Attracting and retaining top talent is no longer a challenge reserved for Silicon Valley. Bulgarian tech companies and mid-market manufacturers alike are under pressure to offer long-term, performance-linked rewards. As more local businesses raise international capital, hire cross-border talent, or prepare for exits, the structure of employee incentives is increasingly scrutinized by investors, auditors, and job candidates alike.
Two vehicles headline most boardroom discussions: (i) real equity – shares in an AD or capital quotas in an OOD–and (ii) “virtual” shares (phantom or shadow equity that pays cash on a liquidity event)*. Both instruments aim to align staff interests with enterprise value, yet they diverge sharply in corporate-law mechanics, governance impact, and –yes – tax treatment.
Real equity incentives grant employees actual ownership in the company–i.e., real shares/participation interests under the corporate law of the relevant company form (e.g., shares in an AD or quotas/“дялове” in an OOD). As a matter of corporate law, the employee becomes a shareholder/partner with statutory rights (and, depending on the structure, governance influence), and the relationship is reflected in the company’s cap table and corporate documentation.
Virtual shares (phantom/virtual stock) do not transfer corporate ownership at all; instead, they create a contractual economic entitlement that tracks the value of equity or an exit outcome. From a corporate governance standpoint, employees remain outside the shareholder body–no voting rights, no statutory minority vetoes, and no need to execute share transfers at exit–while the company retains a clean cap table. This is one reason investors often prefer such structures in scaling companies approaching major funding rounds or exits.
Corporate Governance: Pros & Cons
Real Equity – Advantages
Strong alignment
Employees become true owners with statutory rights, which can deepen long-term commitment and identification with company performance.
Well-known legal framework
The instrument is embedded in Bulgarian company law and market practice, which can provide familiarity and perceived legitimacy among stakeholders.
Real Equity – Drawbacks
Exit execution risk (consent/signature problem).
At an exit, holders of real equity must actually agree and sign to sell their stake. If an employee refuses, the transaction can be delayed or jeopardized. Drag-along clauses are not always fully reliable in Bulgaria; the realistic remedy may be contractual liability rather than a clean forced transfer.
Minority veto or blocking risk via statutory majorities.
Depending on how much real equity is distributed, employees can block corporate actions requiring qualified or unanimous majorities. The issue is particularly acute in an OOD, where capital increases or decreases require unanimity — meaning even a small employee stake can create an effective veto.
More complex incentive mechanics.
Compared to virtual shares, it is typically harder to implement vesting schedules, good/bad leaver provisions, or performance conditions with real equity. These often require multiple corporate actions, transfer restrictions, buyback arrangements, or proxies, and outcomes may still be less automatic than purely contractual solutions.
Governance complexity.
More shareholders mean more formalities, stakeholder coordination, and potential for disputes over time.
Virtual shares – Advantages
Cap-table and voting remain clean
Employees do not become shareholders, so they cannot block decisions through statutory voting thresholds.
Exit-friendly
There is no need for employee signatures to transfer equity at closing; the plan can settle contractually (often cash-settled) upon exit.
Flexibility by contract
Vesting, leaver terms, performance conditions, clawbacks, and settlement mechanics can be tailored with far fewer corporate-law constraints.
Virtual shares – Drawbacks
Purely contractual nature
Because virtual shares are not statutory equity, enforceability and outcomes depend heavily on careful drafting (definitions of “exit,” payout waterfall, dispute resolution, good/bad leaver rules).
Perception gap
Some employees value “real ownership” more highly than a contractual economic right, so communication and plan design matter.
Tax pitfalls to be aware of when planning
The biggest practical concern for employees is often taxation without liquidity — being taxed on theoretical value before shares can actually be sold
Bulgaria has not yet introduced any specific rules that navigate the complexity of taxing stock-based compensation, and this leaves plenty of room for interpretation on who, when, and what gets taxed. There seems to be a growing consensus that, in most cases, what enrolled employees will be bringing home should be nothing short of taxable employment income, and the moment when it gets such will be around the event when ownership over the shares has fully vested.
Unlike in Bulgaria, many other jurisdictions are applying an additional “tradability” test of the shares to make sure they are monetizable before they get taxable. Imagine that an employee has a shareholding vested in a startup that has gone through a successful round with peak values. The employee now owns the vested shares but may be required to hold the shares and only have them sold in a predefined future event, such as an exit by the founders. In other words, the shares are not tradeable yet, even if they are fully vested. In the absence of that “tradability” concept in Bulgarian tax law, however, the employee may as well get taxed at the peak value of the award received in-kind, as well before she can have it monetized for a market-tested (hopefully close or higher) exit price.
It can get even more twisted in defining the taxable point when the instruments awarded are stock options, and this adds an exercise event in the timeline, which does not necessarily coincide with either the date of vesting or the date of sale.
Can it just be done simply yet effectively enough? The short answer is yes, but a simple and lean legal construct can still get you caught up in lengthy and abstract tax arguments on the risks and liabilities when an investor due diligence or audit comes along. Take, as an example, the case of a sole owner of a mature business operation who decides to pass along part of its stake to her team of trusted managers by a quick simple transfer for a nominal amount. Is the value difference now an employment income earned through service and performance, or is it rather a structured sale leading to an undertaxed capital gain, or perhaps to some, it feels like a taxable gift?
In another example, imagine that you co-founded a project and got shares on day 1 that could be clawed back within three years (just in case you decide to free ride along the way). In year three, it is all yours, and arguably, no taxable event would be haunting you. But why should it be different then if you only got a formal promise on day 1 and had a three-year vesting schedule until the title of ownership was awarded in a taxable event?
A common feature that one would expect to streamline all the moving parts is administering the plan through a foreign entity. This naturally would be the parent of the group to which the Bulgarian employer belongs. In such a way, the Bulgarian employees will be directly awarded with equity instruments issued by that top parent entity, presumably in a location where there is a long-standing established legal framework for these matters. This is where, however, the complications of financial reporting may kick in for the local employing entity and open the door for the plethora of tax and valuation issues.
Impact on Company Financials
Еquity settled or phantom incentive plans, inevitably affect financial reporting. Companies applying IFRS must recognize stock-based compensation regardless of whether awards are settled in shares or cash. Phantom plans often appear as growing liabilities on the balance sheet. The accounting treatment can influence key financial metrics and how investors perceive profitability, particularly in high-growth companies preparing for funding rounds or exits.
Conclusion
Under Bulgarian law, real equity offers superior alignment for high-growth scenarios but demands rigorous corporate-governance hygiene. Virtual shares provide structural flexibility and preserve cap-table purity yet shift the tax and social-security burden to employees and create cash-flow obligations that boards must fund.
In practice, many Bulgarian growth companies increasingly combine both approaches — real equity for core leadership alignment and virtual instruments for broader incentive coverage.
The optimal blueprint lies in a calibrated mix, anchored in robust shareholder resolutions, meticulous contract drafting and continuous monitoring of evolving legislation — because the only thing more expensive than talent is a mis-designed incentive that fails to motivate it.
* For the avoidance of doubt, this text does not cover the regime for granting real equity or virtual shares in a Variable Capital Company (DPK). It focuses solely on the two most commonly used company forms under Bulgarian law – namely OOD and AD -and the conclusions herein should not be applied to DPK without a separate legal and tax assessment.
