grant shares to employees as long as certain requirements are met, and phantom shares, which do not entitle to the company’s shares, but rather to their appreciation.
Stock Options (or similar forms of incentives) have become a “must have” for any growing company, whether it is at the beginning of its trajectory or on the way to the stock exchange. More and more companies seek to structure long-term incentive plans for key executives, which can often be decisive for maintaining management.
A relevant impact on the implementation of stock option plans is tax. Depending on the approved plan and the characteristics of its implementation, the tax impact for the executive and for the company can be large (i.e., higher individual income tax and social security tax for the legal entity). Tax authorities have looked closely at these structures, especially when IPOs are successfully carried out and all information is made public.
The adoption of the stock option plan is an excellent alternative to align interests between the beneficiary and the shareholder; since it links the executive’s benefit to the company’s value, the direct influence of his work on the company’s results is evidenced, significantly impacting on the proportion of his dedication. But it is important to consider which is the best incentive structure to be used according to the characteristics of each company and the tax effects inherent to each plan.