Understanding company equity

This guide focuses on French BSPCE (Bons de Souscription de Parts de Créateur d'Entreprise), though many of the principles discussed apply across countries.

Many tech employees struggle to grasp the true value of their company equity. While it's true that most startups fail - potentially making your equity worthless - there's also the possibility that your company becomes highly successful, turning your stocks and stock options into life-changing wealth.

Let's explore the key questions you might have about your equity compensation.

What are BSPCE?

Bons de souscription de parts de créateur d’entreprise (BSPCE) are stock option grants commonly used by French startups to attract, motivate and retain talent. They give employees the right to purchase company shares in the future at a predetermined price (the strike price).

Like most stock options, BSPCE come with vesting conditions outlined in the plan documents. A typical vesting schedule spans four years with a one-year cliff:

• 25% of allocated equity vests after the first year
• The remaining 75% vests monthly or quarterly over the following three years

Always refer to your BSPCE documentation for your specific vesting schedule.

How much are my BSPCE worth?

The current value of your company equity can be calculated using this formula:

Value = (Quantity of vested options × Current stock value) - Cost of exercising

Let's break down each component:

1. Quantity of vested options: Determined by your vesting schedule. If you have multiple grants, sum all vested options.
2. Current stock value: Either the latest company valuation per share or the most recent stock transaction price.
3. Cost of exercising: The difference between the current stock value and your strike price. Calculate separately for each grant if you have multiple.

This calculation gives you the "current value" - essentially what you'd receive if you exercised and sold your shares today. Affluent's equity tracking feature helps automate these calculations for you, and automatically updates them based on your vesting schedule and valuation updates.

There's also a "future value" component based on company performance expectations. However, given the complexity and numerous assumptions required, it's often more practical to focus on the current value for decision-making purposes and discount this future value to 0.

What does exercising mean? How is it different from selling?

Many employees confuse exercising options with selling shares, but these are two distinct steps in the equity journey. Let's clarify the difference.

Exercising your BSPCE means using your right to buy company shares at your predetermined strike price. Think of it as converting your vested stock options into actual shares of the company. When you exercise, you'll need to pay the strike price multiplied by the number of options you're exercising. For example, if you exercise 1,000 options with a strike price of €1, you'll need to pay €1,000 to receive 1,000 shares of the company.

Selling, on the other hand, happens after you've exercised and involves finding a buyer for your shares at the current market price. In private companies, selling isn't always possible - you typically need either a company exit event (like an IPO or acquisition) or a specific opportunity like a tender offer or secondary market sale.

Here's a practical example:

• You have BSPCE with a €1 strike price
• The current company share price is €10
• When you exercise, you pay €1 per share to get your shares
• If you later sell these shares at €10, you'll receive €10 per share before tax

Remember that exercising requires an immediate cash outlay, while selling generates cash proceeds. This timing difference is crucial for financial planning - you might need to hold the shares for some time between exercising and having an opportunity to sell them.

Also, keep in mind that while exercising itself doesn't trigger taxes in France, selling your shares will.

When should I exercise my BSPCE?

The decision to exercise your BSPCE is one of the most challenging aspects of equity compensation, and there's no one-size-fits-all answer. Instead, you'll need to carefully weigh several important factors.

First, consider what exercising means for your overall financial picture. When you exercise options, you're essentially investing capital into stock that's directly tied to your employer. This creates a significant concentration of both your wealth and income in a single, illiquid asset - your company. It's crucial to evaluate whether this concentration aligns with your broader financial strategy.

Your personal financial situation plays a vital role in this decision. Take stock of your current liquidity, available assets, and upcoming financial obligations. Many employees find themselves constrained by the capital required to exercise their options. Make sure exercising won't compromise your ability to meet other financial goals or leave you without an adequate emergency fund.

Time is another critical factor to consider. Startups typically take 5-10 years to reach an exit event, if they achieve one at all. This long timeline represents a significant opportunity cost - the capital you use to exercise could instead be deployed into other investments like public stocks or real estate, which might generate more predictable returns over the same period.

Perhaps most importantly, your exercise decision reflects your fundamental belief in your company's future. While you may not have access to every detail of the company's financials, you likely have insight into key metrics like revenue trends and market position. Use this information to form your own investment thesis: Why do you believe your company will succeed? What are the major risks? What could the best-case scenario look like?

However, it's essential to maintain perspective. Even startups with seemingly unstoppable momentum can stumble. Remember WeWork's dramatic valuation drop from €47 billion to €8 billion in less than a year, or similar stories from other once-promising companies. Early exercising performs worse than doing nothing if your startup fails - you'll lose your entire investment. This isn't meant to discourage you but rather to emphasize the importance of making this decision with eyes wide open.

The timing of your exercise decision becomes more pressing if you've left the company. Departure typically triggers what's known as an exercise window - a deadline by which you must exercise your vested options before they expire. This expiration date should be clearly specified in your grant documents, and it's crucial to calculate it accurately to avoid accidentally forfeiting your options.

If you find yourself in this situation, a general rule of thumb is to wait as long as possible within your exercise window before exercising - unless you believe the options are worthless or there's an immediate opportunity to sell your shares. This approach maximizes your optionality while minimizing the period your capital is locked up in illiquid shares. However, don't cut it too close to the deadline - administrative processes can take time, and missing the exercise window means losing your options entirely.

Consider working with a financial advisor who can help you evaluate this decision in the context of your complete financial picture. At Affluent, we help professionals model different scenarios and understand the implications of their equity decisions.

Should I leave my company before the vesting ends?

Leaving your company before full vesting has several important implications that you need to consider carefully. First and most importantly, your vesting stops immediately upon departure, and any unvested stock options are cancelled. This can mean leaving significant potential value on the table, especially if you're close to a vesting milestone.

The timing of your departure can also have substantial tax implications, particularly in France. Staying with the company for at least three years can mean the difference between a 30% tax rate and a much higher 47.2% rate on your gains. This difference alone might influence your decision about when to leave, especially if you're approaching the three-year mark.

Your departure also triggers what's known as an exercise window - the period during which you must exercise your vested options before they expire. This window might be several months or even years, depending on your company's policies. Make sure you understand these deadlines and have the necessary liquidity to exercise if you choose to do so. If you don't see a promising future for the company, letting your options expire might be the prudent choice.

I’m being offered a discount to sell the stocks from my options, should I accept?

Companies occasionally provide opportunities for employees to sell their shares through what's called a tender offer. These offers typically come with a discount to the fair value of the stock, usually ranging from 5% to 15%. While this might seem like leaving money on the table, the decision isn't as straightforward as it might appear.

Tender offers are relatively rare events - most companies hold them irregularly, perhaps once every couple of years. They're often restricted to current employees who've reached certain tenure milestones. When evaluating a tender offer, you're essentially weighing guaranteed liquidity today against potential future gains (or losses).

The decision ultimately comes down to your personal circumstances and beliefs. Are you comfortable with your current concentration in company stock? Do you have other uses for the capital? How confident are you in the company's future prospects? The discount might be a reasonable price to pay for immediate liquidity and diversification.

Alternative options might include selling your shares on the secondary market, though this isn't always possible. Factors like transfer restrictions, timing, and investor demand can limit your ability to sell outside of official tender offers.

What taxes will I have to pay on my BSPCE?

The French tax treatment of BSPCE is relatively straightforward, though timing matters significantly. You only incur tax obligations when you sell the shares obtained from exercising your BSPCE, not at the time of exercise. The taxable amount is calculated as the difference between your sale price (net of any fees) and your exercise price.

Your tax rate depends on both when your BSPCE were granted and your tenure with the company. For BSPCE granted after December 31, 2017, staying with the company for at least three years qualifies you for the lower 30% rate, while departing earlier subjects your gains to the higher 47.2% rate. For BSPCE granted before December 31, 2017, the three-year tenure milestone results in a 36.2% tax rate instead of the 30%.

Additionally, depending on your household income and the size of your capital gains, you might be subject to the CEHR (Contribution Exceptionnelle sur les Hauts Revenus) - an additional tax on high incomes. This can significantly impact your net proceeds and should be factored into your financial planning.

These tax implications can substantially affect your final returns, making it crucial to understand and account for them in both your exercise and sale decisions. Consider consulting with a tax professional to understand your specific situation, especially for large transactions.

How should I manage proceeds from selling BSPCE shares?

Successfully selling your shares brings its own set of considerations. Your first priority should be setting aside funds for taxes - either 30% or 36.2% or 47.2% of your gains, depending on your company tenure and grant date. Don't underestimate the importance of this step; tax obligations can be substantial and come due before you might expect.

The remaining proceeds present an opportunity to reshape your financial future, but this requires careful thought and planning. Consider your life goals, financial objectives, and risk tolerance. Are you looking to buy a home? Start a business? Build a diversified investment portfolio? The sudden influx of capital can be both exciting and overwhelming.

This is often an excellent time to seek professional financial advice. At Affluent, we offer personal consultation sessions with our founder Thomas to help you develop a strategic plan for deploying your proceeds effectively. We can help you think through asset allocation, tax efficiency, and alignment with your long-term financial goals.

Remember, transitioning from concentrated equity in a private company to a diversified portfolio is a significant financial event that deserves careful consideration and planning.