Employee participation - what you need to know!

Employee participation - what you need to know!

What is the difference between "ESOP", "VSOP" and the "real" company participation? I'll explain all the relevant points.


    In the startup environment, the terms ESOP and VSOP are an integral part of employee share ownership. Only a few people are able to judge why these terms are used, what the difference is and why they are so strongly differentiated.

    Therefore, this article is intended to provide an initial rough definition and then discuss the individual forms step by step.

    So that you can have your say on these topics from now on and weigh up the advantages and disadvantages for your company, we will provide you with the most important information about the "ESOP", "VSOP" and the "real" employee share ownership.

    Behind the terms are various forms of employee share ownership, which play a decisive role, especially in the startup world.


    A rough distinction must be made between three forms of participation. A genuine participation in the company (straight equity), virtual participation (VSOP) and the granting of profit participation rights. The umbrella term - at least the author's - for all these forms of participation is ESOP, which stands for Employee Stock Ownership Plan. In practice, there is no general umbrella term for this, and ESOP is often chosen in order to relate to and distinguish it from VSOP.

    1. Straight Equity Participation

    Genuine participation refers to the direct participation of an employee in the company as a shareholder, with all rights and obligations, since the employee acquired these shares when the company was founded or received them as part of a subsequent Employee Stock Option Plan (ESOP) in order to avoid possible dry income taxation.

    When granting, it should be noted that this gives the employee shareholder rights, such as voting or say-on-pay rights, among other things, and that space at the table becomes tight because the cap table is full of shareholders.

    2. Virtual shareholding VSOP

    Predominantly (in 73% of cases - at least according to the German Startups Association), the Virtual Stock Ownership/Option Plan VSOP variant is used. 

    Virtual shares sound complicated at first, but the idea behind them is quite simple. The employee receives a claim under the law of obligations against the company in the event of certain events, such as an exit, to be treated in the same way as a shareholder. The advantage of this is that the employee has no voting rights, so the founders have control, and the employee does not have to pay tax on the shares he receives for his work if the VSOP program is structured accordingly.

    3. Silent partnership

    Another variant is the so-called silent partnership and the granting of profit participation rights. In this case, the employee has to make a contribution and then participates in the success of the company. He is referred to as "silent" because he does not appear to the outside world as an investor or shareholder. He also does not receive voting rights or similar. The management remains with you as the founder. 


    The background to these programs, some of which are complex, is the participation of employees directly in the success of the company without the disadvantages of (i) voting rights and loss of control and, above all, (ii) tax payments when shares are granted. These programs consist of several complex contracts and are governed by corporate law according to tax regulations and are subject to labor law as ABG. Therefore, it is important to get full advice in each individual case and to coordinate the programs individually. Within the framework of what is to be achieved as a result - depending on the employees and the stage of the company - the right form of participation also results.

    Here it is more true than ever: The thing determines the way it is presented. If you would like advice on this, you can make an appointment here.

    Foto von Daniel Donhauser

    About the author

    Attorney Daniel Donhauser advises with a focus on corporate law, employment law and tax law. His special focus is on the optimization and structuring of VC and M&A transactions. With his expertise in advising on company sales and investments, he helps founders to set up and prepare everything appropriately for financing or exit right from the start.

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