The (still) most common archetypes of "employee ownership" in German startups are "real" employee shares (often in the form of so-called hurdle shares, growth shares or zero shares), options for equity shares in the startup ("ESOP") and virtual stock option programs ("VSOP").
Real Employee Shares: These grant employees a (in-)direct corporate participation in the startup. This means that the employees in these startups become actual shareholders of the company (this can be done directly or pooled via an investment vehicle, often a GmbH & Co. KG) with all the rights and obligations of a shareholder under German corporate law. The value of the beneficiaries' participation in the startup is derived directly from the equity value of the company shares granted to the employees (sometimes minus a negative liquidation preference to avoid dry income tax effects upon issuance of such shares). The employees are registered in the publicly available shareholders' list of the startup as shareholders.
Options for Issuance of Shares (ESOP): Here, share options grant employees an entitlement to a future equity participation in the startup. This means that employees have a contractual right to be granted a certain number of shares in the startup at some point in the future. Apart from the so-called early exercise models, the beneficiaries can usually only exercise their options in the event of a successful exit (such as a sale or IPO of the startup) and are then allowed or, in case of a sale, are required to sell the shares they could purchase under the options immediately in the exit or to receive exclusively a cash payment in the amount of the spread between the exercise price and the value of a common share realized in the sale (respectively, the offer price in case of an IPO).
Virtual Stock Option Programs: In Germany, more widespread than "real" shares or options for "real" shares are participation programs that grant the beneficiary "virtual" share options or virtual shares (also called "phantom stocks"). Virtual programs simply attempt to economically simulate the equity-based programs. In simple terms, the beneficiary receives a payment from the startup in case of an exit event and the amount of such payment is based on, among other things, how much the holder of a common share in the startup receives in a respective exit event. At no point in time, however, the beneficiary will be a shareholder of the company.
Since the so called Zukunftsfinanzierungsgesetz has come into force on 1 January 2024, as an alternative to these three archetypes of employee participation also "Profit Participation Right" schemes (Genussrechtsprogramme) are being discussed which shall provide for beneficial tax treatment for the employees. In the meantime, we have seen first use cases in German startups. However, as "Profit Participation Right" schemes are not yet widespread and there is therefore little standardization and market testing in this respect, it is advisable to continue to coordinate the introduction of such schemes closely with the startup's legal and tax advisors and, if possible, to "test" them in advance with the responsible tax authorities.