Granting equity to international team members

Equity is one of the most sought benefits of startup jobs. But with the rise in the remote labor market, often the best talent is outside of the US, which adds a new layer of complexity when you set up your ESOP to attract new talent.

Rest assured that, most of the time, you can offer equity through the form of stock options to any employee. However tax and compliance regulations vary greatly from country to country, and if you are recruiting more than a handful of team members outside of the US, the legal hoops to jump through may feel daunting.

But it’s worth finding a solution that will allow you to offer everyone in your company, no matter where they’re located, access to equity. Not only will it attract the candidates you’re looking to hire and empower them to be productive and effective team members, it will also unite remote workers with the company’s shared efforts and success.

If only a few team members have access to equity and education on how to manage it, simply because you don’t know how to offer it to remote workers, you run the risk of those team members feeling unaligned with the company culture, vision and goals, and ultimately, uncommitted to its success.

‍

What do I need to know when granting equity to international team members?

When you’re planning to grant equity incentives such as stock options to your non-US team members, and want to do it properly, your best bet is to think in terms of “what is the most employee-friendly way that doesn’t trigger unexpected risks/costs for the company”? From this perspective, your company’s hiring and legal teams will have to take in the following considerations:

‍

What to do before you grant equity to non-US team members?

Determine if you can offer one type of equity incentive in a particular country, and at what cost for the company.‍

• For instance, an offer of stock options may qualify as a public offering in certain countries if they are given to a certain number of your team members, triggering heavy formalities you don’t want to go through, or exposing the company to fines!‍

Decide whether if it’s actually a good thing for your team member to receive equity.

• Sometimes equity is worth nothing because of foreign exchange regulations, which prohibit your team member from transferring the funds necessary to exercise their stock options or from repatriating the cash proceeds of a sale of their shares.

If there are different equity incentives available, determine the best option for both for you and your team members (whether they’re employees of a local subsidiary, contractors, or employees employed via an “employer of record” (such as Deel or Remote)).

• Some countries, such as the UK and France (with EMI and BSPCE schemes), have set up very favorable equity schemes which are available to US companies, too. If you’ve hired in these countries, it’s worth checking to see if they’re available for your team members.

Answer the practical questions that may arise around taxation and its impact on fairness of your equity incentives.

• Can you set the same strike price for your non-US team members? Should you adapt your vesting schedule to make your team member benefit from a favorable taxation, or increase your standard post termination exercise period beyond the usual 90 days to account for a higher local taxation at the time of exercise?

‍

What do I do once I’ve granted equity to non-US team members?

Great! You’ve landed that amazing candidate, and they’re excited about the position! They’re also excited about the opportunity to own shares of the company that they’re going to help make into an incredible success story. Now what? Well, now comes the regulatory rabbit hole.

Your next move is to get very familiar with the taxes and withholding obligations. It is your responsibility to make sure the terms of your equity are airtight to ensure that the employee experiences as little friction as possible. In order to do that, you need to understand the tax laws that are specific to their country.

Here are some some variables to consider:

• Is equity treated like salary? Then, does your company need to withhold anything, or is it your team member’s responsibility? What about the workers you’ve hired via Deel or Remote; is it Deel or Remote’s responsibility to withhold the taxes, like they do for general payroll?
• Who should report the taxable advantage, and when? For stock options for instance, is it when the stock options are granted, when they vest, when your team members exercise, or when they eventually sell the shares as part of an exit or a liquidity program?
• When and on what amount is your team member going to be taxed? Based on the terms of the stock option award agreement, they could be subject to taxation at varying times (e.g. when they exercise their options vs. when they sell their shares). Are they subject to short- or long-term capital gains taxation?
• Will your company’s 409A valuation be accepted by the local tax authorities? The 409A valuation is a function of the IRS, and thus, US.tax law. So do non-US tax authorities accept it when considering US equity for their local workers?
• And what should be reported exactly, and to whom? What are the risks of non-compliance? What kinds of fines and legal penalties are you vulnerable to if you haven’t sorted this out?
• (The list goes on…)

A quick look at the list makes you realize that unless you have a big regulatory and tax team in-house or are ready to spend tens of thousand of dollars on legal fees or have months and months to figure it out yourself, this is too much for a small or growth-stage company to take on and do well.

‍

Is there a shortcut for startups?

We get it! This stuff is intricate and complex. Facing the excruciating prospect of doing this all on your own, the temptation is to:

• Grant one-size-fits-all Non-qualified Stock Options (NSO) to every international team member,
• Ask them to tick a box where they declare that they are aware of all their tax and other obligations, that they will consult their personal tax advisors in due time, and
• Hope that, in the end, everybody will be just fine.

But, take it from us, this is not the place where you should move fast and break things.

As employer, you have a responsibility to your team members’ livelihoods, in the US and abroad. Their confidence in your employment conduct will impact their performance, the product and services you are building together, the confidence of your investors and eventually, your reputation with your customers and industry.

But beyond that, it will instill in your workforce that there are two classes of employees: those based in the US, and those who live elsewhere. The first ones feeling peace-of-mind about their equity and how it works, and the others being left in the dark and potentially facing fines for non-compliance.

In addition, international team members often know less about equity than their US counterparts, and these incentives risk being worth nothing if not accompanied by more education on what it means financially and professionally, and what it could be worth in case the company succeeds.

‍

Is there any easy way to grant equity to remote employees?

At Easop, we’ve gathered information on regulatory and tax obligations relating to stock options and other types of equity incentives in more than 50 countries, which we are building into our platform to help you treat your US and non-US team members in the same way when it comes to equity. We’re also adding education features that help your team members project themselves into the company’s success.

Odds are, if you’re trying to recruit and hire someone outside of the US, we support their country of residence, and equity incentives can be granted compliantly to them in one or two days. And once equity’s granted, the platform and our support team backed by excellent local legal partners will help you navigate your local obligations during the entire lifecycle of your ESOP: from grant date to a potential sale of the shares.

Ready to get started? ESOP can be easy!