What prevents Lithuanian start-ups from rewarding their employees with options?

 "Start-ups are seen as synonymous with positive change, openness, and a democratic approach to employees. Start-up founders are mostly young, technologically savvy, global-minded professionals who choose an independent business path instead of a warm place in a multinational corporation, but such opportunities are limited in Lithuania.

 

    In order to develop and implement innovative ideas, start-ups need top-class professionals. However, start-ups often do not have the resources to pay competitive salaries. As a result, employee rewarding with options has become a global practice for start-ups.

 

    Employee options are a type of equity compensation that a company provides to its employees as additional remuneration in addition to salary and other incentives in the incentive system. The resulting option entitles the employee to purchase shares in the company at a specified price over a period of time. If the start-up succeeds, the share price rises, so does the wealth of the employee with the option.

 

    Employee options are also beneficial for already grown-up businesses that seek to maintain employee loyalty, as they not only act as a financial incentive, but also become more involved in the business, making them feel an integral part of the company.

 

    Typically, ESOP (Employee Stock Option Pool) start-ups make up 5-15 percent of shares of the company, but can sometimes be as high as 30-35%.

 

    A cultural issue

 

    The issue of employee options in Lithuania is twofold - legal and cultural. And it’s not entirely clear which side is more complicated. Let’s start with the cultural.

 

    Options are especially important in the highly competitive talent market, but not all start-ups in Lithuania are willing to develop a culture of options. Sometimes the founders just don’t want to transfer part of the shares to the employees, sometimes they can’t do it because of already existing liabilities to other investors, sometimes they just doubt because they have a vague understanding of the option allocation process and mechanism.

 

    Employees in Lithuania also do not always understand what valuable assets they receive in the form of options. The relatively low instinct of Lithuanian ownership plays a key role here, i. y. desire to be the host of a situation, project or business.

 

    The founder of the startup, giving his colleagues options, says in a way: "Be part of this business, enjoy equally when you succeed, and survive when you fail." In Lithuania, where entrepreneurial traditions are relatively young, employees often do not yet associate themselves with the workplace as a means of long-term commitment and at the same time an opportunity to grow. Meanwhile, the spirit of US entrepreneurship has been flourishing since the time of the gold rush, when every business was set up by partners and willing to share the results.

 

    Legal options are limited

 

    The other side of the coin is legal. Lithuania is in a relatively good position in terms of the legal regulation of options in the European context, together with its neighbors Estonia and Latvia. Still, there is definitely room for improvement.

 

    Normally, shares should be provided to employees by the company itself, but in Lithuania these opportunities are very limited. Under the Companies Act, a company may issue "employee shares", but the regulation of these shares is very inflexible. For example, employee shares cannot be granted to executives.

 

    The Share Allocation Program in force in Lithuania is more suitable for listed companies. They can buy their shares on the stock exchange and distribute them to employees, but only if they have an accounting profit. Start-ups rarely make a profit in the first five or even more years of operation.

 

    Alternatively, it may be agreed that the shares held will be transferred by the founders or other shareholders. Such a tool is currently mostly used by Lithuanian start-ups, however, it is quite difficult, especially if there are significant changes in the start-up's activities (for example, one of the founders is leaving).

 

    Employees may also be granted notional ("phantom", "fictional", "synthetic") shares, i. y. give promise to share in the future. However, this solution also has its drawbacks.

 

    What is missing from the Lithuanian legal framework?

 

    A common consequence of start-up financing transactions is the formation of share premium. Share premium is the excess of the nominal value of the shares, i. y. the amount that investors paid for the shares in excess of the par value of those shares.

 

    Share supplements do not affect the company’s share capital, but increase the company’s assets and equity as the company’s unused funds. The company could use them more efficiently for the purpose of encouraging employees if it were allowed to form reserves for the repurchase of its own shares and provide them to employees.

 

    In general, Lithuanian law does not currently clearly set out or determine the nature of options and other options. Therefore, neither employees nor investors can be fully sure whether option that has been exercised will not be recognized as a preliminary agreement for the future acquisition of shares. In this case, the option holder can only claim damages, which undermines the legitimate expectations of employees and other option holders.

 

     The Lithuanian start-up ecosystem is growing and expanding faster than ever, so these issues are becoming more and more acute. The sooner we address them, the sweeter and bigger the fruits of our growing unicorns and their workers."