How to grant stock options to foreign employees hired via EoR

What's an EoR?

An Employer of Record (EoR) is a third-party organization that hires and pays an employee on behalf of another company and takes responsibility for all formal employment tasks. Using an EoR allows companies to legally and efficiently engage with overseas workers either in a new country or state, without having to set up a local entity or risk violating local employment laws.

In essence, the EoR is the registered employer for the worker, but does not have any supervisory or management role vis a vis the employee’s position.  The original employer maintains the substantive work relationship, making all decisions on compensation, position duties, projects and termination.

Specifically, the EoR is the legal entity that:

• Arranges all visas and work permits for the employee, avoiding delays or refusals
• Provides a registered entity for running a local, compliant payroll inside the country
• Meets all host country labor laws pertaining to local contracts and worker protections
• Advises the client of required notice periods, termination rules and severance pay
• Is the host country interface between the employee and government authorities

⚠ When it comes to ESOP, employees employed via EoR will rarely benefit from tax favored schemes.

Typical situation

Let’s take the example of a mock startup with a U.S. holding hiring business developers in several LATAM countries, who has adopted Easop.

I’m Nour, Chief of Staff at ChickenRun.

ChickenRun, Inc. is a VC-backed tech startup with a holding in Delaware. We’ve developed a technology to map out the geospatial location of chicken and pig farms, with a view to preventing the spread of disease within communities. Our customers are large NGOs and national health institutions. We have a team of 30 software engineers in Kenya, Thailand, and Brussels. Since COVID, we’ve started hiring people through Employers of Record (via companies like Deel and Oyster) in several countries in Latin America, mostly to do business development to sell our licenses to local health institutions.

We have granted Non-qualified Stock Options (NSO), and now Catarina, our Brazilian business developer, is leaving the company and she wants to exercise her stock options.

Alright Nour, let’s look at what you, as the person managing ChickenRun’s equity grants to ChickenRun’s team members like Catarina, will need to do.

When it comes to equity, there are a few important elements that we need to know in order to assess exactly who needs to do what and when. These elements are:

• The type of equity incentive that has been granted (was it NSO, ISO, RSA, SAR, or virtual shares?),
• The nationality of the company that has issued the equity incentives,
• The country of tax residence and place of work of the grantee,
• The type of professional relationship between the grantee and the company that has issued the equity incentives, and
• The main terms of the grant, such as the vesting schedule, exercise price, and exercise timing.

At Easop, we’ve taken all these parameters into account to make sure your equity is granted in a compliant way and tailored to your specific needs, and to help you navigate the complexity of employee equity in a cross-border context during the entire lifecycle of your ESOP.

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Step 1 - Consideration

What Catarina should do when she is considering exercising her stock options.

If the grant of stock options has been made via Easop and provided that you have unlocked Brazil against a one-off fee, Catarina will have received, at the time of grant of the stock options, access to a personal employee portal. This dashboard is continuously updated to take evolving legislation and market practices into account, and will give her access to information, like:

• A clear breakdown of her equity–free of legal jargon–on what stock options are and how they work, and easy-to-read information on the meaning of terms such as strike price, vesting schedule, fair market value, and NSO;
• A thorough FAQ reflecting the most common concerns and questions of Easop users in Brazil;
• Information from local Brazilian tax lawyers on what she needs to do, and when, to comply with her tax and other legal obligations; and
• An individualized overview of her current grants displaying, among others:
• How much of her stock options have vested over time,
• What she has to pay in order to exercise her stock options. For example: exercise price and taxes, such as professional income tax and, if applicable, foreign exchange tax,
• How much time she has to exercise her stock options after her contract is terminated (post-termination exercise period (PTEP)), and
• The current company’s valuation (if you’ve given her access to this information) so she can make an informed decision on whether to exercise or not.

Ultimately, she’ll be able to quickly weigh the pros and cons of exercising vs. not exercising and be able to efficiently inform you of her decision, avoiding the last-minute hassle.

If she has any doubt about her tax obligations or wishes to obtain more bespoke advice regarding her personal situation (e.g. if she wonders if the fact that she spent one year outside of Brazil has an impact on the tax treatment of her stock options, or if she will be able to claim a certain type deduction because of her personal marital status), she would be able to rely on the network of local tax advisors that Easop has built.

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Step 2 - Exercise

Catarina thinks ChickenRun will be a huge success and decides to exercise her stock options! She informs you.

You will be informed through Easop that you need to contact the local Employer of Record (Oyster or Deel) who has the legal obligation to withhold taxes and social security from Catarina’s salary, i.e. an income tax on the difference between the fair market value of the shares at the time of exercise and the exercise price Catarina has to pay to get her shares, at a (current) rate of 27.5%, as well as social security contributions. It’s their responsibility after all as local employer to do so, but they cannot do it if you don’t inform them. Depending on your initial arrangement with Catarina, she could be required to fund the taxes rather than have it deducted from her salary.

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Step 3 - Post exercise

Catarina has exercised her stock options.

Catarina would exercise her stock options via your company’s cap table management solution such as Carta or Pulley, and pay the relevant taxes. Her notice period has ended and she’s now taking some time off.

As the person managing the ESOP, you will be able to choose whether Catarina can still access her personal dashboard, or not.

You could also choose as of now to hide some sensitive information - such as your company’s valuation - but keep a limited access to the tax and reporting obligations and FAQ sections of her portal for instance. She would then be able to see that she still needs to do something after the exercise of her stock options: reporting the holding of the shares in her annual tax return, and she will see how she will be taxed and what she needs to report at the time she sells her shares.

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Conclusion

If Nour and Catarina’s situations sound 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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