Designing Virtual Employee Participation Plans (VSOP) in a legally secure manner – Your employment law firm

Virtual employee share ownership plans, also known as VSOPs (Virtual Stock Option Plans), are becoming increasingly relevant for startups and medium-sized companies in Germany. Especially when financial resources are limited and skilled workers are in short supply, growing companies are relying on clever compensation models to retain key employees in the long term.

As a law firm specializing in employment law with extensive experience in startup and investment law, we provide comprehensive support in the legally compliant design, introduction, and implementation of virtual participation programs. These models enable employees to participate in your company's economic success – without the actual transfer of shares.

What is a virtual participation plan (VSOP)? – Labor law classification for employers

Virtual Stock Option Plan (VSOP) is a modern tool for motivating employees and retaining them in the long term in growth-oriented companies, especially startups.

A virtual shareholder ownership plan (VSOP) is a contractual agreement that places employees in the same financial position as if they were shareholders in the company—without actually transferring any shares. This "virtual shareholder status" simulates proportional ownership rights, often with a view to a later company sale (exit). The goal is to attractively supplement a comparatively low fixed salary with performance-based share ownership opportunities. This can be a significant financial incentive for employees, especially in a "build-to-sell" strategy.

Although VSOPs are widespread in practice, their legal implementation is complex. Many standard contracts are not clearly protected in the context of employment law. Important questions for employers include:

• How should VSOPs be correctly classified in employment contracts?
• What rights arise when an employee is terminated or leaves the company?
• How should the participation be treated under employment and tax law?

Case law has so far provided only sporadic guidance on the specific design of VSOP models. Therefore, employers need significant advice to establish legally sound arrangements and avoid future disputes.

As experienced employment law attorneys, we support you in the legally compliant design, review, and implementation of virtual employee participation programs. Protect your company from legal pitfalls – we draft contracts tailored to your individual needs.

Virtual participation (VSOP) vs. real participation (ESOP)

The difference between a virtual participation (VSOP) and a real participation through shares (ESOP) is significant both legally and economically – with direct implications for the classification under employment law and contractual security.

With genuine participation, such as through an Employee Stock Ownership Program (ESOP), employees receive actual shares in the company. This entails comprehensive participation rights under corporate law, in particular:

• Information and voting rights in shareholders' meetings
• Right to profit participation in accordance with the provisions of the partnership agreement
• Share-based participation in the exit proceeds, i.e. in the proceeds from the sale of the company

For genuine shareholders, withdrawal of shares is only possible under strict legal conditions – usually in return for appropriate compensation.

In contrast, a virtual participation (VSOP) only grants a contractual right to profit participation, typically in the context of a company sale (exit) or upon reaching certain milestones. not about real company shares, with the following differences relevant to employment law:

• No voting or information rights as with shareholders
• No fixed profit share, but only payouts upon exit or defined bonus conditions
• No statutory protection against dismissal for VSOP entitlements – many regulations are legally controversial
• High degree of contractual freedom, but also potential legal uncertainty in unclearly formulated programs

The employment law classification of those entitled to VSOP benefits has not yet been conclusively clarified by case law. Clauses that allow unilateral withdrawal without adequate severance pay or that provide for unclear payout mechanisms are particularly critical.

As an experienced employment law firm, we provide comprehensive advice on the legally compliant design and review of your VSOP programs. Protect your company from future disputes – schedule an initial consultation now!

Virtual Participation (VSOP): Advantages and disadvantages at a glance

Benefits for startups and founders

• Capital-saving remuneration: VSOP programs enable startups to attract and retain qualified specialists and managers without having to pay high salaries or transfer actual company shares.
• Long-term employee retention: The prospect of participating in the exit proceeds motivates employees and fosters identification with the company. This strengthens team spirit and a focus on long-term corporate success.
• Flexible contract design: Virtual participation programs can be individually tailored to the company's strategy, allowing specific key personnel or strategically important employees to benefit.

Benefits for employees

• Tax advantages when starting out: VSOP models generally avoid direct taxation as with real shares and often offer more favorable taxation moments, for example, only upon exit.
• Less bureaucratic effort: Unlike real GmbH shares, virtual shareholdings do not require notarization. Contract processing is straightforward and allows for rapid implementation within the company.

Disadvantages and risks

• No co-determination rights: VSOP beneficiaries are not legally shareholders and therefore have neither voting rights nor access to company information.
• No guaranteed profit sharing: In most VSOP programs, compensation is paid only upon exit; ongoing profit sharing is rare.
• Legal uncertainties: Many clauses in virtual shareholding agreements are controversial under labor law and have not yet been clarified by the highest courts. Particularly sensitive are provisions regarding forfeiture, termination, or withdrawal of virtual shares without clear severance pay.
• Speculation on the exit: The actual value of a VSOP depends on the sale of the company. Whether and to what extent employees will benefit is uncertain.

As an experienced employment law firm, we review your VSOP contracts for legal certainty and design individual solutions that are transparent and fair for both employers and employees.

Virtual participation in the GmbH – legally secure structuring of VSOP models

With virtual participation, the employee does not receive any actual company rights, but rather a contractually guaranteed bonus entitlement, which is paid out upon success. Typical scenarios for such a payout are:

• Share sale (share deal)
• Conversion or merger of the company
• Sale of company assets (asset deal)
• Initial public offering (IPO)

The participation agreement stipulates that the employee participates financially in the company's increased value. Virtual shares are typically allocated in so-called book units. These are often based on the nominal value of the GmbH's share capital and serve as the basis for the subsequent calculation of the performance bonus.

Have your VSOP contracts reviewed for legal compliance – we support you in the professional structuring of virtual shareholdings in the GmbH. Request advice now!

Typical contractual mechanisms for virtual participations (VSOP)

Virtual participation programs often contain complex contractual mechanisms that precisely regulate when and to what extent employees benefit from the company's value. Typically, the full amount of the participation is not paid immediately, but rather subject to certain conditions and time constraints. Important regulatory instruments include:

• Vesting clauses:
  The investment is earned over a defined vesting period, usually up to five years. No entitlement exists before the end of a waiting period (cliff). If an exit occurs during the vesting period, accelerated vesting may apply.
• Good and bad leaver regulations:
  Upon leaving the company, the status of "good leaver" or "bad leaver" determines the extent to which an employee retains their shares. Failure to comply with the contract can lead to the complete loss of the shareholding. Unilateral clauses to the detriment of employees can be challenged under labor law.
• Anti-dilution clauses:
  VSOP agreements often do not contain anti-dilution protection to avoid blocking future capital increases in favor of new investors. This can result in a shrinking virtual shareholding, which represents a financial disadvantage for employees.
• Down rounds:
  In weaker financing rounds, investors sometimes receive shares at a discount (e.g., full ratchet or weighted average). This can lead to further dilution of the virtual shares.
• Exit mechanisms and severance pay:
  If an exit occurs, employees receive a contractually agreed bonus payment – often based on the net proceeds after deducting transaction costs and liquidation preferences in favor of investors. In the case of partial sales, the virtual participation is taken into account pro rata. Some programs allow the company to repurchase vested shares before the exit – subject to predefined severance conditions.

Risks of virtual shareholdings (VSOP) – What employers and employees should know

Virtual employee participation programs (VSOPs) offer attractive opportunities for employee retention, but they are legally complex and many aspects have not yet been clarified by the highest courts. This poses significant risks – both for employees and company management.

The 10 most common risks of VSOP contracts:

1. Tax burdens due to unrealistic company valuations
2. Ineffective or disadvantageous leaver clauses
3. Opaque preferential rights in favor of investors
4. Increase in social security contributions
5. Invalidity of individual clauses due to violation of general terms and conditions
6. Dilution of the shareholding due to lack of anti-dilution provisions
7. Expiry of participation rights after expiry of certain periods
8. Failure to exit – the investment loses its value
9. Unfavorable calculation of exit proceeds
10. One-sided or unfair severance clauses

Our law firm supports you in legally compliant drafting and review of VSOP contracts – labor law, tax and strategic. Contact us now without obligation!

Tax treatment of virtual shareholdings (VSOP) – What employers need to consider

VSOP remuneration can generally be allocated to different types of income for tax purposes:

• Income from employment
• Income from commercial operations
• Capital income

In practice, the Taxation as wages relevant because:

• As a rule, there is no partnership – commercial income is excluded.
• Capital income is not taken into account because employees do not receive any real capital shares.

Standard case: income from employment
Since VSOPs are typically granted in return for work performed, they are generally considered wages. This becomes problematic if the taxable receipt date is already at the grant date or during the vesting period—i.e., long before a potential exit.

This means that employees could pay income tax on a fictitious investment even though they have not yet received any cash. Such a pre-tax burden without an actual cash inflow represents a significant risk.

Differentiation from genuine participation
In the case of genuine GmbH investments, the transfer already creates a taxable asset advantage – regardless of the exit. To avoid an unwanted advance of tax liability, VSOP models should not too closely based on real investments be.

Conclusion: To ensure that virtual participations do not become an unwanted tax trap, VSOP contracts should:

• clearly distinguish between granting and payment
• be clearly separated from the employment relationship for tax purposes
• not trigger a taxable event without a cash inflow

Let your VSOP programs check tax and labor law – we design your investment models to be legally secure and tax-optimized. Get a free, no-obligation consultation now!