Equity compensation is a great tool for attracting, motivating and retaining the best talent, especially within early-stage businesses experiencing periods of fast growth. Yet, as companies expand globally, the process can become considerably complex. Our team led by our co-founder, Antony and Head of Legal, Joanna partnered up with Špela and Tamas from Equity People to shed light on the possibilities and challenges of equity when employing global employees through an EOR.
Businesses often use stock options to compensate and invest in their employees. This is a viable strategy not just when cash is limited, but also as the company matures and the base salary closes the gap to the general market more and more. Providing equity to employees globally is an effective way to retain them.
Using an Employer of Record (EOR), like Teamed, to manage global teams and offer them equity has its own set of challenges and benefits. Our approach at Teamed ensures that while we manage the intricacies of employment law, compliance, and equity compensation on your behalf, we are also mindful of potential risks of offering the equity to EOR employees and work with you to help your business retain autonomy and minimise such risks.
This guide will help you understand how you can grant equity to your staff who are employed via an EOR and how you can manage these grants through the employee lifecycle.
Challenges with EOR and Equity
EORs have changed how companies hire internationally. They handle the legal side of employment, like compliance, payroll, and benefits, making it easier to work across borders. Offering equity compensation through EORs is not always straightforward. When companies aim to provide equity to their employees by using an Employer of Record (EOR), they must thoroughly understand and comply with local laws or partner up with an expert, such as Equity People, who help businesses plan global equity schemes on a daily basis. This is to ensure that their equity offerings are both legally permissible and well-tailored to the needs of the employees hired through the EOR.
Understanding local requirements is critical as tax-incentivised schemes cannot be exported into other tax jurisdictions. This not only affects the availability of specific equity schemes for EOR employees but poses a broader challenge of navigating tax optimisation across borders.
Antony, our co-founder highlights the importance of addressing this issue: "The real challenge lies in the inherent complexities of offering tax-optimised equity compensation in a global landscape. It's important for businesses to understand that tax incentives designed within one jurisdiction often cannot be applied when employees are working in another. This aspect of global employment affects all companies, whether they employ through an EOR or directly.”
What to think about when planning to build up an equity plan?
We’ve built the following list of aspects to consider when looking to draft up an equity plan:
Different Laws: Laws governing equity compensation vary from one country to another. This affects what kind of equity you would want to offer and how it's taxed - for both you as a company, and the employees.
Tax Rules: It's important to know how different types of equity, like NSOs and phantoms, are taxed in different countries to properly plan taxation events. It is important to have an EOR partner that can perform the withholding duties in these events.
Choosing the Right Equity Type: Whether you go for unapproved stock options, or tax optimised instruments such as, ISOs, and EMI, or something else depends on your company's setup, where your employees are, and whether they are employed directly or via an EOR.
Types of Equity Plans:
Equity plans are often interpreted differently in each jurisdiction. Countries with high startup activity offer tax-optimised instruments whereas certain countries do not make tax-favorable instruments available. In general, for EOR employees, companies most often rely on non-tax optimised stock options, warrants, or phantoms.
These instruments are then given different names depending on the jurisdiction. For example, USA offers different types of instruments:
Non-Qualified Stock Options (NSOs): These stock options can be given to anyone who works for the company, but they might not be the best for tax reasons.
Incentive Stock Options (ISOs): These stock options can be given to employees and they have a tax advantage.
Restricted Stock Units (RSUs): Employees get company shares after a certain time.
Stock Appreciation Rights (SARs) and Phantom Stocks: These offer bonuses based on the company's stock value without giving out actual stock options.
It’s worth noting, that you can't give e.g., Incentive Stock Options (ISOs) to people hired through an EOR because they're meant for direct employees only, but you can offer them NSOs.
The UK also have their own version of tax-optimised schemes:
EMI: Stock options, with the highest tax optimisation available.
CSOP: Stock options, with slightly less favourable taxation.
In the UK, it is common to issue unapproved stock options to EOR employees. In the Nordics, it is common to encounter warrants offering tax-optimised terms that work slightly differently:
Stock Warrants: These let certain participants buy shares at a set price in the future, but participants are required to make an upfront payment to get the warrants.
A Real-World Example: Building equity plans and employing them whilst hiring through a global EOR
Let's say you’re a SaaS business who hires global employees through an EOR but wants to start offering equity to their team members in Spain and Poland. Here's how you can make this happen whilst keeping your employees hired through Teamed.
First steps: You can tell Teamed of your plans and whether you have a plan already in place or need to craft a new one.
Redefining existing or building new custom plans: Our team can connect you with a partner, such as Equity People, to review your equity plan if you have concerns about risks or global compliance. Our partners can help ensure that your plans comply with the laws in Spain, Poland, and your base location. They can also create a totally new plan, taking into account the tax and legal regulations in each country.
Putting your equity plan into action: Your business can then set up the equity plan yourself (or with the help of a plan provider) and then our team at Teamed can facilitate the process of granting the incentives.
Spela’s 3 tips for making the best kind of Equity Scheme
Equity schemes boost growth through increased employee engagement. But what can you do to ensure that your scheme directly improves company performance? 🤔 Use this checklist originally shared by Špela on LinkedIn:
1. Make your scheme 𝘶𝘯𝘥𝘦𝘳𝘴𝘵𝘢𝘯𝘥𝘢𝘣𝘭𝘦.
To most people, equity is complicated because it’s unfamiliar territory. Break your scheme down into layman’s terms and ensure employees understand what you’re offering, how much you’re offering, and why you chose that number.
2. Make your scheme 𝘤𝘰𝘮𝘱𝘦𝘵𝘪𝘵𝘪𝘷𝘦.
Benchmarking is a crucial part of building a scheme that enhances employee retention. Not only should your numbers be competitive, but your terms should be, too.
3. Include a 𝘱𝘦𝘳𝘧𝘰𝘳𝘮𝘢𝘯𝘤𝘦-𝘣𝘢𝘴𝘦𝘥 element.
If you want to instill a “one team, one dream” mentality, incentivise employees based on company performance as well as individual performance. When times get tough, they’ll be motivated to get stuck in, and you’ll encourage collaboration and teamwork because everyone will push each other to strive for the best.
For your equity scheme to be worthwhile, it needs to increase performance and generate positive ROI.
Understanding Local Rules
It's important to know and follow the local rules when offering equity. For example, in the EU, you might need to share a prospectus for equity offerings. In Brazil, you have to meet certain tax rules. This is why working with an expert such as Equity People can help make sure everything is done right.
With the right approach and partners, companies can offer global equity confidently, making their teams feel valued no matter where they are in the world.
Learn more about building equity schemes with Equity People or discover how our team can simplify your global hiring process by scheduling a meeting with us.
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