How to Offer Stock Options to Employees Outside the US

In today’s global economy, offering stock options to foreign and remote international employees has become an increasingly important staff retention strategy for attracting and retaining top talent worldwide.

However, this process comes with unique challenges and complexities. Before diving in, it’s crucial to consider whether stock options are the best approach for your company, especially if it isn’t on track for an Initial Public Offering (IPO). Alternatives such as profit sharing or bonus structures might provide more immediate benefits while avoiding some of the international complications associated with stock options.

If you’ve determined that stock options are the right path for your global workforce, this comprehensive guide will help you navigate the process. We’ll cover:

• Understanding stock options for international employees
• Types of stock options suitable for foreign workers
• Common challenges and practical solutions for global implementation
• Real-world considerations and case studies
• Alternatives to stock options for international staff
• Key takeaways for implementing a successful global stock option plan

Understanding Stock Options for International Employees

Stock options give employees the right to purchase company shares at a predetermined price within a specified timeframe. For international employees, this can be an attractive incentive, allowing them to benefit from the company’s growth regardless of their location. However, it’s important to distinguish stock options from other forms of equity compensation or investment that might be more familiar in different countries.

For instance, some companies offer Employee Stock Purchase Plans (ESPPs), which allow employees to buy company stock, often at a discount. Unlike stock options, ESPPs typically involve the immediate purchase of actual shares. Some of these shares might even be monthly dividend stocks, providing regular income to employees who hold them. While monthly dividend stocks can be appealing, especially to international employees looking for steady returns, they’re less common in startup and growth-stage companies that typically offer stock options.

Let’s consider an example involving international employees of nanoglobal companies:

Imagine three employees: Alice, a UK citizen working remotely for a US-based tech startup; Bob, a US expat living in the Philippines; and Charlie, an Irish citizen working for a multinational corporation’s Dublin office.

Alice receives options to buy 1,000 shares at $10 each in three years. If her company’s stock price rises to $50 by then, Alice can exercise her options and potentially gain $40,000 in value (minus taxes and considering currency exchange rates).

Bob, as a US citizen, must still file US taxes even while living abroad. He might use the Foreign Earned Income Exclusion (FEIE) for his regular income, but his stock options could have complex tax implications in both the US and the Philippines.

Charlie’s company offers an ESPP, including some monthly dividend stocks. He purchases 100 shares at €85 each, for a total investment of €8,500. These shares pay a 3% annual dividend, distributed monthly. Even if the stock price doesn’t change, Charlie will receive about €21.25 in dividends each month, plus he already gained €1,500 in value from the purchase discount.

This example illustrates how stock options and other equity compensation can offer different benefits and complexities for international employees.

Offering Stock Options to Foreign and Remote Employees

Extending stock options to foreign and remote employees requires careful navigation of complex legal, tax, and regulatory landscapes in each country where your employees reside. Key considerations include:

1. Compliance with local securities and employment laws in each country
2. Understanding tax implications for both the company and employees in multiple jurisdictions
3. Managing currency risks across different countries
4. Communicating the value and risks of stock options across cultural and linguistic boundaries

Employers typically choose between establishing foreign subsidiaries or using an Employer of Record (EOR) to simplify compliance. Each approach has its pros and cons:

Foreign Subsidiaries:

• Pros: Greater control over operations, potential tax benefits
• Cons: High setup and maintenance costs, complex regulatory requirements

Employer of Record (EOR):

• Pros: Simplified compliance, faster setup, reduced administrative burden
• Cons: Less control, potential higher ongoing costs

Types of Stock Options for International Employees

When considering stock options for foreign and remote employees, companies typically focus on two main types: Non-Qualified Stock Options (NSOs) and Incentive Stock Options (ISOs). However, for international employees, NSOs are more common due to their flexibility.

Non-Qualified Stock Options (NSOs)

NSOs are more flexible than ISOs and can be granted to a wider range of individuals, including non-US citizens and contractors. Here’s how they work in an international context:

1. Grant: The company grants the employee the right to purchase a certain number of shares at a fixed price (the “strike price”) within a specified timeframe.

2. Vesting: Options typically vest over time, often with a “cliff” period.

3. Exercise: When the employee exercises the options, they purchase shares at the strike price.

4. Taxation: Tax treatment varies by country. Generally, the difference between the strike price and the market value at the time of exercise is taxed as ordinary income in the employee’s country of residence.

For example, let’s say Maria, a software developer in Brazil, receives 10,000 NSOs with a strike price of $5. After four years, when all her options have vested, the company’s share price has risen to $15. Maria exercises all her options, paying $50,000 to acquire shares worth $150,000. The $100,000 difference is taxed as ordinary income in Brazil, and Maria may also have reporting requirements in the US if her company is US-based.

Incentive Stock Options (ISOs)

While ISOs can offer tax advantages to US employees, they’re generally not suitable for non-US citizens working abroad. They’re worth mentioning, however, for US expats:

1. Eligibility: ISOs can only be granted to employees, not contractors.

2. Tax treatment: If certain holding periods are met, the employee may be eligible for long-term capital gains tax treatment in the US.

3. Expat considerations: US expats may still benefit from ISO tax treatment, but need to consider how their country of residence will tax the options.

Restricted Stock Units (RSUs)

RSUs are becoming increasingly popular for international employees due to their simplicity:

1. Structure: RSUs represent a promise to issue actual shares at a future date, usually upon vesting.

2. Vesting: Like stock options, RSUs typically vest over time.

3. Taxation: Generally simpler than stock options, as the value of the shares is taxed as income when they vest.

For instance, a US-based company might grant a German employee 1,000 RSUs that vest over four years. Each year, as 250 RSUs vest, the employee receives actual shares and is taxed on their value in Germany.

Common Challenges and Solutions for Global Implementation

Implementing a stock option plan for foreign and remote employees comes with several challenges:

Compliance with Multiple Legal Jurisdictions

Different countries have varying laws regarding securities, employment, and taxation. What’s permissible in one country might be prohibited or heavily regulated in another.

Solution: Engage local legal experts in each country where you have employees. Consider using a global Professional Employer Organization (PEO) that specializes in international employment and can manage stock option administration across multiple countries.

Complex International Tax Implications

Tax treatment of stock options varies significantly across countries. Both the company and the employees need to understand the tax implications in each relevant jurisdiction.

Solution: Work with international tax advisors to develop a comprehensive global tax strategy. This should include understanding withholding requirements, reporting obligations, and potential tax treaty benefits. Implement recharge agreements between the parent company and foreign subsidiaries to optimize tax treatment. Provide employees with access to tax consultation services as part of the stock option package.

Currency Fluctuations

For international employees, currency exchange rates can significantly impact the value of their stock options.

Solution: Consider offering a currency hedge or pegging the strike price to the local currency. Educate employees about the potential impacts of currency fluctuations on their stock options.

Cultural and Communication Barriers

The concept of stock options may be unfamiliar or viewed differently in various cultures.

Solution: Develop localized communication materials that explain the stock option plan in culturally appropriate terms. Conduct training sessions in local languages. Establish a global equity team that can address questions and concerns from employees in different time zones and cultural contexts.

Real-World Considerations

Based on experiences shared by companies with international stock option plans:

1. Vesting Cliffs: A one-year cliff (where no options vest for the first year) can be problematic in countries with strong labor protections. Some countries may view this as a form of prohibited probationary period.
2. Exercise Windows: Be aware that some countries restrict the length of time an employee can be required to exercise options after leaving the company.
3. Data Privacy: Ensure your equity management system complies with data privacy regulations in all relevant countries, such as GDPR in the EU.
4. Mobility Issues: Have a clear policy for employees who move between countries, as this can significantly impact the tax treatment of their options.

Alternatives to Consider for International Employees

While stock options can be powerful, they’re not always the best fit for a global workforce. Consider these alternatives:

1. Global Profit Sharing: This approach can be simpler to implement across multiple countries and provides more immediate benefits.
2. Performance-Based Bonuses: These can be tailored to specific company goals and individual performance metrics, and are generally easier to administer internationally.
3. Phantom Stock: This avoids some of the legal complexities of actual stock ownership while still providing similar incentives.
4. Global Employee Stock Purchase Plans (ESPPs): For public companies, these can be an attractive option for international employees, potentially including the purchase of monthly dividend stocks for those seeking regular income.

Key Takeaways

Offering stock options to foreign and remote international employees can be an effective tool for building a global team, but it requires careful planning and ongoing management. The complexities of international law and taxation make it crucial to work with experienced professionals in each country where you have employees.

Key Takeaways

• Consider alternatives like global profit sharing or bonuses if your company isn’t headed for an IPO. Learn more about alternatives from the National Center for Employee Ownership
• Understand the differences between NSOs, ISOs, and RSUs in an international context. Detailed comparison by the SEC
• Invest in clear, culturally appropriate communication about the stock option plan. SHRM’s guide on communicating compensation
• Remember that there’s no one-size-fits-all solution for a global workforce.

Always consult with legal and financial experts before implementing any international equity compensation plan. With careful planning and execution, stock options can be a powerful tool for attracting and retaining top talent around the world.

Always consult with legal and financial experts before implementing any international equity compensation plan. With careful planning and execution, stock options can be a powerful tool for attracting and retaining top talent around the world.