Equity is a key element of the total rewards package offered by forward-thinking businesses. It gives your team a stake in the future success of the company, facilitates their alignment with the company strategy, and serves as a powerful recruitment and retention tool for key staff members.
It’s possible to grant equity in most countries around the world, but there are rules and regulations to follow, just as there are in the company’s domestic jurisdiction. In addition, you need to be aware of the tax implications of international equity and evaluate whether there are any available tax advantage arrangements wherever possible.
In a recent survey of startup businesses worldwide by Ledgy, Europe’s leading equity management platform, demand for equity is growing: “Companies are doubling down on equity as an incentive to align the team and keep the company focused in a tougher growth and funding environment. Almost two-thirds of companies (64%) said they were planning to make their employee equity plans more generous in the coming 12 months.” Equity is especially attractive for companies with a viable business who want to focus on using their cash on hand to reinvest in the growth of the business with equity recipients reaping the rewards of that investment when there is a tax event.
In an evolving and uncertain economic environment, such as the one we’re currently navigating, now is a good time to build and implement an equity compensation plan for your global team.
What are the benefits of granting equity to a global team?
Increasingly, progressive-minded companies consider granting equity a cornerstone of their corporate vision, and today’s professionals have come to expect it. Here are some reasons why you should offer equity to your global team.
- Increasing engagement and buy-in. Granting equity is a great way to help a distributed workforce feel like they’re part of a single team. With more companies adopting remote and distributed work, it’s easy for global teams to feel disconnected and it’s harder for companies to maintain a sense of cohesiveness. But when people have partial ownership, it’s in everyone’s interest to do their best to help grow the company’s value.
- Recruiting and retaining top talent. With the world as their oyster, the best candidates have plenty of companies to choose from. It’s no longer enough to just pay a salary and benefits. Equity incentive plans help with recruitment because equity is an important part of a total rewards package. And due to vesting schedules and timelines, employees are incentivized to stay with the company long-term, so you’ll have better retention and less turnover.
- Conserving cash. Employee salaries are often a company’s biggest expense, and it’s hard for young companies or startups to pay top dollar right away. By granting equity, you can create a competitive total compensation package even if your salaries aren’t as high as those at more established companies. In this way, you can attract top talent while also saving on expenses and extending runway.
Things to consider when designing a global equity compensation plan
It is important to prepare comprehensively before you launch your equity plan, especially when you’re doing so internationally. For instance, there might be compliance and tax requirements you need to take into account. Here are some key questions to consider:
- What does your equity plan allow? For example, does your plan treat equity grants to contractors or consultants differently than to direct employees?
- What is the most appropriate type of equity compensation in the team member’s country of residence?
- What are the risks and challenges of offering equity compensation in these countries?
- What are the tax implications of offering equity in these countries and who is responsible for them?
- What are the possible outcomes and potential liabilities (e.g., social security taxes) in various scenarios, such as when the company valuation soars? Some countries have uncapped social security taxes, which can create large corporate liabilities.
A good place to start your research would be Oyster’s Equity Assessment Tool, where you can learn about the cost, compliance requirements, and tax obligations associated with offering equity in 60+ countries around the world. You can also find out what type of equity would be best to offer in a particular country, as well as understand the potential risks and how to mitigate them.
What are the different types of equity compensation?
There are several kinds of equity plans, and you should work with your legal team to see what would best suit your business. Below are some of the most common forms of equity compensation.
Stock Options
Stock options are a popular choice in equity plans. A stock (or share) option is simply a right to acquire shares in the future at a price set today (the “exercise price”).
Stock options include Incentive Stock Options (ISOs) and Non-qualified Stock Options (NSOs), and there are some important distinctions between them.
- In most cases, ISOs may only be granted to employees and cannot be granted to a team member hired via a global employment platform (GEP) like Oyster.
- NSOs may be granted to non-employees, but recipients do not get the favorable tax treatment that ISOs provide in most countries.
Restricted Stock Units (RSUs) or Restricted Stock Awards (RSAs)
Restricted stock is stock that is subject to certain restrictions until it vests. A restricted stock award is an actual grant of stock where the recipient of the award becomes the owner of the shares on grant date, whereas a restricted stock unit is a right to receive shares in the future.
Public companies, or companies whose equity has a certifiable liquid market, are more likely to offer RSUs compared to early-stage startups.
Phantom Stock, Virtual Stock Option Plans (VSOP), or Cash Alternatives
Phantom stock, virtual stock options, and cash plans are alternative forms of equity compensation that companies may offer to employees. They differ from traditional equity grants like stock options and RSUs in that they don't involve actual ownership of company stock. Instead, they provide employees with the opportunity to receive a cash payout or its equivalent based on the company’s performance or stock price.
If there are significant barriers to granting equity in some jurisdictions, offering these alternatives mirroring a share option grant is a popular and pragmatic approach.
Finally, when you’re ready to proceed with granting equity or an equity alternative in the global employment marketplace, here’s how to create employment contracts that include equity.
Tax implications of granting equity to a global team
As with most incentives, share plans have tax consequences for both employers and employees, and it’s best to assess the tax obligations in all jurisdictions before launching the plan. The following are a few important points to consider.
- Participant tax at grant, vesting, and exercise (which can reduce the incentive for employees).
- Uncapped employer social contribution (which could be costly for companies with a rapidly rising share price).
- Tax timings, which can vary when granting equity to a non-employee vs. a direct employee.
- Tax reporting obligations, which vary across countries and jurisdictions.
It’s important to anticipate the taxes for both the company and the participant, and work out how and who pays the taxes that arise, and employers need to always be aware of compliance requirements based on local tax regulations.
How does company valuation affect your global equity plan?
Company valuation changes can have significant implications on equity and stock options granted to global and remote teams. However, the implications can vary across different countries. It is important for both employers and employees to understand the specific tax treatment and regulations in their respective countries to effectively manage the implications of these changes on their compensation and incentives.
In addition, some countries may not accept a valuation that does not follow their local standards. As a result, a local valuation may be required even if the company was already valued in another country.
Risks associated with granting equity in other countries
When you grant equity to someone in a different country, especially to someone employed by a company like Oyster, you must understand the potential tax timing differences. For example, in some countries you may have a withholding obligation when the equity grant vests, while in others your withholding obligation may trigger only at exercise. Similarly, an equity grant is effectively a contractual agreement between you and the equity recipient governed by the terms of the equity plan. In that sense, an equity grant can be an indicator of permanent establishment in addition to a host of other factors. Finally, an equity grant to someone employed by Oyster, or to a contractor in another country, can increase co-employment risk if similar awards are made to direct employees.
Simplifying global equity compensation with Oyster
Empowering team members with a stake in the company is considered table-stakes for many organizations, especially in early-stage tech companies. But offering equity fairly and compliantly to a global team is complex and challenging. Tax and compliance requirements vary across countries, and you might be unclear on local regulations and risks. It can be costly to hire external legal advisors, or take on the administrative burden of tax withholding and reporting requirements across multiple jurisdictions over the entire lifecycle of each equity grant.
The good news is that Oyster simplifies equity compensation for global teams. With Oyster’s equity solution (part of Oyster Total Rewards), you can access on-demand, self-serve knowledge on how to award equity compliantly in 60+ countries. You’ll receive country-specific guidance on local taxes and regulations so you can make informed decisions while mitigating risks. And you can manage your global equity plan from a single platform.
Want to learn more? Check out Oyster Total Rewards and request a demo today.
Written and reviewed by Oyster Legal Counsel in collaboration with ShareReporter
Disclaimer: This blog and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.
