Service conditions and cliffs for German virtual grants
Vesting for phantom shares works the same way as for real options: units are granted up front but only become eligible for payout gradually, based on continued employment. A common structure is four year vesting with a one year cliff, meaning nothing vests in year one and 25 percent vests at the twelve month mark, with the rest vesting monthly or quarterly afterward, following the same vesting rules used for real options.
The key difference from real options is that vesting a phantom unit does not let the employee do anything immediately. There is no exercise step and no shares to buy. Vesting simply determines how many units are eligible to participate if and when a payout event, as defined in the phantom share plan, later occurs.
Vesting versus payout triggers
| Event | Effect on vesting | Effect on payout |
|---|---|---|
| Time passing while employed | Units vest per schedule | No payout yet |
| Company acquisition | May accelerate vesting | Usually triggers payout for vested units |
| Employee resigns | Unvested units forfeited | Vested units may or may not retain payout rights, depends on plan |
| No exit ever occurs | Units still vest over time | No payout ever made |
Because payout depends on a trigger event that may never happen, fully vested phantom units can still end up worth nothing if the company never has an exit or declared liquidity event.
Good and bad leaver rules for VSOP
- Good leavers, such as those made redundant, typically keep vested units and remain eligible for a future payout if the plan allows it.
- Bad leavers, such as those dismissed for cause, often forfeit both unvested and vested units under many German VSOP plans, which is stricter than typical real option leaver terms.
- Some plans pay out vested units in cash immediately on departure, calculated against the last known valuation, rather than waiting for an exit.
- Because there is no shareholder register to consult, employees must rely on the company's own records to confirm how many units have vested.
Questions on vesting virtual units
- Does vesting alone trigger a cash payment?
- No. Vesting only determines eligibility. A cash payment is made only when the plan's defined trigger event, usually an exit, occurs.
- What happens to vested phantom units if I am dismissed for cause?
- Many VSOP plans treat this as a bad leaver event and forfeit vested units as well as unvested ones, which is stricter than typical treatment for real vested stock options.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.