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Equity compensation for remote employees
What is equity compensation?
Equity compensation for remote employees refers to offering company ownership interests, such as stocks, stock options, or other forms of equity, as a part of the employee's compensation package. It’s an attractive way to remunerate remote employees, offering multiple benefits to the company and the employee. As discussed in this guide, it also comes with obligations and responsibilities that may differ by country.
What types of equity compensation exist for remote employees?
- Stock options: Stock option grants give employees the right to purchase a certain number of shares of the company's stock at a predetermined price (known as the exercise or strike price) after a specified vesting period. The employee can profit if the market value of the stock rises above the exercise price.
Some option plans have beneficial tax treatment, which makes them particularly appealing. Companies and plans must meet various criteria, which differ by country, to qualify for this.
Examples of option plans with beneficial tax treatment include ISOs in the US and EMI in the UK. Non-qualified stock option plans, on the other hand, do not provide any tax advantages and will be taxed as income for the employee. In some countries, e.g. Belgium and Spain, all option plans benefit from tax incentives.
🥇 Stock options are commonly used in startups as a way to incentivize employees. They are preferred over giving shares because there is no upfront premium or tax to pay, making them a risk-free option for both the employee and the company.
- Restricted stock units (RSUs): RSUs represent a promise to grant an employee a specific number of shares of company stock at a future date, subject to vesting conditions (such as length of employment or performance milestones). When the RSUs vest, the employee receives the shares and can either hold onto them or sell them.
- Restricted stock awards (RSAs): RSAs are equity grants that transfer shares to employees. These shares are restricted until they vest, after which the employee can fully own them without restrictions. Vesting schedules could be time-based, performance-based, or both.
- Phantom shares or Virtual Stock Options (VSOP): these instruments provide employees with a financial award based on the value of the company’s shares, without giving actual equity ownership. Phantom shares or virtual stock options are settled in cash.
- Stock appreciation rights (SARs): similar to phantom shares or VSOP, SARs provide employees with the right to receive the increase in the value of a certain number of shares over a specified period. When exercised, the employee receives the difference in value between the grant date and the exercise date, either in cash or additional company shares.
How do stock options work
Stock options typically grant the holder the right to buy shares of the company at a set price (also known as the strike price) within a certain period (typically ten years).
The stock options holder gets the right to buy those shares by vesting (i.e. unlocking) the stock options over time, following a schedule set by the company, called the vesting schedule.
💡 A common type of vesting schedule for startups is 4 years, with a 1-year cliff and monthly vesting: 25% of the options vest at the end of the 1st year, and the remaining options vest monthly throughout the next 3 years.
If the holder decides to exercise their vested options, they must pay the exercise price (strike price x number of options) and will receive ordinary shares of the company in return. In principle, options holders can exercise as soon as their options vest, or later.
After the exercise, the holder may choose to sell these shares immediately or retain them in the hope that they will appreciate in value, under the assumption of a liquidity event such as an acquisition, an IPO, or a share buyback plan.
It's important to note that exercising options only makes sense if the company's current share price is equal to or higher than the strike price. The decision to exercise also depends on how long the holder thinks they will have to wait before they can see a cash return by selling the shares and any tax implications.
🌎 The rules and tax treatment of stock options vary widely between countries, so knowing the regulations for each country where you employ people is crucial.
🚀 Easop helps companies easily manage equity compensation across geographies. Click here to book a demo.
Which remote employees can benefit from equity compensation?
- Direct employees: Direct employees are individuals who are directly employed by a company (or one of its subsidiaries) on a full-time or part-time basis.
- EoR employees: EoR (Employer of Record) employees are individuals who are employed by a third-party employer of record, rather than by the company that they perform work for. The employer of record is responsible for all administrative tasks related to the employee, including payroll processing, tax withholding, and benefits administration. The company that engages the EoR employee typically pays a fee to the employer of record for these services.
- Contractors: Contractors are individuals or companies who perform work for a company on a project or temporary basis. Contractors are not considered employees of the company and are typically responsible for their own tax withholding, benefits, and insurance. Contractors may be subject to different legal and tax requirements than direct employees, and may be classified as independent contractors or freelancers under applicable laws.
- Advisors: Advisors are individuals who provide specialized advice or services to a company on a part-time or project basis. They are typically not employees of the company and are not involved in day-to-day operations or management. Instead, they provide strategic guidance and advice to the company's leadership team, board of directors, or other stakeholders. The terms of the advisory relationship may vary depending on the nature of the work and the needs of the company. Advisors are not typically eligible for benefits or protections afforded to employees, and their relationship with the company may be governed by a separate agreement or contract.
What are the benefits of offering equity compensation to remote employees?
What are the benefits of offering equity compensation to remote employees?
Offering equity compensation to remote employees has several benefits for the company and its employees.
- Attract and retain top talent: Equity compensation helps companies attract highly skilled professionals who want to maximize their potential for long-term financial gains. Since equity typically vests over a period of time, employees are motivated to stay with the company to realize the full value of their equity.
- Align employee interests with the company’s success: Equity compensation aligns the interests of remote employees with the company's success. When employees have a stake in the company, their financial success is directly tied to its performance. This results in increased productivity, better decision-making, and a founder’s mentality among employees.
- Cash management: Startups or companies with limited cash flow can use equity compensation to conserve cash, while still providing a competitive total compensation package. This can be especially useful for attracting talent in the early and growth stages of a company.
- Tax advantages: In some countries, equity compensation may have tax advantages for the company and the employees. Employees may pay lower taxes on long-term capital gains compared to ordinary income, while companies can potentially claim tax deductions related to equity compensation.
- Inclusive company culture: Offering equity compensation to remote employees can help create a sense of shared ownership and purpose among team members. This can foster a sense of belonging no matter where team members are based.
- Positive corporate image: Companies that offer equity compensation are often perceived as forward-thinking and employee-centric, which can enhance their overall corporate image and reputation.
🚀 Easop offers a fast and cost-effective way for companies to offer equity to their remote employees. Click here to schedule a demo and discuss your company’s requirements.
What are the risks of offering equity compensation to remote employees?
What are the risks of offering equity compensation to remote employees?
- Complexity and administrative burden: Implementing and managing equity compensation plans can be complex and time-consuming. Companies must ensure compliance with tax laws, securities regulations, and accounting rules, which can vary across countries where remote employees are located.
This involves finding local legal counsel, keeping track of requirements and deadlines, accurately logging data, filing reports, and engaging with multiple stakeholders. Some stakeholders, such as employees, may not fully understand equity compensation, which can result in more support work for the employer.
- Legal and regulatory risks: Companies with team members in multiple countries may face different legal and regulatory requirements for offering equity compensation to remote employees. Navigating these complexities can be challenging and could expose the company to legal and financial risks.
Companies must comply with securities laws and regulations in each jurisdiction where they offer equity compensation. This may involve registering or qualifying the plan with local regulatory bodies, adhering to specific disclosure requirements, and ensuring compliance with rules related to insider trading and other securities law matters. Employers must also comply with local labor laws.
The tax treatment of equity compensation also varies across countries, including:
1. Differences in employee taxation, such as different rules regarding the timing, rates, and reporting requirements for taxes on equity compensation.
2. Differences in employer tax withholding and reporting.
3. Differences in corporate taxation, including tax deductions, taxable income, or potential tax penalties.
Non-compliance can result in fines for tax liabilities, missed reporting obligations, or local security law infringement. In the case of the reclassification of remote workers, several areas could be affected, compounding the risks the company is exposed to.
- Employee education and communication: Remote employees may not fully understand the potential risks and rewards of equity compensation, particularly if they are unfamiliar with the financial and legal implications of stock options, restricted stock units, or other equity instruments. This can lead to misunderstandings or frustration if the employee's expectations are unmet or relevant information is not readily available.
🚀 Easop helps companies manage equity compensation for remote employees with a simple solution. Our globally compliant platform removes legal and financial risks, while our workflows enable your team to easily create documentation, reports, and dashboards for all stakeholders, including board members and employees. Click here to book a demo.
How to offer equity compensation to remote employees?
What is the process for granting equity compensation to remote employees?
- Establishing a Stock Options Plan (ESOP) at the level of the top company in the US: This plan should outline the terms and conditions of the equity compensation plan, including:
- The number of options reserved (= the size of the ESOP pool).
💡 ESOP pools typically range from 5% to 20% of the company's total outstanding shares.
- The term of the plan.
💡 Typical term: 10 years.
- The Post Termination Exercise Period (PTEP) (standard / in case of disability / in case of death).
💡 US startup accelerator Y Combinator recommends a 10-year PTEP, a departure from the traditional 90-day rule based on the tax treatment of Incentive Stock Options (ISOs) in the US.
- The definition of eligible team members (= grantees), including indirect employees like contractors.
ℹ️ Stakeholders: your US lawyer
Cost: USD 5,000 - 10,000
Time: 1 week - 1 month
- Approving the ESOP plan: Before granting equity compensation, the plan must be approved by the board of directors (Board consent) and the company's stockholders (Stockholders consent).
ℹ️ Stakeholders: US lawyer / via CapTable Management Software
Time: 1 week - 1 month
- Conducting local legal analysis required to comply with local laws in all relevant geographies.
- Adding a country-specific addendum to the grant documentation.
- Setting up a local entity.
- Setting up a stock options sub-plan.
- Conducting a company valuation.
- Reporting obligations for the employer.
- Reporting obligations for the grantee.
ℹ️ Stakeholders:
- US lawyer
- Lawyer in each country where you plan to grant equity
Cost: USD 2,000 - 8,000 per country ➕ USD 1,000 - 4,000 for review and coordination by US lawyer per country
Time: 2 weeks - 2 months
- Drafting equity grant documentation adapted to take into account local rules (cf. addenda).
ℹ️ Stakeholders:
- US lawyer
- Lawyer in each country where you plan to grant equity
Cost: USD 2,000 - 10,000 per country ➕ USD 1,000 - 4,000 for review and coordination by US lawyer per country
Time: 2 weeks - 2 months
- Issuing equity grants. The issuance process involves defining the grant’s vesting parameters, including:
- Amount of the grant (in $-value, the number of shares, or % of ownership - depending on how the offer is communicated to the employee).
- Exercise price.
The vast majority of US companies choose to set the exercise price based on the fair market value (FMV) of the shares of Common Stock as reflected in their latest 409A valuation. ⚠️ 409A valuation reports are valid for one year following the valuation date, unless a material event occurs that affects the valuation of the company’s stock (e.g. a new financing).
- Vesting schedule.
- Vesting start date.
- Post Termination Exercise Period (PTEP)
Despite the PTEP parameters being defined in the ESOP plan documentation, they are still modifiable on a grant-by-grant basis. For example, some companies make it variable based on tenure.
- Adding other parameters, such as Early-exercise or Acceleration.
Early exercise enables the employees to buy shares before waiting for the end of their vesting schedule. They could receive stock options on Day 1 and pay the strike price to buy the shares that day.The main reason for early exercising is that employees can pay a lower tax rate for their gains. This is because, in many geographies, they will be taxed on the difference between the stock's fair market value at the time of exercise and the exercise price, which is typically lower than the fair market value at the time of exercise.
ℹ️ Stakeholders:
- US lawyer
- CapTable Management Software
Cost: a few hundred USD per grant
Time: a few days
- Approving the grants via board approval.
ℹ️ Stakeholders
- US lawyer
- CapTable Management Software
Time: 1 week - 1 month
- Documenting and collecting each grant: It is important to document the grant of equity compensation to remote employees in writing, including the terms of the grant, the number of shares or options granted, and any applicable vesting schedules or restrictions.
ℹ️ Stakeholders
- US lawyer
- CapTable Management Software
Cost: a few hundred USD per grant
Time: a few days
- Communicating with remote employees: Companies should ensure that remote employees understand the terms of the equity compensation grant and any applicable restrictions or conditions. This may involve:
- Providing grantees with an explanation of the type of equity received, the vesting conditions, and the cost exercise functioning.
- Informing grantees about the tax treatment and implications of the equity compensation received.
- Informing grantees about their reporting obligations.
ℹ️ Stakeholders: Founder / HR team / Finance team
- Ongoing compliance with local laws: When granting equity compensation, companies must comply with securities laws, which can vary by geography and jurisdiction. In addition to the initial setup, companies must monitor regulatory changes to ensure ongoing compliance.
- (For EoR employees) Communicating with the EoR employer
ℹ️ Stakeholders
- Local lawyers
- Founder / HR team / Finance team
- EoR employer
Cost: a few hundred USD per question
Using Easop, companies avoid the costly and lengthy processes described above to grant their global team members equity. Easop’s SaaS solution integrates with CapTable Management Software and provides globally compliant documentation, instantly available dashboards, and self-serve workflows.Cost: from USD 10 / granteeTime: a few hours
Reward your remote team today - with Easop, you can grant stock options to your employees anywhere in just a few hours. Click here to book a demo.
Country guides for offering equity compensation to remote employees