In the current age, business has gone international and even early stage companies may have employees overseas. Stock options are becoming a part of expected compensation, particularly in technology companies. Stock options are an important component of company culture and of the incentives used to attract, compensate, and retain the best employees. Should an early stage company grant stock options to citizens of other countries?
My knowledge of this subject developed when the first-time founders of a company with employees in an overseas country wanted to grant them stock options. There was a lot of momentum behind the proposal and expectations had already been set. The company and the country don’t matter: it could have been any company with employees in India, China, or a former Soviet republic. The issues are the same.
Hearing about the plan for the first time at a board meeting, I innocently asked, “do they have a telephone book there?” (This was a few years ago, when telephone books still mattered.)
Following a moment of stunned silence, the company founder looked at me and asked, “what do you mean?”
“Do they have a telephone book with people’s names and addresses and phone numbers? If an employee exercises vested options and becomes a shareholder, and then quits, you’ll need to track that employee down every time you need shareholder signatures: when you want to increase the stock option pool, or do a financing, or sell the company. Investors or acquirers may want 100% shareholder approval, so they’ll know they won’t have any problems with disgruntled minority shareholders. How will you find ex-employees?”
“I don’t know. We’ll have to check on that,” said the entrepreneur, acknowledging that the infrastructure in this particular country was rudimentary compared to U.S. standards.
For good measure, I added, “is there even a consistent approach to translating employee names from (Hindi, Mandarin, Cyrillic) to English?” I had seen the names of several employees spelled more than one way in various documents. “ When you issue option agreements and share certificates, they’ll have employee names on them. They’ll have to be valid and consistent. The last thing you want is vagueness about ownership when you’re doing a financing or selling the company.”
To be complete, I also asked “what do we know about laws regarding stock options and taxation in this country? It’s just emerging from decades of socialist rule. Do they have the legal infrastructure to enable individuals to own stock, or will the state confiscate them and become a company shareholder? If we grant options, will employees owe tax immediately? If they do, they’ll turn to us for the cash.”
It took over a year to resolve this issue. We hired legal and tax experts with knowledge of the country in question and answered all of the questions that it is a board’s fiduciary duty to ask. Ultimately, we decided to issue employees in those countries stock appreciation rights (SARs) instead of options. We had to amend the company’s Stock Incentive Plan—with shareholder approval—to do so.
SARs separate the financial rights of shares from the ownership and voting rights. They enable employees to benefit from appreciation in the equity value of the company, without granting them ownership and voting rights. This reduces the company’s burden in obtaining shareholder signatures in crucial moments.
Circumstances may differ from company to company and country to country but, for companies with overseas employees, SARs can be an appealing alternative to stock options. Since the time of this story, nearly a decade ago, many countries have improved their legal, regulatory, and tax regulations to conform to international standards, but the search for talent continues to bring new countries on-line. Each time a country becomes integrated into the global economy for the first time, issues like this have to be addressed.