Stock-options (BSPCE) for employees: how does it really work?
As the founder of Kombo, we hire employees and we explain them what BSPCE (equivalent of stock-options in France) are and how it works. When you work in a startup, you understand the big picture, fine. But there are actually several pre-requirements to understand how stock-options really work. Let’s start with a simple question.
What is the value of a company?
Every company has a value, or in other words, a price in € or $:
- When someone creates a company, he has to bring capital, or in other words, money. If the capital is €1000, this persons puts €1000 on the bank account of the company. The value of the company is €1000.
- If a company fails, that’s easy, the value becomes €0. The company does not exist anymore, money is lost.
- For companies, which are listed on the stock market (in French: “cotée en bourse”), the valuation of the companies is public and transparent. When you look at the stock market you can see that Apple Corp is valued USD 940b (July 2019). In that case, the market defines the value of the company. If many people want to buy shares (or “stocks”) of the company Apple, the value of the company will increase.
- For companies, which are not listed on the stock market, it is different. I could give you more info but let’s focus on startups. For startups, valuation is usually based on fundraising. A simple rule is that when you raise any amount, this amount, which is paid by the investors to get stocks of the company, is around 20–25% of the value of the company. Example: when a startup raises €2,5m, the value of the company — after fundraising — is usually defined as €12,5m, so that investors get 20% of the (stocks of the) company.
What does owning a company mean?
When an entrepreneur starts a company by himself with a capital of €1000, he puts the €1000 on the bank account of the company so that he has 100% of the company. If there are 3 founders, the capital (= the total of existing shares) is shared between the 3 founders so that the total is 100%.
If this company accepts investors, the investors pay money to the company (and most of the time, not to founders) and get stocks in exchange. Thus the investors own a certain percentage of the company. With this money, the company can invest to grow further.
What is a stock?
A “stock” in American English, or a “share” in British English, or “action” in French, is a percentage of ownership of a company.
Value of the company = Number of stocks x Value of each stock
More precisely, when the entrepreneur goes to the administration to create the company, he has to say how many shares there will be and what will be the price of each share, so that the total is equal to the capital he has put in the company. For example, if the founder puts 1000€ in the capital, he can do 1000 shares of €1.00, or 10000 shares of €0,10.
Is the valuation of a company real money?
Yes… and no.
Yes, as long as there is a buyer. The buyer can be another company or any type of investor. If a company X is sold to the company Y for €100m, those €100m are given to the owners of company X, proportionally to the amount of stocks they own. Even without company X purchased by a company, the valuation of a company is real money. Let’s keep the example of company X valuation of €100m. If Mister A has stocks representing 10% of company X and sells those stocks to Mister B, Mister B will pay to Mister A the €10m.
But whatever the valuation of a company, if it crashes, the valuation becomes 0€ and the value of the stocks disappears. If the valuation is divided by 2 for any reason, the valuation that was really interesting may become less attractive. And in the case there is no buyer, even if the valuation is high, the stocks are not easily converted into real money (see section “When can you sell the shares ?”).
Principle of the BSPCE
The BSPCE (Bon de Souscription de Parts de Créateur d’Entreprise) is the name of stock options in French law. These BSPCEs are a right to buy shares of the company at a given price at any time — while respecting the vesting described below. Being a right, the owner of BSPCE is free to “exercise” (= use) this right or not, on some or all of the BSPCE which are attributed to you.
The purchase price is called the exercise price or the subscription price. It is usually set at the same price as the last fundraising. Why? Because it is the closest valuation which is agreed by all shareholders, and because it is in the past. So usually the value is going up, so that the stock-options are interesting for the employees.
Company interest
BSPCEs allow start-ups to “pay” employees without spending money on the short term. This is a good thing because a startup has limited resources (=not much money) at the beginning and potentially a big value later.
BSPCEs make it possible to retain employees overtime thanks to vesting.
Employee interest
BSPCEs align the interests of entrepreneurs, investors and employees benefiting from this arrangement, so that everyone has an interest in creating value for the company.
Thus it is possible to go beyond the wage battle where the interests can diverge between the employee and the company.
And above all, on beautiful success stories where startups can be valued hundreds of millions of euros or more (Captain Train, Blablacar, Criteo, to name a few French successes), many employees can benefit from the equivalent of several months/years of salary by selling their BSPCEs.
Valuation and practical terms
The value of the share will change in proportion to the amount of the valuation of the company, at the next fundraising, if it takes place. For example, if the valuation of the company is multiplied by 5 at the next fundraising, the value of the share will also be multiplied by 5, while the subscription price, therefore the purchase price, of each BSPCE will remain the same.
Purchase Price = (Number of Shares you exercise) x (Subscription Price of each share)
Profit = Selling Price — Purchase Price
When can you sell the shares ?
On the stock market, people can put orders to buy or sell shares. For example, if you have 3 Amazon shares, you can do a sell order of those shares for a price of, let’s say $2100, even if the stock price today is $1950. This order will be executed only if the stock price of Amazon share reaches this level.
For startups, shares are not very liquid. “Liquid” means it’s fast and simple to use the money. For example, a note of €20 is the most liquid money you can have. When you own a car, it takes a few weeks to sell it. When you have shares of Amazon, it takes a few minutes or days to sell them (depending on if you want to sell the shares at market price of much higher).
In startups, most of the time, you will be able to sell the shares during a fundraising. Why? Because there are new investors, and those investors may be interested in purchasing the shares of employees. The other possibilities to sell your shares are if the company is purchased by another company, or if the company is doing an IPO (which is rare but possible).
Vesting
Typically, BSPCEs can be exercised with the following vesting: 25% after 1 year, then 1/36 per month beyond this first year, to reach 100% after 4 years. So starting after 1 year of seniority, you can only exercise 25% of them. The vesting over 4 years is standard practice so that employees have the interest to stay at least 1 year to start having a benefit from BSPCEs, and ideally more than 4 years.
Taxation
In France in 2022, the tax rate is 30% = 12.8% of PFU+ 17.2% of “prélèvements sociaux”. This rate is only applied on the profit you get. If you purchase for €1000 and sell for €4000, the profit is €3000. After 1 year, you will pay the taxes which will be 30% x 3000€ = 900€, and keep €2100 in your pocket.
