The short answer
Employee equity lets you keep talent without paying high salaries up front. There are three common models. With an ESOP (Employee Stock Ownership Plan), employees receive real shares or options on them. With a VSOP (Virtual Stock Option Plan) and with phantom stock, they receive no shares, but a claim to a payment based on the value of the company. In Germany, virtual models are especially common at GmbH startups because they are easier to set up. As of October 2026.
The three models compared
ESOP: real ownership
With an ESOP, employees actually become shareholders or receive an option to become one later. This creates strong commitment, but also effort: for a GmbH, a notary is needed to transfer shares, the shareholder list changes, and employees gain voting rights, which you should limit in an agreement.
VSOP: virtual options
With a VSOP, the shareholder structure stays the same. Employees receive a contractual claim to a payment, usually on an exit, meaning a sale or an IPO. There are no voting rights and no notary appointment. In return, the payout is generally treated as salary and taxed accordingly.
Phantom stock: payment based on value growth
Phantom stock works much like a VSOP. Employees are treated as if they held shares and receive the increase in value as a cash amount. The line between it and a VSOP is blurry, and the terms are often mixed up in everyday use. What counts is what the contract says.
Vesting, cliff and leaver rules
Whatever the model, you decide when employees actually earn their entitlement. Vesting over several years is common, often four, with a twelve-month cliff: anyone who leaves before that gets nothing. After that, the entitlement builds up step by step. The leaver rules set out what happens when someone leaves the company, for example by resigning (bad leaver) or leaving for understandable reasons (good leaver). These rules are one of the most common points of dispute and should be clear from the start.
How much equity can you give out?
Usually a pool covering part of the company is reserved before a funding round. The right size depends on stage, team size and investors; there is no fixed rule of thumb. What matters: the pool dilutes the existing shareholders. How this affects valuation is described in Calculating startup valuation. Which clauses investors expect on the pool is covered in Term sheet explained.
Taxes: what to watch for
Tax treatment is where equity models most often fail. With real shares or options, the transfer alone can trigger a taxable benefit, even though no money has flowed yet. With the Zukunftsfinanzierungsgesetz (Future Financing Act), the rule in section 19a of the German Income Tax Act (§ 19a EStG) was improved: under certain conditions, taxation can be postponed to a later point, such as the sale of the shares or leaving the company, at the latest after a period set by law. Depending on the source, different deadlines and allowances are cited, and the rules have been changed several times recently. So check the current conditions before you make any promises. This is not tax advice: have your model reviewed by a tax advisor or law firm.
Typical mistakes
- Starting too late: If you only discuss the pool in the term sheet, you negotiate under time pressure.
- No clear leaver rules: Without them, there is a dispute at the first departure.
- Overlooking taxes: Employees can face a tax bill without having received any money.
- Models that are too complicated: If you cannot explain it in two sentences, your team will not understand it either.
- No link to financial planning: Provisions and payouts belong in the financial model.
How to get started
First clarify who you want to include and why. Then decide whether real or virtual shares fit better, and set the pool size, vesting and leaver rules. If you plan a round soon, agree on this with investors beforehand. For the legal drafting you need a law firm; for the numbers, we are happy to support you.
Frequently asked questions
What is the difference between ESOP and VSOP?
With an ESOP, employees receive real shares or options on them. With a VSOP, they receive only a claim to a payment, without becoming shareholders.
Do I need a notary for a VSOP?
Usually not, because no shares are transferred. The agreement is a contractual arrangement. For real GmbH shares, however, a notary is required.
What does vesting mean?
Vesting means employees earn their entitlement over time, often over four years with a twelve-month cliff.
How is employee equity taxed in Germany?
It depends on the model. For virtual models, the payout is usually treated as salary. For real shares, taxation can be deferred under certain conditions. Get tax advice on the current rules.
Sources
G-Tax (2026) on § 19a EStG and employee equity, LHP Rechtsanwälte (October 2026) on employee equity in startups, Haufe (2024) on the taxation of employee equity. As of October 2026. This article does not replace legal or tax advice.
