BSPCE kit - May 2023

Today, practices are changing, and the growth of scale-ups is posing new problems. That is the reason for this update.

Because, despite these new complexities, they remain unavoidable. Because BSPCEs have become a market standard; because they correspond to the entrepreneur's philosophy, which is based on trust in a project, risk-taking and collective adventure; and because by concentrating the principle of shared value, they will allow as many people as possible tomorrow to benefit from the long-term success of European Tech.

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The BSPCE kit contains:

1. A sample award letter from BSPCE
2. The BSPCE Galion plan
3. A mini shareholder agreement template
4. The explanatory note of the mini-pact
5. An educational document to communicate to your employees

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What are BSPCEs?

Oops, back to basics: Business Creator Share Warrants (“BSPCE” for short) are a tool to retain your employees and associate them with the future success of your start-up. Concretely, these are options that, under certain conditions, give the right to subscribe for shares in the start-up at a price fixed in advance (exercise price).

A popular tool in the Tech ecosystem: 65% of startups give it, 100% of startups that raised 50m+ (France Digitale 2022 barometer).

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Are all startups eligible for BSPCEs?

Not necessarily : the company must have been created in France in the form of a public limited company or a simplified joint stock company less than 15 years ago, its activity must not come from the takeover of a pre-existing activity and its capital must have been held continuously for at least 25% by natural persons (including, where applicable, through a holding company itself owned at least 75% by natural persons).

The regime is applicable including to start-ups listed on the stock exchange but, when their valuation reaches 150 million euros, the start-up loses its BSPCE eligibility after 3 years.

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Who in the start-up can have BSPCEs?

All employees are eligible for BSPCE, as well as social managers (President, CEO and Deputy Chief Executive Officers, Chairman of the Board of Directors, Members of the Management Board, Members of the Board of Directors, Members of the Supervisory Board and, in the case of simplified joint stock companies, Members of any statutory body with responsibilities similar to those of the Board of Directors or Supervisory Board). Regarding independent members of Boards, 63% of them have BSPCEs (0.3% on average) according to The IFA 2022 barometer.

On the other hand, Since committee members do not have powers equivalent to those of a board of directors or supervisory board, consultants or freelancers cannot be awarded a BSPCE. If you want to interest them in capital, one option is to award them warrants (Stock Subscription Warrants) which, however, cannot be issued for free but must be purchased at their market value. The purchase price of vouchers may be paid in whole or in part by way of compensation with the remuneration received, if applicable, by the beneficiaries.

Since the 2015 reform, it has been possible to award BSPCEs to employees of certain subsidiaries that are more than 75% owned.. That said, the BSPCE regime is generally of no interest for employees who have their tax residence abroad, in particular in relation to that of stock options.

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Why assign BSPCEs to your employees?

There are at least 4 good reasons:

1. To attract high-potential profilesL

If you're hiring a top caliber and he/she's not asking you the question of capital incentives, they might not be... top caliber after all. Or if he/she discovers later that they were not offered when he/she feels entitled to it, there is a risk of great frustration.

Especially since BSPCEs are a powerful tool for attracting top-level talent: on the one hand, they make it possible to compensate for a package that is potentially lower than that offered by a large group, on the other hand, the risk taken by joining a lesser-known brand, whose future is subject to a large number of uncertainties.

2. To retain employees

The “vesting” mechanism (see below) is a powerful barrier to deter employees from looking elsewhere... or from being poached, especially in high cycles. But as with the salary, if your employees only stay for the money, it never bodes very well.

3. To improve the involvement of employees in the business project

With BSPCEs, employees feel like shareholders in the start-up. For some people, it is a powerful psychological engine that increases their productivity.

4. To involve your employees in your future financial success

If one day you sell your start-up or put it on the stock market, it's still quite nice to tell yourself that your employees who worked hard for this success are also benefiting from it.

In the end, every reason is not necessarily enough for everyone. But combined together, this makes BSPCEs an effective weapon for start-ups to retain talent.

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Why give BSPCEs instead of free shares?

Free shares are easier to explain to employees, given the absence of strike prices, so it is tempting to use them. However, BSPCEs are more frequently used for several reasons:

1. There are no social charges to pay for the start-up and therefore no impact in terms of cash flow. This tool was created especially for start-ups, it would be a real shame not to take advantage of it!
2. Expected added value is based entirely on future value creation and not past value, which is the spirit of the contract signed with the employee. The system relies on a strong appreciation of the start-up, which means that in principle the exercise price fixed at the time of the award is not really penalizing.

Free shares can be an interesting financial instrument in particular circumstances, for example when it comes to associating in the capital a manager who did not participate in the creation of the company and for whom the allocation of BSPCE would be insufficient, or to correct the fact that BSPCE were not awarded quickly enough, resulting in a high exercise price. When the start-up goes public, they also make it possible to better absorb fluctuations in the share price and therefore reduce uncertainty about the value given to the employee.

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Why give BSPCEs instead of stock options?

The two tools are very similar since in both cases it is a free instrument designed specifically for employees and managers, giving the right to subscribe for shares for a fixed price determined on the date the BSPCE or options are granted.

However, the fiscal and social regime of BSPCEs is simpler and more favourable. both for the start-up (absence of social security contributions) and for its employees. Note that only employees who have their fiscal residence in France are eligible. Eligible start-ups therefore systematically opt for BSPCEs, in preference to stock subscription options.

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What percentage of the capital should be provided for BSPCEs?

To attract the best talent, experience shows thatin general, with a pool of around 10% of the capital, we cover the needs well up to series A, or even B (see the Galion Term Sheet on this subject). In the event of hypergrowth of the company and massive recruitments, we must be able to extend the pool beyond 10%.

In later phases of growth, this pool can typically rise to 15%., sometimes a little more by including the BSPCEs already awarded and those still attributable. The size of the pool depends in particular on the percentage of the capital held by the managers (it is all the more important to award BSPCEs when the managers were not involved in the creation of the company and therefore do not hold a significant part of the capital).

In any event, It's better to think big on each show and not use everything, rather than undersizing and then having to consult shareholders again.

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How to set the exercise price of BSPCEs?

The exercise price of BSPCEs is the price that it is up to the employee to pay to obtain the shares to which the BSPCEs give him the right to subscribe.

Under the General Tax Code, this price must be at least equal to the price of the last capital increase of the company relating to shares of the same nature (ordinary shares) during the 6 months preceding the award of BSPCE less, where applicable, by a discount corresponding to the possible loss in economic value of the security since this issue. In the absence of a capital increase in the last 6 months, the exercise price of BSPCEs must reflect the economic value (Fair value) shares to which the BSPCEs give the right to subscribe on the date of their award.

In practice, The practice is to retain the price of the last capital increase even if it is more than 6 months old or relates to preferred shares and not ordinary shares, unless there has been a recent significant secondary transaction (of at least 1 to 2% of the capital) that makes it possible to build on it.

In the frequent case where the last capital increase concerned preferred shares, it is accepted that the value of ordinary shares be affected by a discount. in relation to preference shares, especially if the preference is participatory. In the latter case, the exercise price of BSPCEs can typically be reduced by 20% compared to the price of the shares in the last round, or even more, which must in any event be justified by simulations on the application of the preferential distribution clause in the event of exit. To obtain maximum security from the tax authorities, it is recommended to call in an expert to confirm the value of this discount.

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How to value BSPCEs?

This is not easy as the value of BSPCEs depends on the future performance of the company., which are by nature uncertain. They are sometimes valued at their strike price for convenience, but that doesn't mean anything at all.

A possible approach consists in making 3 development scenarios: optimistic, low, pessimistic. Each one makes it possible to calculate a theoretical output valuation, and we take the average of the three, possibly weighted by probabilities. Note that, in order to remain credible, The optimistic scenario must remain reasonable.

This exercise is a clever balance. If you are too pessimistic about the prospects for the future valuation of your start-up, you risk diluting shareholders too much. If, on the contrary, you are too optimistic, the tool loses a lot of credibility because the prospects of gain become very random for your employees.

The valuation of BSPCEs remains an internal exercise intended to establish its allocation grid (for the grid, see the question “How much BSPCE should be given to employees?” ”) and not to communicate to employees (such communication being likely to expose the company in case of underperformance). For the subject of communication, see the question “How do I communicate to employees?” ”

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Should one be given to everyone or only to certain employees?

This is a delicate question that does not meet with the unanimity of Galleons. Nevertheless, the vast majority opted to include 100% of employees and this is our recommendation.

The usual objection is that giving it to everyone dilutes their impact, while only a limited part of employees (generally the oldest but not always) really value BSPCEs.

It is also an element of complexity : the need to have each employee concerned sign an award contract and a mini-pact, in particular, and to update it during successive financing rounds, as well as to submit any issue of shares to the approval of BSPCE holders gathered in as many “masses” or special meetings as there are awards.

One way to limit this complexity is to group assignments. (e.g., 1 to 2 awards per year) in order to avoid (i) creating too many distinct “masses” of BSPCE holders and (ii) that an employee alone holds more than 1/3 of the BSPCEs of each asset, i.e. BSPCEs issued under a given allocation (which would give him, under the Commercial Code, a right of veto on certain exceptional capital transactions such as issuance of preferred shares).

The best solution to avoid the cumbersome nature of special meetings is simply to Put preferred shares not in the articles of association but in the shareholder agreement which in practice offers quite sufficient protection under French law.

In any event, There are a lot of benefits in giving it to everyone, which make it the norm in the United States, and is becoming more and more common in Europe as well:

1. Admittedly, some employees, at the beginning, do not really value their BSPCEs. It is difficult to blame them since statistically, in the majority of cases, they will never have value. But experience shows that for start-ups that manage to pass into the hypergrowth phase (a great period that we wish for all start-ups!) , the attitude of the same employees is changing radically. They suddenly become retroactively aware of the trust they were given at the beginning, and are all the more motivated in a critical period for the start-up.
2. On the other hand, if the start-up never takes off, the BSPCEs have cost the company nothing.
3. This sends a strong message of trust and inclusion that motivates teams.
4. This makes it possible to talk openly about BSPCEs when speaking to all employees. This is particularly important when you are in a difficult situation or when an exit or IPO project is in the works.

Finally, pay attention to pedagogy: for BSPCEs to fully play their role, employees must understand the full benefits of this complex system.. It is therefore up to the founders to explain the approach and the mechanics (see on this point “how to communicate” and the educational document).

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How much BSPCE should you give per employee?

Giving BSPCEs to all employees does not mean spreading the word about equality.. On the contrary, BSPCEs are distributed in a much more individualized manner than salaries.

For first-time employees and top managers, each situation is a particular case, often negotiated by mutual agreement. As soon as you have more than ten employees, it is strongly recommended toEstablish an indicative allocation grid according to seniority and the type of position. For example, at an equivalent level, a developer will receive significantly more BSPCE than a salesperson who favors his bonus in cash.

BSPCE amounts are always increasing much faster than salary grids.. For example, for a wage gap of 30%, the difference in the number of BSPCE can reach 100%. For a junior at the beginning of their career, this can represent a potential gain of a few months' salary, while in management positions, you can quickly reach several years of salary.

The minimum at the very bottom of the scale must at least be the symbolic equivalent of a thirteenth month each year (i.e. 4 months' salary for the acquisition of the rights to exercise the BSPCE or” Vesting ” complete over 4 years). This amount is particularly relevant for business models that require hiring a large number of low-skilled employees. Going up the ladder of the grid, the value of BSPCE quickly represents several years of salary in expectation of earnings, especially in R&D and R&D functions. Management.

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What are good investing practices?

As a reminder, the” Vesting ” or fiscal year calendar is the rate at which BSPCEs are definitively acquired by the employee and become potentially actionable. It is generally a function of the length of time the employee is present in the company. It is also possible to condition, cumulatively or alternatively to the duration of the employee's presence in the company, the exercise of BSPCEs to individual and/or collective performance criteria. This is not the current practice in start-ups except in very specific situations.

Too short, the Vesting has no effect on loyalty. Too long is disheartening. So, market standards converged over a total period of 4 years from the date of the allocation of BSPCE (or, in certain cases, in particular during the first award or when a catch up is necessary, the entry of the employee into the company), with a period of one year to benefit from the first installment, which often amounts to 25% of the BSPCE. Over the next 3 years, the recommendation is to do a Vesting monthly (2.08% per month) to avoid threshold effects.

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When should BSPCE be given to employees?

The most common use, for first attribution, is to assign them at the end of the trial period. The Vesting can start at that moment or, better still, be retroactive to the date the employee joined the company.

For refreshes, see “What to do when the vesting is over?”.

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What to do in case of departure of an employee?

Whatever the reasons for leaving, The general practice is that workable or “vested” BSPCEs must be exercised by the employee within a window of 30 to 90 days following his departuret. The idea is that by requiring the employee to work, this makes it possible to remove uncertainty about the composition of capital. This is an important factor when you want to issue a new pool of BSPCE and when many employees have left in the meantime.

In practice, this means that unless they have a very high visibility on the trajectory of the start-up, employees who leave are not able to finance the risk and give up exercising their vested BSPCE, which they therefore lose. As such, it is strongly recommended that the board of directors be given the discretionary power to remove the constraint of the fiscal year window. Management thus provides itself with a very effective negotiation instrument during potentially conflictual departures. Indeed, allowing employees to maintain their capacity to work over a long period of time can be much more attractive for both parties than traditional severance benefits.

Note that as the funding rounds progress, the exercise price of newly awarded BSPCEs increases, taking into account the obligation to set this price at a level at least equal to the market value of the shares to which they give the right to subscribe on the date of award of the BSPCEs.

The consequence is thatExercising your BSPCE can represent a significant amount of money for an employee.. As a result, this subject may be an issue for discussion in the event of the employee leaving before the company is sold or listed on the stock exchange.

Some start-ups have introduced the concept of” Bad Leaver ”. The idea is that BSPCEs that are already tested may be cancelled in some cases of departure. For the same reasons as for the founders (see comments on this subject in the Galion Term Sheet), we recommend not to introduce this type of clause, which is atypical and can generate perverse effects. Especially since their validity is uncertain (case law clearly rules out the application of these options on the grounds that it would be a “double sentence” and there is every reason to believe that the same principles are intended to be applied to BSPCEs).

On the other hand, in the event of a conflictual departure and to avoid having a shareholder who is potentially hostile to capital, it is recommended that the company, and failing that its main shareholders, benefit from a option to call at market price on shares he/she could have purchased following the exercise of its BSPCE.

Attention: In the event that an employee leaves without exercising his BSPCE, these cannot be attributed to another employee or used by the founders to connect : it is necessary to go through an AG decision to note the complete or partial non-exercise of BSPCEs, then make them obsolete and ask the shareholders to re-issue the same number. Note: if there has been a change in valuation, the new BSPCE will be issued according to the last valuation.

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Should an acceleration clause be introduced in the event of a takeover?

Opinions are divided on this issue. The American practice and that of a growing number of start-ups in Europe is not to offer acceleration, this system that allows employees to exercise their BSPCE at the time of a liquidity transaction (sale of the company or IPO), regardless of the initial vesting schedule. The main reason is that this type of clause mechanically decreases the value of the company. In fact, any potential buyer of a start-up will have to include an equivalent amount in their budget in order to retain employees again.

That said, this provision can sometimes be justified for the positions of CEO, CFO and General Counsel ( General Counsel ). The idea is toAlignr in the best interests of this small group with those of the shareholders in a sale process where they often play a key role.Hey. In this case, acceleration occurs when two conditions are filled (” Double trigger ”): a change in control of the company and dismissal (or a significant reduction in employment) of the person concerned in the 6 or 12 months following the operation. This type of specific clause negotiated by mutual agreement for these key positions may be limited in duration (typically 2 or 3 years), the time that the person has acquired the right to exercise sufficient BSPCE under their normal fiscal year schedule.

That said, in order to have maximum flexibility, it is important to provide that the board of directors may, at its discretion, expedite if circumstances warrant.

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When should BSPCEs be issued?

It is important to do it As soon as possible when the valuation is low, so that the loyalty and motivation effect is fully effective.

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In practice, how do you issue BSPCEs?

A pool is authorized by the general meeting, whose duration cannot exceed 18 months under French law. Then The individual responsibilities are the responsibility of the board of directors, the management board or the president. BSPCEs can only be awarded to someone when they are already employed.

Therefore, when negotiating with candidates for key positions that require significant staffing, It is prudent to ensure the prior support of investors for the envelope in question. Otherwise you can find yourself in a delicate position of having negotiated a promise that you are not sure you can keep. Note that the exercise price of BSPCEs must be at least equal to the market value of the shares to which they give the right to subscribe on the date the BSPCEs are awarded (and not to the date on which the pool is authorized by the general meeting).

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When should BSPCE holders sign a shareholders' agreement?

It is very important to have a shareholders' agreement signed at the time of the award and not later.. In other words, the award of BSPCEs must absolutely be conditional on the acceptance of the pact.

It is not a question of having the same shareholders' agreement signed as the one that binds the founders to the investors. In general, we are content witha lightweight version (referred to as a “mini-pact”) which essentially gives employees the assurance of being able to sell their shares at the same time as the main shareholders in the event of a sale of the company (joint exit right) in return for the acceptance by the employees of the usual restrictions: forced exit clause in the event of sale of the company by the main shareholders, right of first refusal for the benefit of the main shareholders, where appropriate preferential distribution of the exit price for the benefit of financial investors (if any) one in the main pact), commitment to conservation in accordance with customs in the event of an IPO and the promise of resale of employee shares at their market value in the event of departure from the company.

For more details on these points, please refer to Galleon Term Sheet and to the mini-pact model.

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Should a liquidity mechanism be introduced on BSPCEs?

In principle, the exercise and sale of BSPCEs take place either at the time of the sale of the start-up, or following its IPO or when an employee leaves the company and a repurchase mechanism is planned (see above). Nevertheless, it may be relevant for mature scale-ups to organize partial liquidity for company employees.

For executive managers, the objective is a bit closer to that of the “partial cash out” of the founders. (see the Galleon document on this subject). By making it possible to secure part of its added value, it is an additional motivating factor to develop the most ambitious vision possible for the start-up without risking losing everything.

For other employees who do not have strategic decision-making power, partial liquidity is above all symbolic: it makes it possible to show that BSPCEs have real tangible value and are not just a piece of paper. For the large number of employees who have never experienced a successful exit before, this is changing their perspective on the value of BSPCEs.

For prevent the added value achieved from being reclassified as a salary, this partial liquidity must not be systematic (i.e. it must not be guaranteed) and the sale price of the shares to which the BSPCEs give the right to subscribe must never be higher than the market value (which is by nature random). It is recommended to limit the transaction to a range between 15% and 20% of approved BSPCEs, which makes it possible to have the desired signal effect without weakening the retention mechanism, which remains the key point of capital incentive.

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How to finance the takeover of BSPCE by the company?

If the company has the necessary cash flow, the financing of the operation is ideally carried out directly by the start-up with a view to redistributing them to employees in the form of free shares or stock options. They can also be cancelled (with the consequence of a reduction in capital and therefore the railing of the other shareholders — we speak of “repurchase-cancellation”) but this decision implies convening a meeting of partners and obtaining their unanimous agreement to renounce asking for the repurchase of a share in their own shares.

Moreover, under French law, a company cannot hold more than 10% of its capital (this constraint does not exist in the US). This threshold nevertheless allows quite significant flexibility, especially since to purge these purchased shares, the board of directors has the option of then redistributing them to employees in the form of free action plans.

If the start-up does not want or is not in a position to mobilize its cash flow, the takeover is typically carried out with the approval of the board of directors by certain major shareholders with the abolition of the right of pre-emption.

There are also a number of platforms that offer to connect employees with potential investors. The use of these platforms requires precautions to avoid an anarchic situation of wild listing, with all the associated reputational risks., with the purchaser therefore having access to all the information as a shareholder. To force these platforms to set up a structured agreement with the company, it is strongly recommended to introduce into the mini-shareholders' agreement, or even into the articles of association by unanimity of the shareholders if it can be obtained, a Clause who requires any potential seller to obtain the approval of the company's board of directors prior to any transfer, via a platform or other intermediary.

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What to do when the vesting is over? The refresh question

As we approach the end of vesting, the retention effect on the employee decreases mechanically.. In the case of management executives who have a very strong impact on the future trajectory of the start-up, fully vetted BSPCEs can maintain a significant retention effect. The obligation to exercise over a short period of time in the event of departure is also a powerful retention factor.

However, for mature start-ups, especially if they are listed on a liquid market, an interesting practice is to Make small complementary BSPCE plans each year that are piled up with staggered vesting, and thus make it possible to maintain the retention effect. Unlike the initial allocation, which is granted on a systematic basis, these annual plans generally only concerna fraction of employees based on merit, which makes it possible to limit dilution.

Some scale-ups assign BSPCE refreshes to their top performers (or sometimes to all their employees) as early as half of the vesting period, calculated according to the business plan validated by the investors and the board, using the following ratio:

• 5 to 7 times the salary for Heads of
• 3 to 4 times for Managers
• 1 time for the Juniors

The salary gain multiple is also a reference for BSPCE refreshes in the context of promotions.. It is then recommended to position the person on the lower scale of the interval of the new level (ex: x5 if he goes from Manager to Head of), knowing that he will benefit from a refresh after 2 years. This not only preserves the loyalty effect of BSPCEs, but also simplifies the calculation of packages.

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How do I communicate to employees about BSPCEs?

Since the value of BSPCEs is by nature uncertain, you should avoid saying too much and A fortiori to commit to amounts of potential capital gain. Ideally, The best is to communicate only on the number of BSPCE and let the employee make his own estimate of the gain likely to result.. In this regard, it is advisable to set the nominal value of shares at 1 euro cent to have a capital composed of several million shares. This is particularly useful for small assignments given to juniors. Even if this does not change the intrinsic value of shares and BSPCEs, it is psychologically more fun to be awarded 800 BSPCE than 8, a figure that seems a bit ridiculous.

The most experienced and smart employees will ask you what percentage of the capital this corresponds to. It is a legitimate question that cannot be avoided for the largest endowments. If they are in demand, we can then simulate future potential value for them according to valuation scenarios. By insisting on the fact that all this remains hypothetical. You will never be criticized for being too pessimistic, when the opposite...

It should also be clearly communicated that The exercise of BSPCE, excluding the sale or IPO of the company, will require employees to withdraw cash.

Finally, it would be a shame if the signing of the BSPCE contract and the associated pact were limited to paperwork. Above all, it would hamper the effectiveness of the system. That's why the establishment of BSPCEs should be a somewhat solemn moment, full of positive emotions, during which the founders explain the philosophy, but also the details and the implications. The vast majority of employees are not familiar with this subject and are eager to know more. As long as the workforce is not too large, the impact is even stronger if this interview is conducted by one of the founders, rather than a middle manager or human resources.

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Article written by JB Rudelle following numerous exchanges with entrepreneurs from Galleon

Thanks to Renaud Bonnet, from the Jones Day firm, for his contribution.

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