Share options, which is a popular form of employee motivation in the West, also gain momentum in Lithuania as a result of tax concessions adopted a few years ago. This is noticed not only among start-ups but also among companies operating in other fields. Moreover, Lithuanian businesses are also looking for financial incentives related to share options, such as phantom shares.
The share option is a right to acquire a specific amount of the company’s shares after some time in the future at a pre-agreed price or free of charge. The employees who have this instrument are entitled to exercise their share options, i.e. to buy the shares after a specified period of time at the price fixed at the date when the options were received regardless of the prevailing market price or get them free of charge. Then, if the employee decides to sell the shares, significant earnings are recorded.
In recent years, one of the most famous examples of the benefits of options to employees was the situation of Elon Musk, CEO of Tesla, the manufacturer of electric cars. In 2012, he had been entitled to acquire 22 million shares in the company in the future at the price of USD 6.24 fixed at that time. Today, one Tesla’s share costs about USD 1,000, therefore, by exercising this right and immediately selling the shares Elon Musk would make billions in profit.
Today, one Tesla’s share costs about USD 1,000, therefore, by exercising this right and immediately selling the shares Elon Musk would make billions in profit.
The employer may provide that the granting and implementation of share options would be subject to certain goals, such as performance indicators or sales results. In other words, the employee will have a right to use his/her share options when the set goals and agreed indicators are met.
Some companies choose to offer share options to the key employees ensuring that the company’s strategy is executed by the team that has a long-standing history with the company while others offer share options to all employees. The common goal of both parties of the share options agreement is to motivate the employee to take a long-term approach, thus increasing the value of the employer as the company, and aligning the interests of the parties. Share options are of personal nature and are inseparably related to the employee as the member of the particular company. The company wants to have longer working relations, therefore, usually an essential condition is to set a long period after which the employees can exercise their right to acquire shares in the company.
It already works well in Lithuania
Among the most outstanding examples of the application of options is Vinted, one of the most successful Lithuanian start-ups, whose employees are motivated by the company’s options. According to Dominyka Mukha, the head of the company’s financial operations, share options are one of the factors contributing to the loyalty of employees.
“Options are an extension of our company’s culture and a generous way to reward employees for their contribution to the company’s growth. Some of our employees have been working for Vinted for 10 years already, which shows that our efforts in loyalty are effective,” says Dominyka Mukha.
Rokas Medonis, the head of CarVertical which also has options, agrees with her. According to him, when the new regulation of options entered into force in 2020, most of the employees at that time were awarded with three-year option agreements.
“Options as the instrument work very well. We also have the option plan for several new employees who join our company. We have noticed that upon placement of the options plan some employees have started looking at the company from a very long-term rather than short-term perspective,” says Rokas Medonis.
He says that the rules of the options of CarVertical are based on the provision that the options agreement must be kept for free years and only then it is converted into shares.
“We have noticed that at the time of the annual evaluations when the remuneration is revalued, the employees ask for an additional options agreement instead of raising the salary. We believe that this plan makes our employees look at the company and the benefits brought by the positions they hold only from a long-term perspective,” states Rokas Medonis.
Lithuanian start-ups have attracted more than EUR 420 million in investments this year, and, according to Inga Langaitė, the head of Vienaragiai LT, the association which unites start-ups, Lithuania should not stop and should continue to improve the legal framework to facilitate the attraction and maintenance of talents.
“To develop and implement innovative ideas, start-ups need top-class professionals, but they often don’t have resources for competitive salaries at the initial stages of their activities. There is a huge shortage of IT specialists in Lithuania and their salaries are as high as never before, therefore share options are one of the ways to attract the right people. At the same time, it is like a motivational instrument – the better the start-up does, the higher return to the employees is,” says Inga Langaitė.
The ecosystem of Lithuanian start-ups is growing and expanding faster than ever: Lithuanian start-ups have attracted more than EUR 420 million in investments within the first nine months of this year. Thus, according to Inga Langaitė, the issues of legal regulation of share options become more and more sensitive.
The ecosystem of Lithuanian start-ups is growing and expanding faster than ever: Lithuanian start-ups have attracted more than EUR 420 million in investments within the first nine months of this year
“The situation is already quite good in the taxation of employee options, but their granting is problematic to start-ups as the share granting plan applicable in Lithuania is more suitable for grown-up, listed companies. In general, currently, the Lithuanian law does not explicitly state or determine the nature of the agreement of share options and other options,” notes the head of Vienaragiai LT.
Not only for start-ups
Andrius Francas, the partner of Alliance for Recruitment which provides the services of human resources, notes that the options in Lithuania have increased since 2020 as the corresponding tax changes occurred.
We see that IT companies, especially young ones, try to attract more experienced professionals by motivating them with the share options and, in some cases, by paying them a lower than the market salary. We have noticed that the employees are not afraid to take risks and join young start-ups. If we take mature organisations, the shareholders and owners of the companies are not willing to manoeuvre options freely. The main reason for this is that there are no different types of shares in Lithuania. In Scandinavia, especially Sweden, there are several types of shares, where type A shares provide one kind of benefits to shareholders, while type B shares provide different ones. More often the employees get the shares that do not grant the right to vote in the form of options. I believe that classification of shares would help to achieve even greater development of options,” says Andrius Francas.
Loreta Andziulytė, the lawyer and partner of the law firm ECOVIS ProventusLaw, also agrees that this method of employee encouragement is increasingly chosen by the Lithuanian companies as well.
“Although options as a means of encouragement are especially popular abroad, several successful Lithuanian companies apply them or get interested in such possibility. Foreign equity companies are more active so far and this is probably because options in other states have already become a popular instrument for motivating or attracting employees. Lithuanian companies can learn from the success stories and apply the most appropriate method of share options in their activities. We also have such examples among our FinTech clients, who, first of all, choose options to encourage employees who work longer or hold higher positions. Options mean that the employees must be “allowed” to manage and grow the company – for some it is an advantage, but, for this reason, others are skeptical about the options”, says the lawyer Loreta Andziulytė.
“Although options as a means of encouragement are especially popular abroad, several successful Lithuanian companies apply them or get interested in such possibility. Foreign equity companies are more active so far and this is probably because options in other states have already become a popular instrument for motivating or attracting employees”, says the lawyer Loreta Andziulytė.
According to her, options are an excellent instrument to align the interests of founders, management teams, and employees and for everyone to have a collective investment in the company’s future. She also draws attention to a related form – phantom shares that are increasingly discovered in Lithuania.
“The alternative to the share options are so-called phantom shares where the actual shares in the company are not granted but the cash bonus provided to the employee is linked to a change in the value of the company. This encourages the employee to become involved in the growth of the company’s value, but he doesn’t become a shareholder of the company.”, says Loreta Andziulytė.
According to the lawyer, applicable taxes are an important aspect in granting of the share options. The general rule is that if the shares are granted to the employee based on the share option, the difference between the fair market value of the shares and the price paid by the employee for the shares may be subject to taxes. In such cases, personal income tax and social security contributions are applied.
However, certain tax concessions are applied in Lithuania to facilitate the conditions for start-ups and the whole business. The tax concession applicable to the share options is applied to personal income tax and social security contributions if, upon fulfillment of the share option, the shares are granted to the employee at least 3 years later. The share options have been subject to the above concession applicable to the social security contributions. Meanwhile, the concession of personal income tax is rather new and is applicable if the share options agreement is concluded after 1 February 2020.
The lawyer also notes that the capital gain which the employee derives from the sale of the acquired shares is subject to the personal income tax.
“Currently, the procedure for granting share options and concluding such agreements is not regulated in the Lithuanian legal system. Therefore, to have more detailed regulations in this area, amendments to the Law on Companies are proposed. We also support further initiatives which would make Lithuania more attractive for high added-value activities and professionals,” concludes Loreta Andziulytė.
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