Option

In practice

Options are often a simple way of granting a stake in a company. However, under German law even the mere obligation to transfer shares must be recorded by a notary if the company is a GmbH (German limited liability company) or a UG (haftungsbeschränkt), a form of GmbH with minimal share capital. An option over existing shares in a GmbH or UG that was promised by email is therefore generally void. A virtual option (VSOP), by contrast, requires no particular form. A convertible loan is also, at its core, an option. Instead of repayment, the lender receives the right, often combined with the obligation, to convert the loan into shares in the next funding round at a discount or subject to a valuation cap. In the fully diluted cap table, options count even before they are exercised: a pool of 10% dilutes the founders’ shareholding. In financings, the pool is almost always created out of the founders’ shares before the round. The tax treatment needs to be clarified in detail. Employees who receive shares at a reduced price as remuneration generally owe wage tax, even though no money has changed hands. For young companies, taxation can be deferred under certain conditions.