Stock Appreciation Rights: incentivize with share appreciation
Stock Appreciation Rights give someone a cash payout equal to the increase in a company's share value, without them ever owning the share. No notary, no cap table changes, no exercise price. They are especially useful for employees who cannot or do not want to invest their own money in the company, but still want to share in the financial upside. It's an ideal long-term incentive for growing companies.
Key facts about Stock Appreciation Rights
- Cash-settled: Participants receive the appreciation in cash, not shares.
- No dilution on the cap table: No new equity is issued.
- Also known as: SAR, SARs, phantom shares, virtual shares, VSOP.
SAR payout over time
- Share value: €0 at start, €120 At Grant, €250 At Payout
- SAR hurdle: €120
- SAR payout: €0 At Grant, €130 At Payout
Drag the chart or slider to see how the SAR payout grows with the share value.
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What is a Stock Appreciation Right?
A Stock Appreciation Right, or Share Appreciation Right, (SAR), is a contractual promise to pay someone the increase in the value of a company share between two moments: the grant date and the payout or leaver date. If the share goes from €120 to €250, the SAR is worth €130. If it stays flat or drops below the hurdle, the SAR is worth nothing.
SARs are usually cash-settled: the company pays out the appreciation, the participant never buys or sells actual shares. That keeps ownership, voting rights and the cap table untouched. It also removes the "exercise price" problem that traditional stock options bring, where employees sometimes cannot afford to buy their own options.
SARs powered by Virtual Shares
Sharesquare manages Stock Appreciation Rights using virtual shares. Each virtual share mirrors the value of a real company share without transferring ownership or voting rights.
This approach lets you configure appreciation hurdles, payout caps, vesting schedules, leaver rules and liquidity events, while keeping the plan simple for both administrators and participants.
How Sharesquare implements SARs
- A company has a real share.
- Sharesquare creates a virtual share that mirrors the real share's value.
- Both move up together when the company grows in value.
- The grown part of the virtual share is the SAR: only that appreciation is paid out.
How a SAR payout is calculated
Andrea joins a growing company as product lead. She receives 1,000 SARs that vest over four years. The value per share at that moment is €120: that is her baseline.
Three years later, the company is sold for €250 per share. By then, 750 of her SARs have vested. She pays wage tax on her payout when she receives it. Had the company been sold for €120 per share or less, her SARs would have paid nothing.
The formula: (share value at payout minus the baseline) times the number of vested SARs.
Interactive payout example
Change the numbers to try your own scenario.
When SARs are a fit
As a long-term incentive
Value appreciation is built over time, and people have a natural incentive to stay long at the company when they are granted SARs.
When the focus is growth
A share in the future upside can be a great incentive to work on the company's growth ambition and to think in terms of collective result.
If an exit is a goal
Preparing for a future exit usually means working on the company value increase. And when the exit occurs, there is liquidity to pay out.
When the company already has value
Letting new participants profit from a value already realised in the past can feel unfair towards early employees. A SAR hurdle is an outcome.
At a very early start
When the company has little or no value yet, a baseline is hard to set. Full-value virtual shares feel much better for participants.
When the business is stable
If no significant growth is expected, there is little appreciation to share. A virtual dividend or full-value virtual share is usually a better fit.
SARs vs stock options vs real shares
All three let people share in the growth of the company. The differences sit in what the participant puts in, ownership and admin.
Good to know: a SAR plan can be supplemented with a virtual dividend so participants share in annual profits on top of long-term value growth. Want the detail on options? Read SARs vs stock options. Already working with a STAK? Read how a STAK and SARs compare and work together.
What if someone leaves, or things don't go to plan?
The question founders often ask: if a participant leaves the company, do we suddenly owe a cash payout? The answer sits entirely in the plan rules you set up front, and a well written SAR plan never creates a payment obligation at a moment you cannot fund.
- Payout only at a defined event. Leaving the company is not a payout trigger. A sale, a buyback, a dividend moment or a fixed date is. Someone who leaves keeps a right that only pays when that event happens.
- Leaver rules decide what stays. A good leaver usually keeps the vested part, a bad leaver loses everything. Unvested grants lapse in both cases.
- No value, no payout. SARs track appreciation. If the value does not rise above the hurdle, there is nothing to pay. The cost moves with the result of the company.
How SARs are taxed
For employees. In most legislations, the SAR payout is treated as salary at the moment of payout. Wage tax and social security apply, and the amount is withheld by the company on the payslip. No taxable event happens at grant or during vesting: employees only pay tax when they actually receive cash.
No annual tax on value growth. Employees are not taxed annually on the value development of their SARs; taxation only occurs at payout. This is an advantage over ordinary shares or even stock options in some countries, where participants may owe tax annually on unrealised gains.
For freelancers, advisors, suppliers etc. Payouts are usually invoiced and taxed as business income. Rules differ per country, so always check with a local tax advisor beforehand.
For the company. SAR payouts are typically deductible as a personnel expense in the year they are paid out. Accounting treatment (accruals, provisions) depends on the framework you report under. Our accounting article covers this in detail for the Netherlands.
Cash settled plans are deductible, equity is not. In the Netherlands a cash payout, such as a bonus, a SAR or a virtual dividend, lands in the wage bill and is therefore deductible for corporate income tax. Value handed over through real shares, depositary receipts or stock options is a shareholder matter and gives the company no deduction. For a plan of any size that difference is one of the strongest financial arguments for a cash settled structure. Confirm the treatment for your situation with a tax advisor.
Sharesquare provides software and educational content. It does not constitute legal, tax or financial advice.
To summarize
Are SARs the same as phantom shares or virtual shares?
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Phantom shares are another name for virtual shares. A SAR is a specific type of virtual share: it gives a right to a cash payment equal to the growth in share value above a hurdle, usually the value at the moment of grant. A full value virtual share tracks the entire share value instead. Neither gives legal ownership, needs a notary or changes the cap table.
How are SARs taxed?
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For employees, the payout is generally treated as salary at the moment of payout. Wage tax and social security contributions apply. No tax is due on value growth before payout, so employees are not taxed on unrealised gains. The company can deduct the payout as a business expense. Always confirm with a local tax advisor before rolling out a plan.
When do SARs pay out?
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Vesting and payout are separate. Vesting builds up an earned right, but the company only pays at a trigger set in the plan rules: usually a sale or IPO, sometimes a fixed date, a buyback or a milestone. The company never has to pay just because SARs vest, which keeps the plan affordable.
Can you use SARs if you never plan to sell the company?
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Yes. A sale is only one possible payout moment. The plan rules can also let the company buy back vested SARs when it has enough funds, for example at a fixed interval, at a valuation set in those rules. Participants can then cash in without an exit, and the company only pays when it can afford to.
What happens if a participant leaves before a payout?
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Leaving is not a payout trigger. The plan rules decide what a leaver keeps: usually the vested part for a good leaver, and nothing for a bad leaver, for example after summary dismissal. A retained right stays dormant until the normal payout moment, so a departure does not create an immediate cash obligation. If you want the option to settle early, set the valuation, payment schedule and a maximum amount in the plan rules up front.
What if the company value falls?
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SARs only pay out on the appreciation above the baseline or hurdle. If the value stays below that level there is nothing to pay. The cost of the plan moves with the result of the company, which is exactly why cash settled plans are easier to carry in a downturn than real shares that have to be bought back.
Can SARs be combined with a virtual dividend?
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Yes. Many companies combine SARs (upside on value growth) with a virtual dividend (annual profit share). Inside the Sharesquare platform you can mix both mechanisms.
What happens to SARs when the company is sold?
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A sale is normally a payout trigger, but the plan rules decide the exact treatment. SARs can pay out immediately, convert into a right against the buyer, or vest faster on a change of control. You can also tie part of the payout to staying for a period after the sale, which gives the buyer continuity and key people a clear reason to remain.