In today's rapidly evolving world, both small and large companies are struggling to attract and retain employees with good skills and abilities. However, employees often leave their employers because the conditions they offer are not good enough. On the other hand, employers are unable to continuously raise salaries and find it difficult to find ways to retain good employees. In these circumstances, a vesting agreement can be of help.
Introduction
Vesting agreement is well-known and widely used in the United States, United Kingdom, and Germany. Although it was not legally regulated in Bulgaria until recently, the vesting agreement is also used here. However, with the new amendments to the Bulgarian Commercial Act, specifically the introduction of a new commercial entity (VCC), the vesting agreement is now regulated. The term does not have a legal definition in our country. The Bulgarian law refers to it as 'Agreement for Granting the Right to Acquire Shares'.
What is a vesting agreement?
"In short, a vesting agreement is a way for a company to retain and motivate its employees by offering them its own shares or stock under certain conditions. Typically, the vesting agreement (also called an 'option') is offered to high-performing employees. Its main idea is to strengthen the employer-employee relationship for a long period of time by adding a personal element. The employee doesn’t just diligently perform their work duties in exchange for a salary, but works with the idea of owning something of their own, so they can benefit from the company's higher financial results. This compensation system shifts the focus of employees from improving personal skills to contributing to the overall success of the company.
Who is the vesting agreement suitable for?
The option is an excellent opportunity for start-up companies that, at the time of their creation, do not offer very attractive conditions for their employees. With the vesting agreement, they ensure that employees will work hard for the building and expansion of the startup. Employees, in turn, invest more in their work because they are financially motivated through shares in the company and feel a sense of ownership.
The Bulgarian Commercial Act provides the possibility for a VCC (variable capital company) to enter into vesting agreements with both employees under employment contracts and individuals working for the company under civil contracts. The conditions and procedure for acquiring and exercising the option are typically determined by a decision of the general meeting. However, it is possible for the general meeting to authorize the board of directors or the manager to make these decisions. This authorization can last for a maximum period of 3 years.
In Bulgaria, the vesting agreement is concluded in writing between the company and the employee. The total number of shares acquired by employees cannot exceed 15% of the total shares in the company.
What are the types of vesting agreements?
The conditions of the vesting agreement are freely determined between the parties. A vesting period ("cliff"), goals to achieve, and installment plans may be included. Ideally, if all conditions are met, the employee acquires a share of the company. This share can be in the form of actual shares ("share options") or virtual shares.
Actual and virtual shares in the vesting agreement
Actual shares are often part of an Employee Stock Ownership Plan (ESOP). An ESOP allows employees to purchase real shares of the company at a fixed price at some point in the future. In this way, they become partners in their former employer, albeit with a modest percentage of shares.
In order to be more flexible, small start-up companies often prepare their own virtual options plan (Virtual Stock Option Plan/VSOP). The virtual shares are subject to the VSOP agreement. In this case, the owner or partners in the company keep their actual shares, but a certain percentage of virtual shares is granted to employees. They can only bring employees cash income, but no real shareholder rights. The virtual share only grants the right to receive profits or an increase in the value of the shares.
How are shares acquired under vesting agreements accounted for?
Vesting agreements are legally regulated only for VCC (variable capital company). At the end of the financial year, the board of directors, or the manager, of a VCC determines the number and value of shares acquired during the financial year. The management board, or the manager, presents the partners with the annual financial report for the respective year, along with a report on shares acquired by employees through vesting agreements. The report must include information on the number and value of acquired shares; the total number and value of shares that could be acquired under agreements granting the right to acquire shares, where rights have not been exercised or conditions have not been met; as well as the periods during which the rights under the active agreements can be exercised.
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