Since Covid-19 first hit in 2020 most companies have had to reimagine their employees' office attendance and its importance. As time passed, we all understood how effective and beneficial remote employment is, and today it is an inseparable part of the high-tech ecosystem.
The second quality that is also vastly practiced within high-tech companies is allocating stock options. The founder creates a strong bond between the employees and the company by giving them a fraction of ownership. At the same time, he’s not being forced to give immediate cash as compensation so it is considered to be a win-win strategy.
Companies today try to integrate the two and offer well-structured stock-based compensation plans to remotely-based employees. Even so, some things may change or vary between countries or states and the process might be a bit different. This article will lighten the runway for founders planning to allocate stock options to employees working remotely.
To err is human
The first step in allocating overseas or remotely is to reduce human error to the minimum, it starts with managing your cap table properly. Long long ago in a time forgotten, people relayed solely on excel tables to make sure everything is well updated. Inevitably, the Sum is no longer higher in the chain of command when it comes to cap table management.
An automated cap table is considered to be the best solution in equity management, and it seamlessly allows keeping the often-updated stock options data in check. By reducing human interaction within the cap table, running a multi-continent stock-based compensation plan can become significantly simpler.
Furthermore, and presumably most importantly, in some countries, the cap table is used as a baseline for many important reports and valuations. By keeping an automated cap table, issuing these reports and applying valuations on demand become effortless as it is reduced to a few clicks of a mouse. One of the more common cap table based valuations is the 409A valuation.
When in Rome
There are countries that have specific laws and regulations regarding stock-based compensation plans given to their citizens. In some cases, not following these regulations can cause heavy taxation that the employee will have to pay, like in Israel for example. The Israeli government wanted to encourage start-ups so they issued a section to the Income Tax Ordinance called 102.
The 102 section dictates that a person given stock options will be able to sell them and pay up to 25% tax (instead of a maximum of about 60%). One of the regulations under that section obligates the company to run its option via a trustee, skipping this obligation or failing to follow the other regulations, will cause the employee to pay an unnecessarily high tax. Imagine, wanting to encourage your employees but failing to follow the regulations and creating an unhappy, and frustrated team.
In other cases, it is simply impossible to allocate stock options without following specific laws, like in the case of the United States and the 409A valuation. When tending to allocate any stock-based compensation in the US, the exercise price has to comply with the common share price of the company. To calculate the common share price within the US regulations, a 409A valuation has to be made and applied to the IRS.
It's important to know that the 409A valuation has an expiration date of exactly 1 year but it's crucial to understand that there is another reason for it to expire. A 409A valuation will expire if a major event with financial implications occurs in the company. It means that a 409A might need a redo after a few months, so it is highly recommended to give it extra attention.
Unlike the Israeli 102 that failing to follow it will have taxation implications, the 409A valuation is a must if you desire to employ Americans. Allocating stock options to American employees without the common stock price from a 409A is illegal and you will probably hit a brick wall if you try to go around it.
Where do I sign?
We often recommend using a digital data room to keep all the documentation in order, and to create effective compartmentalization. In this case, the data room feat is not only a “nice to have”, it’s a must. A dedicated data room that is secure enough for all the sensitive information can save thousands of time and money. Trying to send, receive, or apprehend important documents such as grant letters, contracts, and board signatures will turn from a hustle to a simple task.
One of the biggest challenges of employing people that aren't close by is finishing processes that required their signature or interaction. When it comes to finalizing confidential documents companies used to bring the employee all the way to headquarters. As the employee sometimes don’t work in the same country, this task was costly and time-consuming. With a well-structured data room that has all the security and protection required, all these processes are reduced to a link and click.
The big three - conclusion
Now you can start the process of allocating stock options to employees working remotely with ease. Just remember these three important tips:
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