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The Employee Equity Handbook

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Researched and Written by Founder CEO of Ekwity Florent Artaud Book Design and Images by Designer Sophie Louise Hurley Walker

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CONTENTS Contents 1 Introduction 5 12 2 Glossary 13 17 3 The Startup Ecosystem 18 28 4 The Stock Options Journey in 10 Questions 29 42 5 Case Studies 43 49 6 Takeaways 50 60 7 Thank you EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 4 61 65

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1 INTRODUCTION EKWITY EKWITY SAS SAS 2019 2019 1 INTRODUCTION THE EMPLOYEE EQUITY HANDBOOK 5

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1 INTRODUCTION What Who Why What is this guide for This Ekwity guide will help European basic knowledge on how startups are entrepreneurs and startup employees financed through handy infographics understand what employee ownership clear actually means and how to implement testimonials that help you concretely it We hope to participate in building understand how employee ownership a stronger and more resilient startup works ecosystem thanks to explanations and real life education and better sharing of created value But don t get us wrong There are many Furthermore we hope that employee differences and nuances depending ownership will show its full potential on where you are based In Europe by entrepreneurs the company culture you are building and investors who come through the nourishing new or working within will vary as will the pipeline of successful European tech discussions an entrepreneur has with giants investors and other partners No two companies are the same just as no two This guide is intended to demystify and entrepreneurs are the same clearly explain the complicated world of employee including All the content you will find here is the jargon and loopholes that make based on our own experiences and it so intimidating It aims to give the views at Ekwity EKWITY SAS 2019 ownership THE EMPLOYEE EQUITY HANDBOOK 6

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1 INTRODUCTION Who is this guide for 1 This guide is dedicated to all the The culture and mission of the company entrepreneurs and startup employees out there All the content you will find 2 Employee ownership Equity is a here is based on 100 interviews with powerful tool to engage people European for the long run entrepreneurs VCs and other experts We have collaborated with tier 1 VCs such as The Family At Ekwity we believe that sharing the daphni Partech Dominic Jacquesson capital of a company with employees and have the support of 30 European and educating them on the sometimes companies from pre seed to series D hidden economic and social aspects of entrepreneurship is essential for a Creating a company from scratch requires ambition vision and virtuous and sustainable ecosystem a You need to know how companies are great team Most of the people we financed and governed and by whom interviewed agree that startups have two secret weapons for building their dream team EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 7

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1 INTRODUCTION Why do you need this guide Behind every great human achievement making something real isn t about is a story of collective work The administrative best entrepreneurs know that heroic equity doesn t mean anything for leadership is not enough It s their employees so long as entrepreneurs teams that turn the dream into reality don t make them truly understand paperwork Sharing what it is You need the tools to explain Equity is not just non cash how equity might be a win win for compensation It is a potential game everyone changer for individual members of a company Think about the first Every employee can have a long term employees at Google Uber or Netflix commitment to the company There rewarded for their loyalty and work isn t a category of employees that with a big payday More than enough don t matter every employee is part to start a new company or take endless of the project and if the company holidays In reality most startups fail succeeds should get their fair share as startups are risky by nature But in that success They invest their time the expectation of benefiting from a ideas and passion which can mean tremendous upside is a formidable much more than any cash investment motivator Equity is a unique tool to engage people for the long run and building a However getting someone to join company takes a really long run the dream team before it is much of anything is not an easy game So let s get into the rules of the Every great entrepreneur knows that game EKWITY HIGHSCORE 02452710174 EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 8

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1 INTRODUCTION Preface Nicolas Colin Co Founder Director of The Family For the European startup community Thus the situation in Europe is radically employee equity is only beginning to different from that in Silicon Valley be considered seriously We in Europe There a startup that reaches escape haven t yet built a first generation of velocity can allocate employee equity immensely successful tech companies so as to hire the best talent they can and so very few Europeans have find Since that startup is entering gotten rich thanks to employee equity the phase of exponential growth being part of that growth means that Sure we have mechanisms to allocate stock options could turn into millions equity to employees But because of dollars as the valuation grows those rarely translate into sizeable accordingly amounts of money nobody really cares about them neither the founders who Indeed the reason why employee are unable to make an equity argument equity is so important in startups is to attract talent nor the employees because those organizations unlike themselves who don t really consider traditional businesses are driven by equity when they decide what startup increasing returns to scale In traditional they ll join companies allocating shares to employees doesn t really translate into EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 9

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1 INTRODUCTION those employees making fortunes the Fortunately many are working on it growth of the company will be linear Our friends at Index Ventures have at best rather than exponential But launched a vast long term effort so as for a tech company success means a to make it easier to reward European very big success with a high valuation talent with stock options you can learn that can turn into substantive rewards more by visiting notoptional eu And for employees we at The Family have been partnering with Florent Artaud to launch Ekwity Promoting employee equity is a critical a company specialized in assisting step in the global war for talent Today founders who want to share value with there is no such thing as a single their team European market for talent because Europe is so fragmented by language This guide is the result of great team and culture And even if talent was work with Florent I am certain that it moving around it s incredibly difficult will help move things forward and I to manage employee equity at a definitely hope you ll enjoy making use pan European level The rules are of it whether as a founder an employee different from one country to another a venture capitalist or a policymaker It is a headache for both companies Europe s fate in the global digital which spend a lot on compliance and economy depends on our collective employees who can be taxed at rates effort that can rise to 60 and beyond EKWITY EKWITY SAS SAS 2019 2019 THE EMPLOYEE EQUITY HANDBOOK 10

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1 INTRODUCTION Ekwity Manifesto Sharing created value with employees is the key to a virtuous and sustainable entrepreneurial ecosystem There s more to a startup story than just brilliant ideas visionary founders and record breaking funding rounds The ability to attract the very best talents to motivate them and to keep them at your side often draws the thin line between success and failure There are people working hard at your company everyday building the best possible user experience making sure every line of code is perfect and holding your infrastructure together These are the people who truly generate value alongside entrepreneurs Startup employees belong to a particular species They are risk takers No secret here if you re looking for a stable well paying job you d better look somewhere else and join a more mature company Those who join a startup make the choice of taking on an intense and demanding job And without them no risky venture would ever succeed in achieving its goals High risk demands high return there s no way around that Startup employees should thus have skin in the game But how to give them fair compensation for the risk taken and their contribution Employee ownership is one of the answers as it is a core part of the compensation package in such companies Employee equity schemes have been around for quite some time in countries equipped with a solid startup ecosystem In the US and Israel for example yesterday s unicorn employees are tomorrow s investors startup founders and CEOs in no small part thanks to the equity prize they signed on to chase For many reasons Europe and France are now betting their economic futures on startups Yet somehow we Europeans are still stuck in an age of ignorance We celebrate funding rounds but pay little attention to how capital is being put to work The million or billion dollar question is not only how much but to whom Capital structure is the bedrock which makes it possible for highly successful companies to EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 11

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1 INTRODUCTION generate long term value Once we Europeans understand that we will be able to bring our startup ecosystem to the next level The ball is mostly in our court but we aren t quite prepared to grab it Employee equity schemes are a matter of precision They are not something that can be improvised especially not in a startup where time is a scarce resource They re not a simple matter of equity either Above all they are a matter of pragmatism Sharing value through stock or any other means available is key to making your employees part of the adventure It is key to better aligning the interests of every stakeholder within your company This is how Europe and France will eventually emerge as lands of opportunity for entrepreneurs and employees all around the world At Ekwity that is our strongest belief A belief we want to share with you EKWITY EKWITY SAS SAS 2019 2019 THE EMPLOYEE EQUITY HANDBOOK 12

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2 GLOSSARY EKWITY SAS 2019 2 GLOSSARY THE EMPLOYEE EQUITY HANDBOOK 13

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2 GLOSSARY Your Startup Glossary Startup language can be complicated and intimidating Here are the main terms that you should have in mind while reading this guide or working at a startup Our icons are here to help you to remember them Shareholders Founder s Employees Anyone that holds at least one share of the company Person s who comes up with the idea and the vision and starts the company The greatest asset having a specific working relationship with the company As opposed to freelancers and contractors who also create value Business Angels Person who invests as an individual rather than as a professional in companies EKWITY SAS 2019 Friends Family Love Money Venture Capitalists Funds VCs People who invest in the very early stages of the idea and care more about the Founders than the project itself Professionals investing in and advising private companies by purchasing shares in companies THE EMPLOYEE EQUITY HANDBOOK 14 Corporate Funds Organisation owned by a big company doing the same job as VCs but for different reasons such as acquiring intellectual property rights or know how of an innovative company

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2 GLOSSARY Share Capital of the company Financial Stages Employee Option Pool Sum of the individual shares issued in the company or the overall pie Companies fundraising rounds according to their maturity and development stage Percentage of the capital reserved for the employees Stock options EMIs Capital gain Dilution Options BSPCE EMIs etc that give you the right but not the obligation to purchase a certain number of shares at a fixed price Stock options with a tax advantage scheme attached called Enterprise Management Incentives limited to the UK The profit you can earn when selling shares of the company at a higher price than the price at which you bought them The result of a reduction in ownership percentage of the company for present shareholders due to the issuance of new shares The share capital is divided into smaller pieces EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 15

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2 GLOSSARY FMV FDE ESOP Cap table Fair Market Value reflects the price agreed during a transfer of shares of the company or based on an accurate valuation or assessment made by financial professional auditors Fully Diluted Equity means the total number of shares already issued plus the shares that could be issued through the exercise or conversion of options warrants or other instruments Employee Stock Options Plan set up by the company defining the terms and conditions of the stock option grants A list recording all of the company s shareholders with the number of shares class and percentage of shares or options they hold Cliff The Vesting Schedule Non vesting period after the options have been granted in practice part of the 4 years of vesting You then earn part of the options usually 25 of the grant and the remaining vesting period starts EKWITY SAS 2019 Stock option grants are subject to certain conditions you most likely need to stay in the company for a certain period of time usually 4 years to own all of them Granting Date Strike price The date you receive the stock options and sign all the contracts which is usually once you have passed your probationary period The price at which an option can be exercised In other words the price you must pay to buy a share It is usually based on the last valuation of the company and fixed at the granting date THE EMPLOYEE EQUITY HANDBOOK 16

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2 GLOSSARY Pre money Valuation Post money valuation Company s valuation before fundraising This represents the amount at which investors are willing to buy shares of the company at this Company s valuation after a fundraising premoney valuation total amount of new funding raised time Carve out Contractual provisions establishing that a certain amount of the proceeds from a sale will be distributed first to certain persons founders some employees etc before preferred stock liquidation preferences EKWITY SAS 2019 Waterfall or Liquidation Preferences After the exit of the company sale or IPO it s last in first out for the shareholders Preferred Shares Common Shares Shares of the company with special rights attached like financial ones with liquidation preferences e g You are paid first in an exit Shares of the company without special rights attached only standards like financial dividends and politics vote information etc THE EMPLOYEE EQUITY HANDBOOK 17 Exit Way of cashing in an investment usually through an initial public offering IPO or a trade sale of the company to a larger player in the industry Also referred to as a liquidity event

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3 THE STARTUP ECOSYSTEM 3 THE STARTUP ECOSYSTEM EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 18

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3 THE STARTUP ECOSYSTEM Basic Financial Knowledge Prior to further explaining how equity incentives work we d like to give you an overview of the 4 basic pieces of knowledge needed to master the financial basics of the startup ecosystem The Share Capital of a Company The capital of a company is essentially composed of people individuals or companies holding a stock or an option the shareholders and stakeholders The capital is the motherboard of a company as it is the basis of 2 strategic components 1 Economic value this refers to the resources created by these stakeholders or the business s activity reflecting the economic value of the corporation 2 Governance this provides the rules through various contracts by laws shareholders agreement etc and connects all these shareholders and people holding options together by establishing how the company is governed and how economic value is distributed EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 19

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3 THE STARTUP ECOSYSTEM The Value of a Share A company s worth or its total value is called its market capitalization or market cap It is represented by the company s stock price multiplied by the number of shares and options held by its shareholders Although it is often used to describe a company market cap does not measure the objective equity value of a company Indeed the enterprise value could be more accurate That s the price if a company were to be bought Plus only a thorough analysis of a company s qualitative founding team governance etc and quantitative financial economic etc information can do that Market cap cannot fully value a company because the market price on which it is based does not necessarily reflect how much any given piece of the business is worth Shares are often over or undervalued by the market meaning the market price is simply how much the market is willing to pay for shares EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 20

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3 THE STARTUP ECOSYSTEM Private Companies A private company is a firm held under private ownership Private companies may issue stock and have shareholders but their shares do not trade on public exchanges In general the shares of these businesses are less liquid less able to be quickly converted into cash and their valuations are more difficult to determine mainly due to the lack of available accurate information on the market Moreover companies now tend to stay private longer and longer for a multitude of reasons At Ekwity we share the feeling that private could be the new public in the future EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 21

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3 THE STARTUP ECOSYSTEM Public Companies A public company is a company that has issued securities through an IPO and trades its stock on at least one stock exchange or over the counter market It is not a company owned by the state but one that allows anyone to buy and sell their shares through a market Although a small percentage of shares are initially floated to the public daily trading in the market determines the value of the entire company by the mechanism of supply and demand for its shares in the market It is considered to be public since shareholders who become equity owners of the company may be composed of any member of the public who purchases stock in the firm EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 22

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3 THE STARTUP ECOSYSTEM Introduction to Funding Rounds The Financial Cycle For a company to develop from funding developing their Minimum something virtual an idea to Viable Product MVP with just something concrete a business it enough features to satisfy early needs funding at different stages or customers and gather feedback rounds as it grows We call this The for future product development Financial Cycle This cycle begins when one or more person s the Seed Stage Stage at which Founders come up with an idea that startups have monthly revenue needs to be financed A company s and a growing business but need lifecycle may not be linear but it further funding to build a team usually starts with the people closest improve the product and find true to you friends and family and should product market fit to become extend further a new incumbent in its market investors as the company grows i e proportionally to People investing at this stage are for further growth you need further usually friends and family business investments angels angel groups or some specialised VCs The funding and development stages of a startup have some patterns that Early Stage Early stages refer the ecosystem relies on as it tries to to rounds of funding needed for take further development Series A is into account entrepreneurial hazards used to build a bigger team with better expertise in the business Following that logic companies go and improve the product features through different stages of funding Series B to expand the business and maturity from the concept to the internationally and continue to final exit build a better product and team All Pre Seed or Stage which at Concept of following funding rounds are mainly made by VCs entrepreneurs syndicates of business angels begin to develop the idea and and or corporate funds initiate the project before any EKWITY SAS 2019 the Stage THE EMPLOYEE EQUITY HANDBOOK 23

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3 THE STARTUP ECOSYSTEM Growth Stage This refers to new Exit Stage Emerging companies funding rounds needed to further like grow the business while looking for monetize profitability and or a larger piece through its capital during an exit of the market and are termed The exit could be made by selling Series C D etc These could the company or going public In include VCs corporate funds and either case any persons holding other professional investors The a piece of the company like company could also raise some entrepreneurs investors BA VCs money from existing investors etc and employees would be doing what is called a bridge to entitled to sell their shares subject help them get to the last stage to various conditions depending tech companies the value usually created on the form of the exit People should be rewarded according to the value they create and the risks they take This seemingly straightforward task is in fact very difficult to achieve Different people contribute in different ways to the company s value creation The trick is to reach the fairest value iteratively through the free exchange of information and people between companies and the market environment until equilibrium is reached Said another way the least imperfect value is market compensation But if that trick works very well for salary it s not the case for stock options Information is harder to get and leverage since uncertainty and feedback loops increase radically so the market is much more inefficient In that sense whereas most companies can design their package easily thanks to market practices relying almost entirely on salary it s harder for startups which don t have enough cash on hand and need to use stock options The shareholders should have two important principles in mind when they tackle this challenge and design their stop option plan stock options should 1 Cover the downside by repaying the opportunity costs taken by founders and employees who often accepted a discount on their salary and took a bigger risk 2 Ensure huge rewards and thus create an incentive in case of massive success since founders and early employees never get rich with salary they get rich through capital Willy Braun Co founder of daphni EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 24

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THE FINANCIAL CYCLE From Pre Seed to Exit 3 THE STARTUP ECOSYSTEM 10 100k PRE SEED 1 000 000 500k 2M SEED 6 000 000 5 10M SERIES A 20 000 000 10M SERIES B C 3 42 50 000 000 50M 1B EXIT 3 3 23 500 000 000 Companies fundraising rounds according to their maturity and development stage Pre Seed VCs used to build and improve the product hire employees and develop the business used for various reasons such as international expansion hiring experts buying other companies etc Series A Exit Sale or IPO the company goes Money from friends and family used Money from VCs a group of public also referred to as the moment to begin the project and build an Business Angels and or Corporate when shareholders get their Funds used to scale customer initial product investments back and more in the acquisition team and revenues THE EMPLOYEE EQUITY best caseHANDBOOK scenario EKWITY SAS 2019 25 Company Value The worth of a business or its market value depending on its business activity turnover assets Money raised B C FINANCING STAGES Money from Business Angels and or Series Other rounds of funding Seed Funds invested in the company by the shareholders in return for a part of the company s capital

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3 THE STARTUP ECOSYSTEM Startup Employee Compensation Salary vs Capital Some people are attracted to the employees as much as traditional startup lifestyle because they want to companies would But since they have work in an innovative environment the high growth potential they can adjust mission of the company or the team the salary more over time Moreover Whatever the reason they should be owning a piece of the company could looking to have a bigger impact than be worth a lot in the coming years in a traditional company or nothing never forget the risk likelihood of the outcome being zero In Europe especially in less mature ecosystems the working That very real potential is why most in a startup is also associated with startups give equity to their employees common stereotypes like having a on top of their salary That way they ping pong table at the office no dress can compete with big companies code and no hierarchy But such myths to attract and engage talent As an even if they are not completely wrong employee getting equity can be a should be balanced with a practical great deal but you must understand understanding how it differs from your salary Equity To idea put of it simply working in a startup is pretty risky and cannot replace salary you need to work super hard Here we ll be considering only the financial Salary is simple reliable and recurrent aspects You get paid in cash every month hopefully That is quite convenient A startup is a young company that is since after all you need to pay your looking for a scalable and profitable rent and buy groceries Equity stock business options BSPCE free shares RSU model Without steady revenues most startups cannot pay EKWITY SAS 2019 EMIs can t pay for those things THE EMPLOYEE EQUITY HANDBOOK 26

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3 THE STARTUP ECOSYSTEM Here are the main differences between salary and equity Liquid vs Illiquid For private companies i e most startups it is only possible to sell the shares of Concrete Payday vs Unclear the company if you have someone Payday You receive your salary in else who is keen to buy them This your bank account every month is typically when the company is Equity is granted through complex sold or goes public via an IPO and legal instruments stock options less commonly via a secondary BSPCE free shares RSU EMIs sale with documents that you sign but might not really understand That is why in most countries the law requires that every employee always Short term vs Long term Salary gets a salary Even if most founders is worth its exact value as soon are unpaid for the first months of their as you get it Equity only has its venture they always end up getting a value set by the market private salary when the company raises funds or public and is worth something Nobody can rely on equity to pay their only if the business grows which bills but still equity can be a game does not happen overnight changer Certain vs Uncertain Once Even with a high salary it will take granted salary is yours and has a years or decades to become rich from fixed value Equity is riskier since those monthly payments That is why the value depends on the results equity is worth the risk having 0 1 of your company Keep in mind of a company valued at 1 billion is not that equity is never guaranteed at all impossible in the startup world to make a profit until you sell your That s why every startup employee shares which are not the same should have some part of the value thing as your options they re creating EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 27

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3 THE STARTUP ECOSYSTEM SALARY VS CAPITAL The pros and cons of both 2019 Financing mechanisms such as BSPCE stock options free shares etc Fixed and or variable salary Long term Short term Certain EKWITY SAS 2019 Uncertain Liquid cash Non liquid Not a Game Changer Game Changer THE EMPLOYEE EQUITY HANDBOOK 28

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4 THE STOCK OPTIONS JOURNEY IN 10 QUESTIONS 4 THE STOCK OPTIONS JOURNEY IN 10 QUESTIONS EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 29

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4 THE STOCK OPTIONS JOURNEY IN 10 QUESTIONS Tom 10 Major Points Equity incentives stand at the crossroads of HR legal finance and tax It is not an easy topic for entrepreneurs to manage So just imagine what it s like for employees without any backgrounds in those fields That was Ekwity s team s experience during our previous adventures This is why we are happy to share with you our ten major points to think about when it comes to stock options 1 What is it for Employee ownership is a tool to provide long term value that can attract retain and reward startup employees It s one of the best tools that startups have to compete with big corporations capable of attracting top talent without necessarily having tons of cash on hand ESOPs are also a good way to align all stakeholders interests founders investors and employees Startups employees are in a way an investor just like the others The only difference is that employees aren t investing money even if they may accept a lower salary when working in a startup in exchange for equity incentives but are instead investing their time and energy in the overall success of the company to create great value Thus it only makes sense that investors founders and employees should all have their future economic interests properly aligned What could be more motivating when you share the ambition to create and build a tech giant from scratch Employee stock options can be very powerful when rewarding talent and greatly impact a startup s success especially when you need to convince people to join your startup yet it s a topic that is still less talked about and addressed in Europe With the huge development of our ecosystem in the last few years it s becoming increasingly important for us to share best practices and encourage startups and their employees to better understand employee stock ownership EKWITY SAS 2019 Roxanne THE EMPLOYEE EQUITY HANDBOOK 30 Varza CEO of Station F

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4 THE STOCK OPTIONS JOURNEY IN 10 QUESTIONS 2 What are the benefits Equity incentives like stock options are a financial benefit but also a question of culture In Europe we are not used to thinking about them while in the US and UK they are common practice This is changing rapidly in Europe due to rise of startup culture and the great potential of emerging European companies such as Alan Spendesk Totem and SpaceFill The benefits are paramount Essentially if your company is sold or goes public it allows everyone involved to benefit from that economic success which can be substantial This is one of the big advantages to a startup However a startup isn t just that and by its very nature a startup is risky Most projects fail with only a small minority being sold or going public The expectation of tremendous upside created by building a sustainable value added business is a formidable driver that should be shared by entrepreneurs employees and investors Founders are pushed to be earnest and can attract retain and reward the best talents on a highly competitive market Employees are valued as they should be representing the greatest asset of the company Investors are comforted by the fact that all founders and employees will work towards the goal of delivering optimal value to make the company a success Every employee can have the same long term commitment to the company There isn t a category of employees that matters less It s natural that when any employee takes the risk of joining a particular startup especially early on they re rewarded if things go well That reward should be proportionally balanced with the risk taken and the impact employees have in that success At Ekwity that s one of the services we provide assessing that risk to strategically build your employee ownership plan The startup ecosystem is becoming more and more dynamic in Europe especially in France and that s good At Alan we aim to build a European champion To achieve this goal the battle of the coming years will be played in the recruitment of the best talents Also today it no longer seems to me acceptable to not share the value with those who create it Sharing should become the norm and France is still needs to catch up Jean Charles Samuelian CEO of Alan EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 31

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4 THE STOCK OPTIONS JOURNEY IN 10 QUESTIONS 3 Why are stock options the norm for equity incentives in startups There are many different legal tools covered by the term equity incentives They mainly depend on the legal framework of the country in question but usually there are two kinds Options or Stock Options these give the right but not the obligation to buy a share subject to certain conditions Shares these represent a part of a company usually giving you four rights financial dividend governance vote seat in shareholders meetings information and ownership ability to transfer your shares However globally stock options shares and other equity incentives depend on the applicable legislation Various schemes including everything from legal to tax aspects vary considerably from one country to another For example in France BSPCE are mainly used in the UK the EMIs scheme is preferred check out the Glossary and in Belgium and Germany it is likely to be a mess due to a very unfavorable regulatory scheme See more details in the Takeaways section of the Tax discussion That said stock options as the US standard have largely prevailed in the European market even if the name varies BSPCE and EMIs simply mirror local differences on tax and legal aspects This is why for the sake of clarity we will mainly refer to stock options in this guide and won t be too picky on such details Your local legal tax and financial advisors will be more than happy to help with those questions Explaining the possible benefits of receiving equity incentives during an interview is much easier for a more mature company with a rational valuation You can correlate it with salary and other standards But in the early days of your startup entrepreneurs just need to convince employees that they can build something huge and successful At this time it is much more a question of vision and fairness Rodolphe Ardan CEO of Spendesk EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 32

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4 THE STOCK OPTIONS JOURNEY IN 10 QUESTIONS 4 Who is behind an employee ownership policy How equity incentives are granted and allocated is or should be a question addressed by the entrepreneurs themselves This is a strategic issue that should be carefully balanced with the entrepreneurs vision and the associated costs There can be bad surprises if the plan is not well designed for both the company and the team due to potential tax and social charge impacts Entrepreneurs should dedicate some time to designing their internal policy that reflects their internal DNA and culture while also optimizing costs Then this becomes a question that should be validated by the company s board and checked with top notch experts lawyers tax and financial advisors etc In other words with plenty of advice the investors and the entrepreneurs will decide what will be granted and to whom For instance stock options can be granted to everyone or not As we aim to be the first one stop shop for employee ownership we help you with all of those questions at Ekwity Equity incentive plans drafted by the entrepreneurs and approved by the company s board contain details of the beneficiaries rights The options agreement in the case of grants of stock options will provide the key details of your option grant such as the vesting schedule how the options will vest shares represented by the grant and the exercise or strike price i e how much it costs to buy one share This is the work of the previously mentioned top notch experts we work with If you are an employee it may be possible to negotiate certain aspects of the options agreement such as the number of shares or percentage of options you will be granted a vesting schedule where the shares vest faster or slower upon your departure of the company It may also be worth discussing the options agreement with your peers lawyer or financial advisor to get a clear understanding of what you will receive Rather than treating stock options as an ad hoc incentive they should be a core part of your remuneration package Oussama Ammar Co founder of The Family EKWITY EKWITY SAS SAS 2019 2019 THE EMPLOYEE EQUITY HANDBOOK 33

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4 THE STOCK OPTIONS JOURNEY IN 10 QUESTIONS 5 Is it free Yes and no If you grant or receive free shares in France or restricted stock units RSU in the US then yes But you will progressively vest it over a certain period of time the vesting period So it may be free in the beginning but once it is fully vested and the options are exercised see below point 6 Why should the stock options be exercised it could cost money like in the US or Germany Plus such a grant could be subject to performance objectives like KPIs or OKRs whether individual or collective If you grant or receive stock options you grant or receive them for free in most countries Granting and receiving stock options usually costs nothing for both the company and the employees Of course it costs some dilution i e existing shareholders own a smaller percentage of equity than before This can be the case for France UK Germany and Belgium depending on the associated scheme Similarly if an employee has the opportunity to purchase their shares at the strike prices and immediately resell them for a profit there will be no cost for him her just taxes to pay on that handsome profit See more details in Takeaways in the Tax section If employees want to exercise buy their stock options because they re leaving the company they have to purchase the shares at the price fixed strike price set when the stock options were granted In this case yes the stock option is free but buying the shares isn t see 6 Why should the stock options be exercised If they choose not to purchase them they ll lose their stock options won t be shareholders of the company and likely won t benefit from the future sale of the company Also if an employee leaves the company there usually isn t the possibility of immediately selling their shares So they have to hold them for some time whether the company value goes up or down Giving equity to employees is not only a strong sign of trust but also a way to share with them the long term rewards of their work Having a clear equity policy is at the core of our culture of trust and transparency at SpaceFill Maxime Huzar CEO of SpaceFill EKWITY EKWITY SAS SAS 2019 2019 THE EMPLOYEE EQUITY HANDBOOK 34

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4 THE STOCK OPTIONS JOURNEY IN 10 QUESTIONS 6 Why should stock options be exercised The main advantage with stock options is that the strike price is fixed in advance from when they are granted and it won t change So why you should exercise your options To make some money You exercise your options sell immediately your shares and make some cash out of it You could of course keep your shares and potentially earn dividends from it but this is pretty rare with startups looking for an exit Simple example You joined the company as a Chief Marketing Officer CMO during its early stage let s say Seed stage when the valuation was at 10 per share You have been granted 500 stock options which allow you to buy 500 shares You re still there 6 years later you re a loyal one The company has continued to grow and closed further funding rounds see Financial Cycle section above Its latest valuation has increased 10 fold to 100 per share Your capital gain is the price you sell at minus the price you purchased at So if we do the simple math You were granted your 500 options with a strike price of 10 You bought shares at 500 10 5 000 You re selling shares 500 100 50 000 Your gains are 50 000 5 000 45 000 On the other hand if the company s value has gone down during the time between when the stock options are granted and the day when employees can exercise their options the day they are fully vested there will be a loss in value usually referred to as an underwater stock options or out of the money stock options In this case it wouldn t be a good idea to exercise the options Check out the Good Bad Ugly scenarios later on I believe it is the responsibility of founders and more generally investors and the global start up ecosystem to make equity not only a recruitment marketing tool but something that actually works and creates real value for founders investors and employees themselves Rafa l de Lavergne CEO of Totem EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 35

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4 THE STOCK OPTIONS JOURNEY IN 10 QUESTIONS 7 What is The Vesting Schedule Stock options are always granted subject to certain conditions All of these conditions should be laid out in either your contract stock option agreement or grant letter In startups stock options are most likely granted to employees in proportion to how long they stay in the company Usually employees have to stay at the company for 4 years to own all of the stock options granted This is what is called vesting Stock options are considered vested when the employee is allowed to exercise the options and purchase the shares Also if you stay at the company for less time let s say 3 years you will own 75 of the total number of options granted For example if you have been granted 100 options over 4 years vesting and you leave after 3 years you ll have earned 75 options out of 100 You could then exercise all or part of those 75 options Stock options typically vest in chunks over time at predetermined dates as set out in The Vesting Schedule For example the standard in European and US startups is the following Overall vesting period 4 years or 48 months following your entry date in the company you earn 100 of your stock options Probation period or Cliff 12 months following your entry date in the company you earn 25 12 48 of your stock options Vesting after the cliff monthly vesting i e each month you vest 2 0833 1 48 of your options Vesting start date your entry date in the company Employee ownership brings important discussions to have with French and more broadly European employees who are often less aware of these practices than Americans for whom the use is more widespread These are topics that can be complex when you are not used to them with the exercise prices vesting periods cliffs but also because they touch on things like taxation For example at alan we share our salary and capital grid from the beginning of the recruitment process with an explanation of the complex terms Jean Charles Samuelian CEO of Alan EKWITYSAS SAS2019 2019 EKWITY THE EMPLOYEE EQUITY HANDBOOK 36

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4 THE STOCK OPTIONS JOURNEY IN 10 QUESTIONS Here is a visual illustrating the vesting schedule THE VESTING SCHEDULE 2 08 vested option granted every month over 4 years with a 1 year cliff OF GRANTED OPTIONS VESTED 100 75 50 25 TIME SPENT AT COMPANY 0 Finally it is good to note that stock options usually have a term of 10 years This means that after 10 years employees would no longer have the right to buy shares therefore the stock options must be exercised before the 10 year period counting from the start date of the option grant is up EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 37

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4 THE STOCK OPTIONS JOURNEY IN 10 QUESTIONS 8 When should stock options be exercised First question to ask Are the stock options exercisable Make sure to check the conditions included in the stock option agreement and the vesting schedule see 7 What is the vesting schedule Second question to ask When is the right time to exercise the stock options Whether to exercise the stock options or not usually comes up in 4 situations for an employee and an entrepreneur Departure When you leave the company In general you have 90 days but it could be more or less to exercise your stock options but you have no guarantee of being able to sell your shares This point is outlined in the allocation letter and the regulations of the stock options plan You re taking on the risk of financing the stock options without immediately benefiting from any increase in value if there has been any Sale of the company When the company is bought Generally when a company that is to say its shares are 100 purchased you are required to exercise your stock options and sell your shares to the buyer This point is addressed in the regulations of the stock options plan and in your mini associates pact with the drag along clause You may have the ability to exercise all of your stock option rights even those that haven t yet vested according to an acceleration clause Employee ownership is part of the startup culture because when employees take the risk of joining a particular startup especially at the beginning they should be rewarded if things go well rewarded proportionally to the risk they took and rewarded for the part they played in that success Florent Artaud CEO Founder of Ekwity EKWITY EKWITYSAS SAS2019 2019 THE EMPLOYEE EQUITY HANDBOOK 38

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4 THE STOCK OPTIONS JOURNEY IN 10 QUESTIONS IPO of the company When the company goes public an IPO Usually you ll have a lock up period of 6 12 months just like other historical shareholders then once your stock options have vested you can sell your shares on the market at market price Secondary market When the company raises a fundraising round through a secondary offering It s possible even if it s not particularly common for certain employees typically those who were there in the very early stages to be able to sell their shares to investors participating in the fundraising round This is referred to as a secondary offering It only occurs in mature companies those more than 4 years old who have raised multiple fundraising rounds It is your CEO who negotiates this possibility with the investors during the fundraising process Take a look at the Good Bad Ugly section to have an idea of different exit scenarios There is a fine balance between being generous with your employee share scheme and giving away too many shares particularly in the early days Plus you should get the best legal advice you can afford as soon as you can Mistakes made when starting out can be costly in the future IIan Shaw Head of UK Employee Share Schemes Incentives at Orrick EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 39

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4 THE STOCK OPTIONS JOURNEY IN 10 QUESTIONS 9 How do I sell my shares As an employee once you ve exercised your stock options you become a shareholder You can thus go to shareholders general meetings and vote or not depending on the location and form of the company benefit from certain information about the company or not depending on the location and form of the company receive dividends but don t expect it that s very rare in the startup world where there usually aren t any profits for years and sell your shares Essentially You cannot sell or give away your stock options but you can sell the shares that come out of the options Selling your shares is the only way to monetize your stock options However startup shareholders as with any private company that doesn t trade on the public market cannot easily sell their shares You need to sell your shares in what we call the liquidity event As a general rule there are two ways to sell your shares a moment generally referred to as an exit 1 The company goes public 2 The company is bought These are the same situations dealt with in question 8 When should stock options be exercised as these are the principal liquidity events in the startup world In general you don t exercise your stock options until you are assured of being able to sell your shares and receive the gains There is a 3rd way of selling your shares through the secondary market The method of selling your shares directly is even rarer in Europe than in the US If you exercise your stock options you have in theory the right to sell your shares to anyone That s easier said than done No matter what you are still bound by your contractual undertakings signed when you were granted the stock options The contractual undertakings provided in your agreement set the conditions on how to sell your shares once you have exercised your options Plus There could be limitations on who you can sell them too People outside the company might be one of them So make sure you understand what is provided for there EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 40

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4 THE STOCK OPTIONS JOURNEY IN 10 QUESTIONS 10 How does all this work when it comes to taxes As mentioned in question 3 Why stock options is the norm for equity incentives in startups equity incentives depend on the applicable legislation and scheme attached from legal to tax aspects Taxation in particular can vary considerably from one country to another However here are the main key events to think about for tax purposes Grant of the options Vesting of the options Exercise of the options Sale of the shares To see a more detailed overview see the Takeaways in the Tax section Your ESOP reflects your company It s a tool that must be tailored to the characteristics of the company its culture and DNA and the specific aims it wishes to pursue If you don t truly believe in it and are not well prepared you should avoid disaster and use other incentives Otherwise the real world will teach you some hard lessons Florent Artaud CEO Founder of Ekwity EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 41 EKWITY SAS 2019

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THE STOCK OPTIONS JOURNEY Classic example of 2 08 vested option granted every month over 4 years with a 1 year cliff 4 THE STOCK OPTIONS JOURNEY IN 10 QUESTIONS KEY DATES Employed GRANTING DATE Congratulations You ve been hired and you re now onboard Your employment date is the date on which your contract starts Granting Date GRANTING DATE ed in a long term co nt r employ 1st yea r YE LEAVERS the ve sted UN E 2 AR 5 SHARES BUY You decide to buy the shares exercise options and pay the strike price for all or part of the stock options owned according to your vesting period Sometimes you can be obliged to buy all of them not just a part Be sure to check ER XC CIS no tt oe xce rcise Buy Shares 25 ED LEAVERS When you leave the company you have a certain period of time 90 days standard to buy the shares by paying the strike price and become a shareholder in the company or not and lose them R1 EA CLIFF Leavers e id ec You leave and d CLIFF Non vesting period after the options have been granted You then earn part of the options and the vesting period starts Y Cliff assed your probat ion pe ve p riod you nd ta ac The date you receive your bundle of stock options not vested and sign all the contracts usually once you have passed your probationary period options 0 Exit YEAR 3 Cashing in usually through an 75 2 0 8 v EXIT initial public offering IPO or a trade sale of the company Also referred to as a liquidity event e sted Strike Price of the o The price to buy exercise a share It is usually based on the last valuation of the company and fixed at the granting date ptions g rant ears ed every month over 4 y After the cliff you own 25 of the options granted and have triggered the vesting monthly quarterly etc You now have the right to buy shares 50 are vested After 2 years you own 50 of the options granted 75 are vested O n RCIS CE ED o s EKWITY SAS 2019 EKWITY SAS 2019 as Once any options have been vested you have the right to buy shares And shares is part ownership of the company sp Exercised Options Shares ar When you leave you can decide not to buy any shares losing your options too ye Unexcercised Options No Shares 10 ED RCISED SEED 100 are vested After 4 years you own 100 of the options granted ER XC CIS A EX 100 B C Stay in After 3 years you own 75 of the options granted AR 4 YE excer cise the ves ted options ons vested the opti BUY SHARE 75 of 100 de cid e to th e AR 3 YE with ny pa m co LEAVERS Y 1 d n Y ea 25 50 UN E 4 00 25 are vested R1 EA AR 2 YE EXC E R EA CI ER SED BUY SHARE S You leav Cliff 0 Year 1 In your first year of employment you have earned 0 of your options EX C OPTIONS STAGES Options BSPCE EMIs give you the right but not the obligation to purchase shares at a fixed price av er ag it ex an til n u e w y pan orking at the com THE EMPLOYEE EQUITY HANDBOOK 42

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5 CASE STUDIES EKWITY SAS 2019 5 CASE STUDIES THE EMPLOYEE EQUITY HANDBOOK 43

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5 CASE STUDIES The Waterfall The Good The Bad and The Ugly According to a report from CNBC in Today the European startup scene is December 2018 the US company Juul growing faster than ever and European put 2 billion of its recent 12 8 billion tech giants are about to become more raised in a funding round from the common Doctolib PayFit Get tobacco giant Altria towards employee your Guide bonuses recent examples hopefully they are and N26 are just some only the beginning We assume that some of the 1 500 employees became millionaires Pretty That said there are some basic issues obvious with such an amazing and to understand before thinking about improbable amount owning shares in a company in order to make a profit Indeed how the company They didn t have a shared lottery ticket cap table is structured and the terms or at least not the kind one might think negotiated by the entrepreneurs and Those instant millionaires had two investors will impact the distribution of characteristics in common that made value them rich 1 They worked at Juul 2 When they There is one big thing that has to negotiated their be outlined here the liquidation contract most of them knew preference clause a clause that in what equity benefits are and practice is referred to as the Waterfall they asked for them and or the This clause is usually provided in company offered them in its the shareholders agreement or the hiring package which is pretty company by laws It provides certain common in the US rights to the different shares and options in the cap table ordinary Even though most companies do not shares preferred shares series seed have the same potential as Juul or A B C stock options etc Such other giants like Google all startups rights give the framework of the value have the same ambition the big distribution that becomes liquid cash success and the sustainability of their during an exit event It describes which enterprise kind of shares will be paid first when EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 44

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5 CASE STUDIES the company is bought or go public before the preferred stock liquidation The principle here is last in first paid preferences are satisfied However there are different ways to Over the page are some simple address the problems that can arise examples that will help you visualize from liquidation preferences One of the Good Bad Ugly scenarios too these is the creation of a carve out simple to be true Keep in mind that all providing that a part of the proceeds M A or IPO operations have their own 5 10 20 etc from a sale complexities transaction will be distributed to certain persons first founders employee etc EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 45

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5 CASE STUDIES The Good The Good refers to the hypothetical best case scenario where the company either exits through a sale or an IPO and where the price of such exit is high enough to pay back all the debts and the shareholders plus reward the team In that hypothetical case employees can have the chance to be rewarded fairly and hopefully without greediness on the part of entrepreneurs and investors Statistically this is the least likely scenario and indeed the norm is more the Bad and Ugly outcomes But again startups are based on one dichotomy risk vs opportunity CARVE OUT EXIT CARVE OUT EXIT SERIES B C SERIES B C SERIES A SERIES A SEED SEED SERIES O SERIES O EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 46 32 32

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5 CASE STUDIES The Bad The Bad refers to the hypothetical bad case scenario where the company hasn t found the potential market and business model for profitability Therefore no shareholders receive any money and even the initial investors can struggle to get their investment back 9 10 businesses end up this way as building even a mediocre company is much harder than one tends to think You need determination the right time to market a team hard work and vision keeping all those things properly aligned for a long period of time usually a minimum of 7 to 10 years in order to build a profitable and or wealthy business Even with all of that and a bit of luck it may not be enough This is part of the game that risk we ve been talking about EXIT EXIT SERIES B C SERIES B C SERIES A SERIES A SEED SEED SERIES O SERIES O EKWITY EKWITYSAS SAS2019 2019 THE EMPLOYEE EQUITY HANDBOOK 47 32 32

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5 CASE STUDIES The Ugly The Ugly refers to the hypothetical worst case scenario where the company is bought at a low valuation and the exit price is just enough to pay back some of the company s debt and later investors but nobody else It can be a terrible scenario for the initial funding team as well as for the employees The amount the company sells for isn t sufficient to buy their shares above the option strike price meaning that the options of the employees are worthless EXIT CARVE OUT EXIT CARVE OUT SERIES B C SERIES B C SERIES A SERIES A SEED SEED SERIES O SERIES O EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 48 32 32

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5 CASE STUDIES You are the future The startup ecosystem is far from being perfect but it offers tremendous opportunities that can generate great value and wealth creation Employees do earn less than founders and investors but can learn a lot more than other employees in more traditional jobs Like in a virtuous cycle early employees contribute to that creation of value and these early employees become tomorrow s founders and investors At Ekwity we have been through it and even without that huge payday it gave us enough invaluable learning and confidence to start our own journey THE VIRTUOUS STARTUP CYCLE Creating a sustainable and virtuous financial cycle for the tech ecosystem Startup is born Experienced talent become business angels entrpreneurs etc 222222222 32 Talent is recruited and investors provide capital 32 Talent and investors are rewarded EKWITY SAS 2019 Startup is a success Job creation Productivity Up skilling Innovation THE EMPLOYEE HANDBOOK growth EQUITY workforce 49

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6 TAKEAWAYS EKWITY SAS 2019 6 TAKEAWAYS THE EMPLOYEE EQUITY HANDBOOK 50

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6 TAKEAWAYS Essential Reading For you employees Why is equity interesting 1 Mathias Pastor The Case for Joining a Startup While everyone cannot become an entrepreneur any employee in a startup can get some of the upsides of the entrepreneurial journey and equity is one of them This article from Mathias Pastor Director at The Family should make the financial ins and outs of the startup journey clear for you What are stock options 2 Rewarding Talent Stock options 101 by Index Ventures Now that you understand why stock options matter let s make sure you know what they are and how they work Options are not shares and it is critical that you know the difference How to value stock options 3 Ben Kuhn Startup options are much better than they look If you want to know exactly when startup stock options are worth more than the salary you could have earned at a large company this precise article will give you the mindset and formula to think about it How to negotiate 4 Jean de La Rochebrochard Pour Toi Employ e Startup It can be hard to approach the negotiations around equity without a strong understanding of how startups get funded For French readers nobody makes it clearer than Jean de La Rochebrochard When to exercise 5 Ben Mathed 90 Days and My Six Figure Mistake Once you have been granted stock options you still need to exercise them Ben Mathes learned that the hard way so his story should help you understand important questions you need to ask when negotiating your equity package EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 51

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6 TAKEAWAYS For you entrepreneurs Concrete Overview 1 Rewarding Talent A guide to stock options for European entrepreneurs by Index Ventures The Bible of employee ownership Check out this part to make sure you know what stock options are How Much to Give 2 Paul Graham The Equity Equation Deciding how much equity or stock options to give is an art rather than a science but there are still elements that can be discussed rationally The legendary Paul Graham gives a clear approach thanks to one simple formula 1 1 n 3 Willy Braun Startups Employees Perks Incentives Everything cannot be settled with one simple formula Willy Braun digs deeper in the right questions to ask to know how much equity to give and to whom Red flags 4 Venture Hacks The Option Pool Shuffle There are some risks involved when raising funds for your startup and you should definitely be informed on the question of the Option Pool if you don t want any bad surprises 5 Venture Hacks Accelerate your vesting upon a sale In case of an exit you can lose some of your stock options That is of course if you do not understand the acceleration clause in the contract From Ekwity with Love 1 Salary vs Capital Why equity is so important for startup employees 2 What every startup employee should know on equity incentives 3 Articles to read before drafting an Employee Stock Options Plan ESOP 4 Everything you need to read on employee equity 100 articles 5 How Stock Options Work in Real Life 6 Make it real Employee ownership EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 52

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6 TAKEAWAYS BSPCE Pocket Tax Scheme for France In France in short in 2019 BSPCE are startups preferred employee scheme because i companies do not have to pay any taxes or social security contributions and ii beneficiaries do not have to pay taxes until the sale of the shares STATE OF OPTIONS EMPLOYER EMPLOYEE Grant No tax impact No tax impact Vesting No tax impact No tax impact Exercise No tax impact No tax impact Sale of the Shares No tax impact Tax and social security contributions applicable Tax No tax impact Depends on the seniority of the employee Less than 3 years 30 More than 3 years 12 8 The tax rate is applicable to the capital gain meaning the difference between the sale price of a share and the strike price at the moment of the sale Employees can also opt to be taxed via income tax but the social security contributions will remain the same Social Security Contributions No employer social security taxes 17 2 in social security contributions based on the capital gain Reporting Bureaucracy At the exercise date a report has to be provided by the company to the beneficiaries which indicates the date of exercise number of shares bought how long the employee has been working within the company etc At the exercise date employees have to keep a copy of the report delivered by the company The company also has to share all this information with the tax authorities EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 53 At the date of sale employees have to include the capital gain in their tax income return of the year of the sale

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6 TAKEAWAYS OTHER CONSIDERATIONS Plan scope Restrictions Company main requirements Scheme reserved to employees only Less than 15 years since company formation Held by individuals holding up to 25 or more of the share capital Pays corporate tax in France Not available for French savings plan scheme Plan d Epargne Actions PEA Strike Price Local bad practice is to set the strike price at last round valuation Income Tax Progressive income tax rate with 4 tranches marginal rate applicable from 156 245 income Marginal tax rate of 45 International Mobile Employees In that case equity incentives could be subject to various locations Each of these locations may have tax consequences for both the employer and the employee while the employee worked in or provided services associated with the location Rules for internationally mobile employees are really complex This is why it is highly recommended to seek professional tax advice on an individual basis Disclaimer This summary is provided by Ekwity and its tax and legal partners for informational purposes only to provide an outline of the general tax and social security position based on current tax law Not all companies or employees qualify to grant or be granted BSPCE We recommend that legal and tax advice is obtained prior to the implementation of any employee equity plan EKWITY SAS SAS 2019 2019 EKWITY THE EMPLOYEE EQUITY HANDBOOK 54

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6 TAKEAWAYS EMI Pocket Tax Scheme for the UK In the UK in short in 2019 EMI options are the preferred employee scheme because i companies do not have to pay any taxes or social security contributions and ii beneficiaries do not have to pay taxes until the sale of the shares Note that the summary below assumes that a the EMI conditions are met between the grant and the exercise of the option there are certain disqualifying events which can restrict the tax advantages and b options are granted with a strike price per share of at least the actual market value AMV of a share on the date of grant EMI options can be granted at a discount to AMV some companies grant EMI options with a strike price of nominal value but income tax and potentially employee and employer social security contributions will arise on the discount when the option is exercised STATE OF OPTIONS EMPLOYER EMPLOYEE Grant No tax impact No tax impact Vesting No tax impact No tax impact Exercise No tax impact No tax impact as opposed to non EMI options which are taxable at the point of exercise Sale of the Shares No tax impact There may be capital gains tax on the amount by which the sale price of a share exceeds the strike price Gains above the employee s annual capital gains allowance 12 000 for 2019 2020 20 tax rate unless the individual is entitled to entrepreneurs relief If the sale of the shares is two years or more after the grant of the EMI option 10 tax rate the entrepreneurs relief rate even where the individual doesn t otherwise qualify for entrepreneurs relief Social Security Contributions No employer social security contributions No employee social security contributions EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 55

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6 TAKEAWAYS Reporting Bureaucracy The grant of EMI options must be reported electronically to HMRC within 92 days of grant Exercise lapse and certain other events must be reported annually No specific report except on point of sale of the shares Any capital gains tax will need to be paid through self assessment OTHER CONSIDERATIONS Plan scope Restrictions Company main requirements Can be used by independent private or public companies with gross assets of 30m or less Independent company not controlled by another company Less than 250 full time equivalent employees globally Employee main requirements Employees must work at least 25 hours a week or 75 of their total working time Maximum of 250 000 worth of shares can be granted to each employee The employee must not have a material interest in the company broadly 30 of the shares or in certain cases assets Total value limit of a company s shares which may be under option is 3m Strike Price Valuations usually 70 90 below the last round valuation and can be agreed in advance with HMRC Income Tax Where applicable e g on the exercise of an EMI option granted at a discount or where a disqualifying event has occurred progressive income tax rate with 4 tranches top rate 45 applicable to income over 150 000 International Mobile Employees Equity incentives could be subject to tax in various locations Each of these locations may have tax and securities laws consequences for both the employer and the employee while the employee worked in or provided services associated with the location Rules for internationally mobile employees are really complex This is why it is highly recommended to seek professional tax and securities laws advice on an individual case by case basis Disclaimer This summary is provided by Ekwity and its tax and legal partners for informational purposes only to provide an outline of the general tax and social security position based on current tax law Not all companies or employees qualify to grant or be granted EMI options We recommend that legal and tax advice is obtained prior to the implementation of any employee equity plan EKWITY EKWITYSAS SAS2019 2019 THE EMPLOYEE EQUITY HANDBOOK 56 EKWITY SAS 2019

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6 TAKEAWAYS Stock Options Pocket Tax Scheme for Germany In Germany in short in 2019 Stock options are used without any tax advantaged scheme attached income taxes apply but companies usually avoid such restrictions by issuing virtual stock options that confer no ownership no voting rights or information obligations from the company as they are cash bonuses based on the growing valuation of the company STATE OF OPTIONS EMPLOYER EMPLOYEE Grant No tax impact No tax impact Vesting No tax impact No tax impact Exercise Withholding obligations for the income tax and solidarity surcharge Church tax can occur see Other considerations below Taxable income tax at point of exercise and at point of sale subject to withholding by the employer see Other considerations below Sale of the Shares No tax impact Tax and social security contributions applicable Tax No tax impact Income tax and solidarity surcharge applicable see Other considerations below Social Security Contributions Withholding obligations for social security contributions capped at a marginal annual income see Other considerations below See box on the right for withholding obligations of the employer and Other considerations below for tax income scheme Reporting Bureaucracy Regular monthly payments and reporting to the tax authorities Annual tax reporting may apply with income tax return e g the employer is not in charge of it OTHER CONSIDERATIONS Plan scope Restrictions No specific tax scheme attached Strike Price Local practice to set the strike price at last round valuation as there is no assured valuation with the tax administration EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 57

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6 TAKEAWAYS Tax income Progressive income tax rate with 4 tranches marginal rate applicable from 250 000 income Marginal tax rate of 45 solidarity surtax of 5 5 of the tax rate i e effective marginal tax rate of 47 475 Church tax also applicable 8 9 International Mobile Employees In that case equity incentives could be subject to various locations Each of these locations may have tax consequences for both the employer and the employee while the employee worked in or provided services associated with the location Rules for internationally mobile employees are really complex This is why it is highly recommended to seek professional tax advice on an individual basis Disclaimer This summary is provided by Ekwity and its tax and legal partners for informational purposes only to provide an outline of the general tax and social security position based on current tax law We recommend that legal and tax advice is obtained prior to the implementation of any employee equity plan EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 58

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6 TAKEAWAYS Stock Options Pocket Tax Scheme for Belgium In Belgium in short in 2019 Stock options are used without any tax advantaged scheme attached income taxes apply but companies usually avoid such restrictions by issuing virtual stock options that confer no ownership no voting rights or information obligations from the company as they are cash bonuses based on the valuation of the company STATE OF OPTION EMPLOYER EMPLOYEE Grant No tax impact Tax payable at the grant date only if the employee formally accepts the options within 60 days from this date In that case taxes to a percentage at least 18 depending on the validity period of the option based on the company valuation at the grant date shall be paid Vesting No tax impact No tax impact Exercise Withholding obligations for the income tax and solidarity surcharge Church tax can occur see Other considerations below Taxable if the employee has not formally accepted the options tax applies at the date of exercise see Grant above Sale of the Shares No tax impact No tax impact Tax No tax impact See Grant above Social Security Contributions In case social security contributions apply withholding obligations for the employer apply too If the options are taxable at the grant date usually no social security contributions apply In case it is taxable at the exercise date gain will be subject to Belgian employee social security contributions for local employer not for foreign companies Reporting Bureaucracy Regular monthly payments and reporting to the tax authorities Annual tax reporting may apply with income tax return if the employer is not in charge of it EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 59

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6 TAKEAWAYS OTHER CONSIDERATIONS Plan scope Restrictions No specific tax scheme attached Strike Price Local practice to set the strike price at last round valuation as there is no assured valuation with the tax administration Income Tax Progressive income tax rate with 5 tranches marginal rate applicable from 38 830 income Marginal tax rate of 50 local tax up to 9 of the tax rate ie effective marginal tax rate of 54 5 International Mobile Employees In that case equity incentives could be subject to various locations Each of these locations may have tax consequences for both the employer and the employee while the employee worked in or provided services associated with the location Rules for internationally mobile employees are really complex This is why it is highly recommended to seek professional tax advice on an individual basis Disclaimer This summary is provided by Ekwity and its tax and legal partners for informational purposes only to provide an outline of the general tax and social security position based on current tax law We recommend that legal and tax advice is obtained prior to the implementation of any employee equity plan EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 60

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7 THANK YOU EKWITY SAS 2019 7 THANK YOU THE EMPLOYEE EQUITY HANDBOOK 61

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7 THANK YOU A big thank you to We would like to give special thanks to everyone who gave quotes for this handbook and to our contributing startups Alan is a digital health insurance platform that revolutionizes health insurance by focusing on user experience with an excellent price quality ratio health plan Alan is the insurance company that makes healthcare simpler smarter and better and it has raised more than 35m with leading investors such as Index Ventures CNP Partech and Portage since its creation in 2016 Spendesk is smart spend management software designed for both finance teams and employees With flexible payments approvals automated receipt capture and real time spending insights finance can decentralize operational spending across the business without any loss of control or visibility Employees benefit from streamlined expense and invoice management through the Spendesk website and app Totem builds top notch modular cafeterias delivers snacks organic fruits coffee tea and other groceries for your team Totem believes that fostering interactions in the office makes employees feel engaged and fulfilled SpaceFill is a European platform for temporary storage and logistics services making storage of physical goods as simple and flexible as cloud storage More than 2 000 warehouses are part of their network to date Another big thanks to our partners The Family Station F Orrick Bpifrance France Digitale Join Lion and Capital Ingenium The Family nurtures entrepreneurs through Education Unfair Advantages Capital Moving at startup speed The Family is transforming a portfolio of non linear companies special projects and virtual infrastructures into a connected community of entrepreneurs operators fellow investors who inspire and support each other EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 62

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7 THANK YOU Station F is a startup campus with a central hub building with dedicated services to the French tech ecosystem The founders envisioned the company to be a hub where entrepreneurs from around the world both brilliant and crazy can come together to work live laugh and fuel society with innovative startups that bring real value Orrick is a leading global law firm focused on representing companies in the technology financial and energy sectors We are committed to long term strategic relationships with our clients and are widely recognized for the quality of our client results With 1 100 lawyers based in key markets worldwide our global platform allows us to meet the needs of our clients wherever they do business and through every stage of growth Bpifrance is a public investment bank a French organization for financing companies development It specifically supports small and medium sized enterprises medium sized enterprises and innovative ones With more than 80 000 companies supported by debt or direct investments Bpifrance is one of the biggest investors in France for emerging companies France Digitale is a non profit organization co chaired since November 2018 by Jean David Chamboredon and Fr d ric Mazzella With 1 400 members entrepreneurs and digital investors venture capitalists and angels investors France Digitale promotes the digital economy with the public authorities Lion is the first school built for startup employees Their pedagogy is based on the idea that teachers should be doers thus all the teachers are entrepreneurs themselves and content is very pragmatic Founded in 2016 they now offer 3 different programs selective school night school day school according to the needs of everyone Last but not least a special thanks to some individuals for providing us with particular assistance including Nicolas Colin Willy Braun Roxanne Varza Dominic Jacquesson Ian Shaw Youn s Rharbaoui Kyle Hall and Sophie Louise HurleyWalker EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 63

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7 THANK YOU Contact Researched and Written by Florent Artaud CEO Founder of Ekwity Book Design and Images by Sophie Louise Hurley Walker Freelance Designer www hurley walker com Ekwity SAS 14 rue Charles V 75004 Paris France Email contact ekwity co Telephone 33 6 80 47 65 54 Website www ekwity co 1st Edition printed October 2019 Copyright 2019 by Ekwity SAS All rights reserved Contributions and insights from the Ekwity team The information provided in this handbook is a general guide and specific legal and tax advice should be sought when implementing option arrangements Follow us EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 64

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7 THANK YOU EKWITY SAS 2019 THE EMPLOYEE EQUITY HANDBOOK 65