Stock options in Lithuania in 2023
Stock options, or options as they are called, have proven to be a stimulus tool for a long time, and more recently after 2020. The changes to the Income Tax Act (VAT), which came into force in February, are gaining popularity even faster.
The popularity of options was also affected by the pandemic, which brought the business world to a standstill, which forced employers to look for more and more unique ways to attract new talent – from finding Bites Lietuva employees in the Tinder app to financial proposals to attract employees. With exceptional experience or qualities. Therefore, employee stock options are gradually becoming a new part of the workplace culture that benefits both companies in developing long-term employee loyalty, as well as providing its employees with financial security for their future in the company.
Employee stock options
The option principle for employees is the same as for other stock options – a financial instrument giving the holder of the option the right (but not the obligation) to purchase shares of the company at an agreed price, which is usually the preferred price, within a specified period of time. One of the goals of an optional contract can be the formation of long-term and loyal relations with the employee and the introduction of flexible pay policy in the organization. Such a motivational package shapes the attractive culture and image of the company in the public space, helps to ensure the motivation of employees related to obtaining material benefits and greater confidence in the future. A stock option may be granted to an employee by both the employer and other organizations in the group of companies. Stock options can be given not only to company employees, but also to individuals with whom the company has not concluded employment contracts (for example, for external consultants,
hired financiers, etc. whose relationship with the company corresponds to labour relations). It is important to note that in such a case, the exemption from the GPM can be applied only to persons considered as employees (Article 2 of the General Agreement on the 32nd).
The terms and conditions for offering stock options can be selected and adapted to the company’s objectives, for example, an option transaction may be tied to the fulfilment of certain conditions: efficiency of the company as a whole, time and achievements of the employee in the company, t. as well as changes in the share price of a company and other indicators that can be determined by the company providing the stock option.
The process of providing stock options
A stock option sale is not in itself a basis for transferring the company’s shares to an employee. It only entitles the employee to acquire shares in the company in the future. After an option transaction, shares are transferred under an additional transaction, which the employee can always refuse. In the event that an employee decides to exercise the right to an optional transaction, a transfer of shares by gift, sale or other form of transfer of shares is made with the employee, after which the shares are finally transferred to the ownership of the employee. The shares themselves are usually granted to employees by issuing new shares or by transferring shares owned by the company or shareholders. In normal practice, the beneficiary of an option is allowed to make a payment option, i.e. after a certain period during the period of the option, for example.
When the intended option is exercised, shares are not transferred to the employee, but instead are paid in cash the value of the shares, which is taken into account when the option is exercised.
As with any financial instrument, there are risks associated with an employee stock option transaction. One of the main goals of the stock option is to motivate employees, keep employees in the company or attract new employees, to create a positive image of the employer. This implies the need to establish guarantees in the transaction for cases where, when the employee does not meet the necessary criteria and/or leaves the company, and the option ceases to perform its function for the company.
In an option transaction, it is advisable to provide that if an employee leaves the company improperly (for example, an employee is dismissed for gross violation of labour law), the employee loses the right to exercise the option. Undoubtedly, the rules may establish ways in which the employee’s care is appropriate (for example, after a certain goal has been achieved). Various guarantees are also available to maintain control over shares and voting rights (for example, in the case of a general purchase of shares, where all shares of a company are repurchased by the investor, monetary compensation is paid to the employee instead of shares).
A properly prepared legal and risk management stock option for employees can be an excellent tool for improving the company’s image as an employer and attracting or retaining employees, providing a direct financial benefit. When workers are increasingly pragmatic about the benefits from the employer, or do not see the direct value added that they create (for example, an employer’s luxury office gives little to an employee working from home), stock options may indeed be advantageous. The best way to increase motivation and strengthen long-term relationships.