Employees of subsidiaries and equity

Typical situation

Let’s take the hypothetical situation of a startup with a U.S. holding and a wholly-owned subsidiary in France.

I’m Thomas, co-founder and CEO of Scara-bee. Scara-bee is a tech startup using food waste to feed grasshoppers and turn them into high-protein food for dogs. We were part of Y Combinator (YC) Winter 2021 Batch. We’ve incorporated the holding company in Delaware to get into YC, but my team is in Paris where we’ve set up a subsidiary.

I’ve been working day and night to get my promising business off the ground.

After eight months, I’ve recruited five brilliant and dedicated engineers. I want them to feel truly part of my core founding team and equity seems the way to go. But then come scary concepts such as the 409A valuation, cap table management solutions, NSO, fully diluted number of shares, BSPCE (see below), and of course, there’s taxation.

These things first started lurking in the back of my mind, then slowly grew bigger and bigger, turning into a threatening locusts swarm. My employees are asking me when they’ll be granted the nice equity package I promised them in their offer letters. Let’s face it, I can’t procrastinate any longer.

💡 BSPCE is a specific type of stock options subject to strict limitations which can in some way be compared to ISO in the U.S. or EMI in the U.K. Instead of being taxed at exercise, BSPCE holders will be taxed at the point of sale and will, under certain conditions, be subject to a more favorable taxation compared to “standard” stock options.

Absolutely, Thomas! And don’t worry, it’s not as daunting as it seems.

Let’s look at what you need to bring your French team members into the fold, and reward them for the contribution they bring to your company’s success.

We understand you have a lot of things on your plate as a founder, and admin is not your top priority, but you shouldn’t postpone your equity grants for too long or the details (be it the percentage, the value of the stock options, or exercise price) that you may have outlined to your team members could be outdated or no longer relevant by the time you grant them equity. You want to incentivize your team members with equity, but the devil is in the details. <a class="article-overlay">Easop</a> is here to help you make sure you’re communicating effectively and comprehensively to your employees.

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Step 1 - Setup

Set up your cap table management solution, order a 409A valuation, and approve your ESOP pool and equity plan.

Yes, it seems like Step 1 is actually just a lot of little steps, but they can all be managed fairly easily thanks to some relatively new technology solutions. We know the cost-cutting temptation of turning to spreadsheets to organize everything, but there are a number of well-crafted tools for U.S. companies, such as Carta and Pulley, which will help you manage your cap table and get your 409A approved (an almost indispensable step if you want to feel safe when granting stock options) in a matter of days. They will also help you to issue your ESOP pool, and organize and adopt your equity plan.

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Step 2 - Research

Look for the best equity incentives.

With your 409A (which gives you the fair market value (FMV) of your shares of Common Stock) and your ESOP pool ready, your cap table management software will offer some useful material on stock options and the details around the equity… for your U.S. team members. Not much there for international employees, specifically those members of the team based in France.

You try to Google your way out, but after a lot of extra time and effort on your part, you decide that foreign tax and legal wrangling is not something you want to mess with. You contact your French lawyer. Although competent, they’re not able to assist without the help of a U.S.-qualified lawyer and they aren’t sure to have a good contact in the US.

You’re tempted to grant non-qualified stock options (NSO) to everyone to make things simple. But you shouldn’t. Certain countries—like France—have introduced specific equity incentives that are favorable from a tax perspective, quite easy to put in place, and available for early-stage U.S. companies too, subject to some conditions.

In France, one of these widely used schemes is called BSPCE. With BSPCE, your employees will not be taxed at the time they exercise their stock options, but only if and when they effectively cash out. In addition, the tax rate is substantially reduced in case the employee stays with the company for at least three years.

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Step 3 - Eligibility

Check that you’re eligible to offer BSPCE.

As a newly incorporated YC company with a wholly owned subsidiary in France and employees working under a French labor law contract, chances are that Scara-bee qualifies for BSPCE.

If that’s the case: go for it! Easop has enlisted the help of its local legal team to easily verify if you’re eligible and help you set up everything you need in a matter of days. From there, you’ll just need to sign a few documents (a BSPCE sub-plan and corporate approvals).

If you are not eligible, another option (that’s a bit less favorable tax-wise, but still a way to grant equity) would be to grant NSO (non-qualifying stock options).

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Step 4 - Grants

Start granting stock options qualifying as BSPCE on Easop.

If you decide to use <a class="article-overlay">Easop</a> and unlock a new geography like France, avoiding a  one-off fee from a local legal team, you (or the person responsible for managing equity benefits at your company) will be able to grant as many stock options qualifying as BSPCE as you want and reward your team members with the long-awaited equity awards that you promised them, but also arm them with the information they need to understand their equity.

Your team members will be invited to log in to Easop where they’ll have access to an individual dashboard where they will see what their stock options are potentially worth, as well as what they need to do, and when, to comply with their tax and other legal obligations. Chances are that our FAQ section will release you from lengthy discussions with your team members around stock options mechanics, taxation, and legal obligations.

Easop has streamlined the grant process to make sure you can grant stock options fast and safely. Since each option grant requires board consent, your board members will also be invited to log in to Easop and approve the suggested grant in the platform. At the end of the grant process, the right set of documentation will be automatically generated.

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Conclusion

Here’s a glimpse of what you and your employees will need to do when your employees exercise their stock options qualifying as BSPCE.

Your team members will log in to their Easop portal, which will notify them of their tax and reporting obligations. Since there are no tax obligations at the time of exercise, they’ll simply see that nothing needs to be done at that stage, and they’ll receive practical guidance on how to exercise, either in the app or from our customer support team.

For BSPCE, it’s not complex and they will only have to wire the funds required for exercising the options. This will easily be done via your cap table management solution. A huge advantage of BSPCE is that your employees won’t have to pay taxes at that time, and they don’t need to report anything to the tax authorities. The only thing for them to do is to keep the written individual tax statement you’ll have generated through Easop for their future personal tax filings.

It’s only when the employees hopefully sell their shares that they’ll have to pay taxes, and the information displayed in their individual dashboards will help them assess what they will have to pay.

You, as the employer, will approve your team members’ exercise requests via your cap table management solution. You will also deliver a written individual tax statement based on guidelines of the French tax administration (which will be generated automatically on Easop) and declare the exercise of options-BSPCE in your yearly salary declarations.

Much of Thomas’ and Scara-bee’s situation is specific to France, but there are many similar intricacies in the countries where your employees reside. If Thomas’ and Scara-bee’s experience sounds familiar, you can reach out to us at <a class="article-overlay">Easop</a>. It’s likely we’ll be able to help!

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The article above is published for general information purposes only and does not constitute legal advice.

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