Among attractive remote employee benefits, stock options rank high on the list. This incentive not only makes you stand out among companies recruiting in similar markets, but it can also motivate better employee performance, leading to higher productivity and quality of work.
Put simply, when an employee performs well, it benefits the company. This boosts stock value making your company more profitable. While it may sound like a win-win, offering equity, especially among a distributed workforce, comes with its own challenges.
So, how do stock options work? We break down everything you need to know about offering equity to a remote, distributed team of employees.
Before diving into how to offer equity, you should clearly understand what stock options are and how the stock market generally works.
Overview: What are Stock Options?
Stock options are financial contracts that give the holder (in this case, your company) the legal right to buy or sell a certain number of shares of a company's stock at a predetermined price (known as the "strike price") within a specified time frame to an employee.
Stocks are often referred to as shares or equities, and simply put, represent a slice of the company offering financial incentive.
There are two key types of stocks you should be aware of.
Call Options: A call option gives the holder the right to buy shares of a company's stock at a predetermined price within a specific time frame. Call options are often used by investors who believe the stock's price will rise. They buy the stock at a lower price (the strike price) and then sell it at a higher market price.
Put Options: A put option gives the holder the right to sell shares of a company's stock at a predetermined price within a specific time frame. Put options are often used as a form of insurance or to profit from a decline in a stock's price.
Stock options are often leveraged as part of employee compensation packages. They are called employee stock options and are a way to attract top-tier talent and provide competitive compensation and benefits packages.
Stocks are bought and sold on stock exchanges, such as the New York Stock Exchange (NYSE) or the NASDAQ. Investors can buy or sell orders through brokerage accounts.
The value of your stock is dependent on a variety of factors and fluctuates often. Factors that can positively or negatively impact your stock’s value include:
- Company’s financial performance
- Current market conditions
- Industry trends
- Overall economic health
Benefits of Employee Stock Options
When a company offers an employee equity compensation plan, it's an attractive incentive that can generate greater interest in your company, allowing you to recruit top quality employees.
Employees can earn dividends and capital gains, which means more money in your employees’ pockets, in addition to their salaries. This contributes to employee satisfaction and company morale, which is great for business.
When deciding to offer your employees stock options, consider these benefits.
Increases Financial Potential
Stock options offer the opportunity for employees to earn additional income through capital gains. If the company's stock price increases, employees can exercise their options and sell the shares at a higher market price, realizing a profit.
Fosters a Sense of Ownership and Engagement
Stock options give employees a sense of ownership in the company's success. This ownership mentality can increase engagement, motivation, and commitment to helping the company achieve its goals.
Align with Company Performance
When employees hold stock options, their financial well-being becomes tied to the company's performance. This alignment encourages employees to work harder and contribute to the company's growth and success.
Creates Long-Term Focus
Stock options often have vesting periods, encouraging employees to stay with the company for the long term. Focusing on the company's future can lead to more consistent effort and dedication.
Allows You to Provide Competitive Compensation
Offering stock options can make a compensation package more attractive, especially for companies that might not be able to offer higher salaries. It allows employees to earn more based on the company's performance.
Enables Wealth Accumulation
Successful stock option programs can enable employees to accumulate wealth over time, especially if the company's stock appreciates significantly.
Educates & Promotes Professional Development
Employees might gain a better understanding of financial markets and investment principles as they monitor their stock options' performance. This financial education can have long-term benefits for their personal finances.
Promotes Retention
Stock options can be used strategically to retain key talent. The vesting schedule encourages employees to stay with the company, reducing turnover and the associated costs of hiring and training new employees.
Facilitates Recognition and Incentives
Stock options can serve as a recognition of an employee's contributions and achievements. It provides a tangible reward for their hard work.
Provides Flexibility and Choice
Employees usually can decide when to exercise their stock options. This can allow them to take advantage of favorable market conditions or align their decisions with their personal financial goals.
Enhances Benefits Packages and Keeps You Competitive
Stock options can enhance the overall benefits package a company offers, making it more competitive in attracting top talent.
Provides Opportunities for Diversification
Once employees exercise their stock options and acquire shares, they have the option to diversify their investment portfolio by holding a mix of assets.
We know all of this sounds great — and it is. But don’t forget, with great reward, comes some element of risk. There is always the possibility of your company's stock price decreasing or remaining stagnant. So, we recommend consulting with financial professionals who can help you and your employees make informed choices.
Offering Equity: Where do I begin?
Now that you know a bit more about stock options, what they are, and how they can benefit you and your remote, global teams, let’s discuss ESOPs.
An ESOP, or Employee Stock Ownership Plan, is a kind of employee benefit plan whereby companies grant equity in the business to their employees.
Employee Stock Option plans, or ESOs, are a type of equity companies grant to employees through ESOPs. An employee stock purchase plan gives employees the right to purchase company stock at a set price.
Offering your remote employees an ESOPs or employee stock purchase plans is a steep learning curve.
Before diving in, you’ll need to familiarize yourself with the different types of equity incentives. You’ll also need to learn about the securities laws in the various countries where you are issuing equity so you remain compliant. Lastly, you’ll need to understand the local tax laws and ensure you follow the proper steps regarding documentation and filing.
To start, we’ve listed some common terms associated with ESOPs:
- Cliff: The period after which the first portion of an option grant vests. A typical vesting schedule is four years with a one-year cliff.
- Fair market value (FMV): The price for which the stock would sell if traded on the open market. For private companies, the fair market value is determined through a private audit process.
- Liquidity event: An event such as an acquisition, merger, or IPO (initial public offering) providing a significant change in the ownership structure of the company. A liquidity event often means that employees can finally sell their exercised options, either to investors or on the open market.
- Strike price: Also called the “exercise price,” the strike price is the set price per share at which an option may be purchased at exercise.
- Spread: The difference between the strike price and the fair market value.
- Stock option agreement: An agreement between a company and an employee containing the terms, conditions, and restrictions on the specific stock option(s). The agreement will include key details like the type of stock options, number of shares, strike price, vesting schedule, and expiration date.
- Taxable event: An event that triggers taxation for the option holder. Taxable events may include granting vesting, exercising, selling, and holding stock. These vary by type of award and country in question.
- Vesting: The process for earning an asset, like stock options, usually set over a period of time. Employees can only exercise options that have vested.
- Vesting schedule: Determines when the employee may exercise their options. Traditionally, the length is four years with a one-year cliff, meaning 25% of options vest after one year of employment, and the remaining options vest monthly throughout the next three years.
- Virtual Stock Options (VSO): The contractual agreement between your company and its employees of virtual shares that give the employees the right to a cash payment at a particular time or as a result of a particular event. These shares can increase as the stock price rises and decrease as it falls, all without the employee receiving any stock. In a VSO, the employee is not an actual shareholder and doesn’t have any of the rights or privileges as such. Their “ownership” in the company is on paper only.
- Restricted Stock Units (RSU): An award of stock shares, usually given as a form of employee compensation. Before receiving them, the employee must meet certain requirements such as a number of years spent with the company.
- Stock options: The right to purchase a set number of shares for a fixed price, also known as the “exercise price” or “strike price.” It can include Incentive Stock Options and Non-Qualified Stock Options and requires that employees purchase the stocks before they own them.
Not All Equity are Equal
Not all equity incentives are the same. As an employer, you will need to determine what type of equity makes the most sense for your business.
Here are three equity incentives you can offer remote employees.
Appreciation rights: This is the right to the value of the appreciated stock but not the stock itself. Appreciation rights do not grant employees equity in the company. For example, VSOs are a type of appreciation right.
Awards: Similar to stock options, awards are non-cash compensation paid through company equity. Employees don’t have to pay to receive them. Awards are often great performance incentive tools, for example, an RSU.
Stock Options: This is a type of equity that employees can buy or refuse. Note, that out-of-country remote employees are only eligible to receive Non-qualified Stock Options (NSOs). With NSOs, you pay taxes when you exercise the option (purchase shares) and sell those shares.
Key Considerations When Offering an ESOP to Foreign Employees
When you want to offer ESOP to remote and distributed teams, remaining compliant will be your biggest hurdle.
Consult legal experts in each country where you plan to offer equity incentives. Invest in in-house legal counsel before making bold equity claims in your job descriptions.
There are three key things to consider when offering an ESOP to foreign employees.
- Employer taxes: If you file incorrectly, your company can face penalties and even break the law.
- Employee taxes: Some countries offer tax-advantaged schemes for employees, and some don’t. Not knowing means you may lose out on cost savings.
- Tax reporting obligations: This will vary from country to country and may be difficult to understand. Despite this, it’s crucial to report properly and per the requirements set out by the country you are operating in.
How Borderless Can Help
Offering stock options to full-time employees in other countries is much more complicated than paying international contractors.
As an employer, you will be responsible for navigating things like labor and tax laws and ensuring you abide by country-specific data policies to remain compliant. This can involve a lot of time and money for your business. Thankfully, there’s a solution.
Onboard, pay, and manage talent in over 170 countries with our all-in-one platform.
Borderless offers in-depth knowledge of each country and localized contracts, ensuring that your business is always compliant — from taxes to payments, terminations, misclassifications, and everything in between.
We guarantee that you maintain strict adherence to foreign pay and taxation regulations, so you can focus on building scalable growth. Book a demo to see how Borderless can help you hire from anywhere, in minutes.
