One topic we get asked about regularly at Samira Advisors is how startups can incentivize employees early on.

At the beginning, cash is limited, salaries are often below market, but expectations are high. Offering employees a stake in the company can help bridge that gap. But what does that actually mean in practice, and do employees really benefit in the end?

Over the years, we have seen many different approaches across startups, growth companies, and transaction processes. In practice, most discussions usually come down to two structures: ESOP and VSOP.

 

ESOP: Attractive in theory, complex in practice

An Employee Stock Option Program (ESOP) is typically based on a pool of shares reserved for employees, often around 10 percent in early-stage companies. Employees receive options, meaning the right, but not the obligation, to acquire shares at a predefined price, known as the strike price.

In theory, this creates strong alignment because employees can become real shareholders and directly participate in exit proceeds. The strike price is usually below the price paid by investors in the latest funding round, allowing employees to benefit from future value creation.

In practice, however, real ESOP structures are still relatively rare in early-stage startups. From our experience advising founders and investors, the reasons are usually the same:

• Granting shares can trigger taxation at the time of grant, even though no liquidity is received, resulting in the well-known dry income issue
• An early valuation of the company is required, which adds complexity
• Legal implementation, especially in a GmbH, often requires notarial involvement

 

Because of these challenges, several European countries have introduced reforms in recent years to make employee participation more startup-friendly.

Germany, for example, expanded its tax deferral rules under the Future Financing Act, allowing employees in qualifying startups to defer taxation until a liquidity event under certain conditions. France has long been considered one of the leading European jurisdictions in this area through instruments such as BSPCE options, which offer comparatively attractive tax treatment and simpler implementation. The United Kingdom established EMI schemes years ago, which are now widely used across the startup ecosystem.

The overall direction is clear: Europe is trying to make employee participation easier, more attractive, and more competitive internationally.

Austria has also taken important steps in recent years. The introduction of the startup employee participation regime was a meaningful development for the local ecosystem. Under certain conditions, taxation can be deferred until the actual sale of the shares, and a significant portion of the proceeds can be taxed at the favorable 27.5 percent capital gains rate.

However, the framework still comes with conditions around company size, age, holding periods, and the type of participation granted. In practice, this means that every structure still needs to be assessed carefully on a case-by-case basis.

There are also structuring alternatives. One example is pooling via a Kommanditgesellschaft, which can simplify administration and potentially support more favorable tax treatment upon exit.

In addition, the introduction of the FlexCo created a more flexible corporate framework specifically designed to facilitate employee participation. Compared to a traditional GmbH, the FlexCo allows simplified share transfers in certain cases and introduces more flexible share classes that enable economic participation without granting full shareholder rights.

From what we currently see in the market, the FlexCo is becoming increasingly relevant for startups that want to structure employee participation more efficiently while remaining attractive for future investors.

That said, all of these structures still come with legal, tax, and operational complexity, particularly around structuring, valuation, and investor alignment.

 

VSOP: The market standard in many startups

Because of these challenges, many startups ultimately choose a Virtual Stock Option Program (VSOP).

A VSOP does not grant real shares. Instead, employees receive a contractual right to participate economically in:

• Exit proceeds, often referred to as phantom shares
• Increases in company value, known as stock appreciation rights

 

In practice, a VSOP tries to replicate the economics of an ESOP without transferring actual ownership.

This comes with several advantages:

• No dry income issue, as taxation usually only occurs once cash is actually received
• Simpler setup and administration
• No immediate transfer of shares or shareholder rights

 

But there are also trade-offs:

• Proceeds are generally taxed at income tax rates, which can be significantly higher than capital gains tax
• Employees are not actual shareholders, which can affect perceived ownership and long-term alignment
• The economic outcome depends heavily on the contractual terms

 

In our experience, this last point is often underestimated. Two VSOP programs can look very similar on paper while leading to very different economic outcomes in an exit scenario.

 

Vesting: Where participation actually becomes valuable

Both ESOPs and VSOPs usually include a vesting structure, which defines when employees actually earn their participation over time.

Typical market standards include:

• A four-year vesting period
• A one-year cliff
• Monthly or quarterly vesting after the cliff period

The cliff means that if an employee leaves within the first year, no participation is granted at all. After that, the participation gradually vests over time.

In an ESOP setup, each option is linked to a strike price, which defines the price employees would need to pay to acquire shares. The actual value for employees is therefore the difference between the exit price and the strike price.

Another important concept is accelerated vesting. In certain situations, such as a company sale, participation that has not yet vested can vest earlier than originally planned, allowing employees to participate more fully in the exit proceeds.

 

So what is the “right” solution?

From our perspective, there is no universal answer.

• In very early stages, real equity can be attractive but often difficult to implement efficiently
• In later stages, VSOPs usually offer more flexibility and simpler administration
• Structuring, taxation, and negotiation remain critical for both founders and employees

One point that is often overlooked is that ESOP pools are not static. In many cases, they are topped up in later funding rounds to ensure sufficient equity is available for future hires and retention. As a result, dilution over time becomes an important consideration for everyone involved.

At the same time, employee participation can be a highly effective incentive tool when structured and communicated properly. In some of the most successful companies we have seen, employee participation created very strong alignment across founders, management, and employees.

The key is transparency. Employees need to understand what they are receiving, how it evolves over time, and how it could translate into actual value in an exit scenario.

 

ESOP & VSOP: What employees actually get in practice

One of the most common questions we hear is simple: Does it really pay off?

The honest answer is that sometimes it does, but much less often than many people assume. That is exactly why structure and communication matter so much.

Across Europe, employee ownership is still materially lower than in the US. Index Ventures found that employees in European late-stage startups own around 10 percent on average, compared to around 20 percent in the US. Even more striking, roughly two-thirds of stock options in Europe are allocated to executives, while only one-third goes to employees below executive level.

In other words, employee participation exists, but the upside is often concentrated at the top.

There is also a surprisingly large knowledge gap. In a 2024 Sifted survey of European startup employees:

• 41.4 percent said they do not know what their options are worth
• 44.3 percent said their company had not explained how to exercise them
• Only 12.6 percent expected a life-changing payout

 

At the same time, almost 30 percent expected to receive little or nothing from their options.

So yes, meaningful outcomes absolutely happen, but they are far from guaranteed.

There are real European success stories. When Criteo listed on Nasdaq, at least 50 employees became millionaires overnight. TransferWise reportedly created 33 new millionaires through a secondary share sale, while many hundreds of employees and former employees participated in liquidity. At Taxfix, more than 40 current and former employees sold vested shares in a secondary transaction.

These examples show that employee participation can create meaningful wealth, but typically only in companies that either reach substantial scale or actively create liquidity opportunities through secondaries or exits.

The broader European exit environment also matters. PitchBook reported that European VC exit activity recovered in 2024, but much of the rebound was still concentrated in a relatively small number of large transactions. In practice, this means employee upside often depends on relatively few successful exits across the ecosystem.

This is also why option pool design matters from day one. Index Ventures notes that seed-stage ESOP pools in Europe are typically around 10 percent, with many companies operating in the 10 to 15 percent range. Unlike in the US, these pools often do not expand significantly over time, which can limit broad-based employee participation as companies scale.

 

So what is the takeaway?

Employee participation is not a magic instrument. It does not automatically create alignment, and it certainly does not automatically create wealth.

However, when participation is meaningful, clearly communicated, and supported by real liquidity paths, it can become an extremely powerful incentive tool. We have seen firsthand how well-structured participation programs can strengthen retention, improve alignment, and create a stronger ownership mentality within teams.

At the same time, poorly designed programs can create frustration rather than motivation, especially if employees do not fully understand the economics behind them.

The real lesson is simple: Equity only works if employees understand what they are receiving, under which conditions it vests, and whether there is a realistic path to liquidity.

Because in the end, the difference between a good ESOP story and a truly valuable employee participation program is simple: Whether employees actually see money when it counts.