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Old 19.01.2013, 15:50
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Shares as compensation

Hi all,

My firm want to give me part of my bonus as shares this year. In principle, I'm all for it but:

a) It's a small firm that has never done this before
b) I have zero confidence in the firm accountant
c) I dare say they'll diddle me if they can

So, m'colleague an I want to put the proposed deal in front of a lawyer to see if it's legal and fair. Does this sound like a good idea? Any recommendations? Anything I should particularly look for in terms of traps or nasty surprises?

Thanks a lot for any input!
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Old 19.01.2013, 16:10
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Re: Shares as compensation

Are these shares in a publicly listed company, or is the company privately held? If the company is privately held, think about how you would sell your shares if you ever needed to.
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Old 19.01.2013, 16:17
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Re: Shares as compensation

Unless the rules have changed you will pay the AVS on the value of the shares and possibly some income tax on the grant of the shares. Ask what has been agreed by the company accountant with the tax authorities as to taxation. Tax on the grant of the shares or only when they are sold?
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Old 19.01.2013, 16:18
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Re: Shares as compensation

I have designed and experienced a number of employee share plans.

Before going to a lawyer there's some extra details you can ask for that will give you many of the answers or at least make the lawyer meeting more efficient.

I am assuming this is not a listed/public company.

1. Is this a scheme being extended to just a few of you or more generally? If the latter there is more likely a detailed set of rules developed by the company.
2. How are the shares being valued at grant? This will generally be on the basis of profitability times a "multiple" plus cash minue debt.
3. What type of shareholders agreement will you be expected to sign regulating how the company is administered.
4. What are the rules if you leave the company for whatever reason (leaver provisions)
5. Is the company due to be sold at some point, if so what are the rules to allow you also to participate (drag and tag rights)
6. If not, how will you get value for these shares (dividends, sale potential). Shares stuck in a private company that doesnt pay dividends and cant be sold are effectively worthless.

Be aware if you are granted the shares in lieu of bonus and/or below their tax value, there will still be tax to pay on the benefit in kind value and you will have to pay tax without a corresponding cash income (since you got shares instead.)

Hope that helps get you started.
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Old 19.01.2013, 17:01
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Re: Shares as compensation

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Hi all,

My firm want to give me part of my bonus as shares this year. In principle, I'm all for it but:

a) It's a small firm that has never done this before
b) I have zero confidence in the firm accountant
c) I dare say they'll diddle me if they can

So, m'colleague an I want to put the proposed deal in front of a lawyer to see if it's legal and fair. Does this sound like a good idea? Any recommendations? Anything I should particularly look for in terms of traps or nasty surprises?

Thanks a lot for any input!
If the company is not listed, then you need to seek proper legal advice as to how the shares are valued for wealth tax purposes, the rules defined in the tax law are complex and can result in some crazy valuations.
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Old 19.01.2013, 17:04
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Re: Shares as compensation

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If the company is not listed, then you need to seek proper legal advice as to how the shares are valued for wealth tax purposes, the rules defined in the tax law are complex and can result in some crazy valuations.
I would expect the company to do (in fact have done) this work for the employees since they anyway have to comply with the social insurance deductions etc.

Im not so sure valuation of shares is complex, but once you get into options, the volatility of black scholes can generate some counterintuitive answers for sure, however this isnt the situation here.
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Old 19.01.2013, 19:21
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Are these shares in a publicly listed company, or is the company privately held? If the company is privately held, think about how you would sell your shares if you ever needed to.
Yes, exactly, the firm is not publicly listed, and I'm not even sure if they would be negotiable. This worries me.

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Unless the rules have changed you will pay the AVS on the value of the shares and possibly some income tax on the grant of the shares. Ask what has been agreed by the company accountant with the tax authorities as to taxation. Tax on the grant of the shares or only when they are sold?
It's tax at the time of granting. That much I do know.

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I would expect the company to do (in fact have done) this work for the employees since they anyway have to comply with the social insurance deductions etc.

Im not so sure valuation of shares is complex, but once you get into options, the volatility of black scholes can generate some counterintuitive answers for sure, however this isnt the situation here.
Right, these are just plain shares. No optionality. The value is, supposedly, based on the taxable value of the firm. Does that make any sense?

Last edited by Caviarchips; 20.01.2013 at 07:57.
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Old 20.01.2013, 00:14
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Re: Shares as compensation

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I would expect the company to do (in fact have done) this work for the employees since they anyway have to comply with the social insurance deductions etc.

Im not so sure valuation of shares is complex, but once you get into options, the volatility of black scholes can generate some counterintuitive answers for sure, however this isnt the situation here.
I'm talking about wealth tax, not income tax nor capital gains tax. The valuation is determined by the IOT based on the accounts filed by the company and is based on the formulas set out in the tax codes. It has nothing to do with financial theory.
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Old 20.01.2013, 01:28
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Re: Shares as compensation

I'm not sure why you are "all in favour of it" given what you've said!

In a nutshell, if you are being asked if you *want* to take shares, then fine -- you can make a decision. If you're being told you must, I would be unhappy, and would be scouring my contract.

There's a big difference between being given actual trade-able shares that have some sort of recognised monetary value, and being offered a share option that might be worth something sometime in the future if and when the company becomes publicly listed. I've been stung twice like this before. Unless you know that the company is intending going public, I would stay well clear.

Also, remember that usually with these arrangements, all entitlement ceases when you leave the company.
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Old 20.01.2013, 16:15
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Re: Shares as compensation

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I'm talking about wealth tax, not income tax nor capital gains tax. The valuation is determined by the IOT based on the accounts filed by the company and is based on the formulas set out in the tax codes. It has nothing to do with financial theory.
We were always able to negotiate a sensible corp style finance formula with the authorities. This for cases in a variety of cantons.
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