Can a long-term incentive be a dangerous graft?

I love analogies. So get ready, because here comes another one:

Do you recognize yourself?

Six situations involving talent and equity participation

Have you ever experienced any of these cases?

• The partners want to bring a key person into the business as a partner, as a retention tool.
• In an M&A process, a potential investor wants to see clear vesting rules before signing the check.
• An angel investor wants to come in as a partner but requires that the process can be reversed at any time if things do not go well.
• A salesperson responsible for 40% of revenue wants to become a partner and needs clear targets.
• A founder wants to offer financial participation to the technical team without granting voting rights or diluting control.
• The company wants to deliver free shares as a retention bonus for directors.

Each of these situations happens in many companies. And each one requires a different tool.

Money does not buy loyalty

The Brazilian startup market moved R$ 9 bilhões in investments last year. But money does not buy loyalty. The LinkedIn Workforce Report 2025 shows that 92% of technology companies report real difficulties retaining technical talent, and turnover in the sector runs around 35% per year. The obvious solution, adopted by many business owners, is to offer a piece of the business as a retention tool for key people. And that is possibly one of the best strategies. However, it is in the execution of this idea that companies tend to rush and create problems that only surface years later.

There is a belief in the market that the vesting model is the best. Which leads me to ask: best for whom? Those who adopt vesting as a generic remedy for Long-Term Incentives may be self-medicating without knowing what they are doing.

The analogy

The graft as a metaphor for integration

To explain this more clearly, let us use an analogy. Think of the company as a mature grapevine. The Shareholders Agreement is the main trunk. It is the structure that already exists, with deep roots, dictating how the sap rises and sustains the plant. The talent you want to bring in from outside, or the employee you want to promote to partner, is a new branch that needs to be inserted into that already established structure.

A Long-Term Incentive (LTI) program can be thought of as a graft, which is the technique that joins parts of two different plants so they grow as one. It is the precise cut in the central trunk, the careful selection of the new branch, and the transparent wrap that protects the union until the new branch becomes part of that organism and begins to bear fruit. If the cut is poorly made, or if the wrap does not protect it properly, the sap does not flow. The branch dries up and falls. Or worse: it can infect the entire plant.

Every graft requires refined technique and experience from whoever performs it in order to succeed. And when we talk about LTI, it is the same thing.

texto do artigo

Obviously we are not going to give a biology or botany lesson here, but it is important to know that every graft requires refined technique and experience from whoever performs it in order to succeed. And when we talk about LTI, it is the same thing. There are at least six different partner grafting techniques, meaning LTI mechanisms. Each one solves a different problem. And each one carries a distinct tax burden. The difference between choosing the right mechanism and the wrong one is the distance between paying 15% and 65% in tax and labor costs.

The six partner grafting techniques and the necessary precautions

1. Time-Based Vesting

   This is the gradual entry. The wrap stays in place protecting the union for four years. Typical structure: a cliff of 12 months and monthly vesting over the following 36 months, totaling 48 months. The ideal situation is when partners want to bring in a key person.

   Caution: establish clear Good Leaver and Bad Leaver rules. If the partner leaves for cause, the company buys back at a lower value. If the partner leaves voluntarily, the buyback is at market value.

2. Milestone-Based Vesting

   Integration does not depend on time, but on targets. The salesperson earns 5% of the company when revenue reaches R$ 1 milhão.

   Caution: define targets with mathematical precision. Who measures? Over what period? What happens if the target is nearly reached? These answers need to be in the contract so the graft is not rejected by internal disputes.

3. Stock Options

   The talent receives the right to purchase shares at a pre-set price. In September 2024, the STJ ruled on Tema 1.226 and established that stock options have a commercial nature. This means income tax only applies to the capital gain at the time of sale, at rates between 15% and 22.5%. But the sap only flows at this lighter tax burden if the contract has three pillars: onerousness (the person pays something), voluntariness (the person chooses to exercise), and risk (the person can lose the investment).

   Caution: if one pillar is missing, the tax authority may reclassify the transaction, and the bill jumps to 65% (IRPF, INSS, and FGTS).

4. Phantom Shares

   Here the technique is not quite a graft. It is a branch that does not fuse with the trunk: it only receives the financial fruits. The talent receives the financial equivalent of the company's appreciation but does not become a partner. It is ideal when a founder wants to provide financial participation without diluting control or granting voting rights.

   Caution: phantom shares have a compensation nature from day one. The 65% burden is not a risk: it is the rule of the game.

5. RSU (Restricted Stock Units)

   Restricted shares delivered for free as a retention bonus.

   Caution: the free nature leads the tax authority to treat it as compensation. The tax burden is 65%.

6. Partnership

   The complete graft with differentiated governance. The talent enters with real participation, but in categories (junior, senior, equity) with progressive rights. It is a model of commercial nature, but requires very clear rules for entry, continuity, and exit in the Shareholders Agreement.

Preparing the trunk

The LTI is the entry point. But you do not perform a graft without preparing the trunk.

It makes no sense to distribute participation if your Shareholders Agreement does not provide for dilution rules, does not establish the size of the option pool (the reserve of shares for employees, which in Brazil typically runs around 10% of capital), and does not define how that talent exits the company.

Another point: in a future M&A process, the buyer will look at exactly these rules and how they were structured. If the vesting rules are not clear, the negotiation becomes slower and more expensive.

Trust is what motivates the initial handshake. But the talent of today may not have the same alignment tomorrow. People change, the market shifts. A well-drafted contract is the wrap that protects the graft: it is not a certificate of distrust, it is the preservation of rationality and the health of the entire plant.

Article originally published on GazzConecta.