Exercise of BSPCE: It's not rocket science!

If the story of a company begins in a very small committee (among founding shareholders), its success is written over time with all its collaborators. And that, French startups have understood well! To attract, retain or reward employees while promoting the growth of the company (#win-win), BSPCE are THE preferred system. But beware, let's not mix up BSPCE and shares! So how and why to transform these famous vouchers into actual shares? We explain everything to you!

BSPCE: brief overview

As a reminder, a BSPCE (Warrants for Business Creators) corresponds to an option that will give its beneficiary (manager, employee or advisor) the right to buy shares at:

• longer or shorter term,
• a price determined in advance,

in return,

• the satisfaction of conditions (time, objectives or both),
• • payment of a favorable exercise price (the "strike price") - materializing the subscription to the company's shares applying this system (i.e. the startup itself or its potential French or foreign parent company).

Benefiting from a BSPCE allocation is therefore having a ticket to enter the very select club of shareholders, but it will still be necessary to reach the end of this quest... Let's discover together how to proceed!

From the allocation of BSPCE to their exercise: it's not just one step

The exercise of the BSPCE is not immediate, after the allocation comes the acquisition period which takes place according to a calendar (the "vesting") whose conditions are set by a grant plan.

In other words, it is important to distinguish well the vested BSPCE from those that are not (yet) since only the former can be effectively exercised.

However, the departure of an employee, for whatever reason, will result in the interruption of the vesting of his BSPCE which will become void (the main condition of acquisition - i.e. the presence of the employee in the company - no longer being satisfied). In the same way, any suspension of the employment contract (extended sick leave or sabbatical leave for example) also results in a suspension of the acquisition which will be extended by an equivalent period.

Conversely, in the context of certain capital transactions (change of control of the company or merger for example), the exercise of the BSPCE may take place accelerated without taking into account the initial calendar to allow the beneficiaries to exercise more or all of their warrants (under “acceleration clauses”).

Now suppose that BSPCE can actually be exercised (i.e. - transformed into shares), when and how to proceed?

Focus on the exercise period 

When to exercise?

The exercise period begins in principle, at the time of the acquisition of the BSPCE and ends, at the latest, at the expiration of their validity period (generally 10 years from the allocation). Like unvested BSPCE, the BSPCE not exercised during this period become void.

However, this period can be arranged by the plan through the establishment of exercise windows:

• For practical purposes, according to one or two periods determined in the year or in case of a punctual window organized at the initiative of the company, in order to group all the formalities related to the conversion of the vouchers and therefore to the increase of the capital (recognition of this increase, publicity formalities, ...)
• In case of departure of the beneficiary, according to the conditions of departure (good or bad leaver? dismissal, resignation, other...) the company may provide to reduce the exercise period, to lift potential uncertainties on the composition of its capital.

At the same time, for more flexibility and fairness towards their employees, more and more companies adapt the exercise deadlines of their plan(s) by applying less strict durations (post-departure exercise duration equivalent to the time spent in the company by the employee as at MemoBank or Equify).

In any case, negotiations can always be considered between the beneficiary and the management team, at the time of departure, in order to potentially agree on more flexible exercise terms.

How to exercise?

To exercise their BSPCE, employees must:

1. complete and sign an exercise form (also called a subscription form)
2. proceed with the payment of the exercise price (depending on the case, different payment methods can be accepted including compensation with salary/bonus etc.) 

The subscription of the new shares obtained by exercising the BSPCE is then recorded in the share movement register of the company while the beneficiary will have an individual shareholder account opened in their name.

Why exercise?

Being an option, the employee is not immediately or even definitively constrained to exercise his BSPCE. But obtaining the status of a shareholder is a mandatory step, since no one can sell or give his BSPCE without paying the price (of exercise). Thus, the interest of transforming his vouchers into shares lies in the opportunity to resell them afterwards and maximize their capital gain (= Resale Price - Exercise Price).

Although the exercise price is supposedly advantageous (as it is potentially lower than the price of the share as valued at the time of conversion), this can still represent a significant sum to be paid out at a given moment for its holder, without certainty regarding the timing of its return on investment. To overcome this uncertainty, and when they have the opportunity, it is therefore very common for employees to practice the “cash-less” technique by exercising their warrants and simultaneously selling the associated shares to directly receive the amount of the net capital gain of the exercise price (i.e. without previously paying the sum corresponding to the subscription price of the shares).

Whether it is related to the upcoming exercise deadline or to the prospect of a simultaneous sale, everyone therefore sees the opportunity to monetize his BSPCE at his door.

Shareholder and then? 

According to the famous adage:“No liquidity, no money”. It is particularly difficult to understand the value of BSPCE, without the possibility to quickly convert into cash the shares resulting from it. However, in terms of liquidity horizon, listed companies and startups are not on an equal footing. What liquidity prospects for shares of unlisted companies? 

Liquidity events

1. The IPO : theoretically, this is the liquidity event par excellence since on this occasion, a part of the company's capital becomes public and therefore accessible to a considerable number of potential investors (it then becomes more obvious to find a buyer for its shares). In practice, the IPO assumes a certain stage of development and may involve complications and prolonged delays (Deezer, among others, had to try twice).
2. The company's buyout: M&A (Merger&Acquisition) operations are a certain liquidity opportunity for BSPCE holders, because if they have exercised or decide to do so, their shares will a priori also be affected by these operations. According to the terms provided in the plan or the mini-pact, employees may even consider exercising their BSPCE whose vesting would not have ended, under acceleration clauses.
3. Secondary operations (see below): corresponding to the direct resale of shares by the BSPCE beneficiary post-exercise (outside the above cases). Liquidity windows The previously mentioned liquidity events being very exceptional, many founders set up mechanisms aiming to reduce the time-to-liquidity.

Liquidity windows

The previously mentioned liquidity events being very exceptional, many founders set up mechanisms aiming to reduce the time-to-liquidity.

During fundraising, more and more founders negotiate with new investors to accept “to offer liquidity” to employees by dedicating a part of the invested sums to the repurchase of securities held by these latter.

• Blablacar has managed to open liquidity windows at each of its fundraisers, redistributing more than 15 million euros to 86 employees
• During its last fundraising, all the BSPCE beneficiaries of Sendinblue were able to exercise and then sell their shares (including the unvested BSPCE under an acceleration clause!)

Outside of these cases, the issuing company can also provide “breathing” liquidity windows, actionable upon the occurrence of personal events in the lives of employees (marriage, birth of a child, acquisition of a principal residence...).

Secondary operations (over-the-counter)

If it is less obvious to find a buyer for unlisted shares, this remains a possibility to consider. New liquidity initiatives are gradually being set up in this regard:

• within the company: some companies like Expensya, choose to set up internal exchanges (via a dedicated interface or, if smaller structure, via the definition of resale rights under conditions) thus allowing their employees to negotiate their titles between them;
• inter-company: new players such as Caption, participate in the establishment of new marketplaces promoting the meeting between potential investors and employee shareholders, while allowing the latter to better understand and optimize the resale price of their shares.

However, it is common for the sale of shares subscribed for the exercise of BSPCE to be accompanied by specific conditions (listed in a Mini-pact or contractual commitment): holding agreements (inability to sell the shares before a given date), leaver clauses (application of a discount on the sale price of the shares in case of departure before the expiration of a certain period or for certain reasons), pre-emption rights and/or approval clauses (obligation to propose first the repurchase of his shares or submit the sale project for approval to the existing shareholders).

However, it is important to keep in mind that liquidity is an essential element of the vitality of the startup ecosystem: the proceeds from the sale of a company's shares can allow new entrepreneurs to emerge and thus contribute to forming the next generation of startups.

And concretely, what does it give?

Let's assume that in the framework of a BSPCE plan, 100 BSPCE are allocated (free of charge) to an employee or manager who benefits from an option to subscribe to 100 shares for a price of 10€ per share. A few years later and when all the BSPCE have been vested and then exercised for a payment of 1000€, he receives a buyout offer at a rate of 100€ per share following the evolution of their valuation. His gain would therefore be 9000€!

In reality, this is without counting: the 'article 163 bis G of the General Tax Code' which provides for the taxation of capital gains from the sale of shares subscribed in exercise of the BSPCE. To go further 👉 Taxation of BSPCE : what you need to know

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