Challenges to Managing Cross-Border Equity Grants

Issuing equity to workers is a particularly effective way for high-growth companies to attract, engage, and retain the type of talent that they need. In light of the global shift towards a more flexible workplace, companies are now willing and able to look outside their borders to find this talent. Professional Employment Organizations (PEOs) exist to help these companies navigate the complex global employment market, maximizing the benefit from remote workers without running afoul of regulations that govern employment outside the home country.??

When it comes to equity, however, there is little in the way of ensuring global compliance with the myriad of laws and regulations that come into play when securities are involved.? Traditional routes for compliance often involve engaging large legal and accounting firms, often out of reach for a startup. This can cause disparate treatment of ex-U.S. employees and contractors, leaving them without the long-term advantage of ownership. The benefit to all but the largest companies is massively outweighed by the time and cost to implement a compliant stock plan in a single country, let alone multiple jurisdictions.?

While many of the legal, tax, and regulatory issues are similar among countries, solutions to ensure compliance often turn on slight nuances that mandate the need for country-specific counsel and modifications to the grant documents.?

This article sets out just a few of the major roadblocks that a startup must navigate to make sure that they stay on the right side of the regulations.

Taxes and Withholding

Equity grants can be a financial minefield for company and worker. A host of issues come into play, like determining what is compensation, what taxes may apply, and who is responsible for making the payment (and to whom!). In certain jurisdictions, properly framing the agreement can confer a benefit to the employee, deferring taxation and allowing for overall better tax treatment. If the company does not suitably paper over the issuance and take advantage of available tax-efficient vehicles, there can be dramatic financial consequences for the worker, the company, or both.?

Securities Regulations

In the United States, we have grown accustomed to relying on common registration exemptions when issuing stock. Many countries have a securities exemption for stock issuances to workers, provided you understand how to take advantage of it. Some exemptions are based on the number of recipients, while others are based on the total value of the equity (and some have exemptions for both). For instance, most EU countries have adopted the EU Prospectus Regulation, which has an exemption (issuing to fewer than 150 persons) available should options be considered a security. It is not a simple task to navigate complex foreign securities laws - but a small company lacking access to professional help still cannot afford to come under the scrutiny of a foreign securities regulator.?

Cross-border currency exchange and foreigh asset ownership

The issuance of stock upon the exercise of options generally requires some form of payment from the optionholder to the issuing company. When foreign currency is involved, this can trigger reporting requirements to a specific bank and/or tax authorities. Additionally, some jurisdictions, while permitting the receipt of foreign currency upon a dividend or sale of stock, mandate the repatriation of funds within a certain period after the transaction. Knowing when and where to report is critical to maintaining a cross-border equity plan.?

Social Insurance and Labor Laws

As in the U.S., certain compensation to employees requires a contribution to the applicable social insurance scheme. The company (or its local subsidiary) is responsible to understand when compensation accrues and when/how to remit the appropriate amount. In some countries, the act of granting an option could be considered employment compensation, so carefully wording the grant can avoid or at least delay any remittance. Companies also must be careful to avoid issuing option contracts that may be considered to be a guarantee of ongoing employment - which can also trigger continued vesting even after termination.

Data Protection Requirements

Data protection and privacy regulations seem to constantly be evolving. Given the nature of equity grants, this necessitates the handling of very sensitive data in a manner that is compliant across multiple countries with varying degrees of regulation. This is particularly important should you wish to store data outside of an individual’s home country. Understanding how to properly obtain consent and how to adequately disclose the handling of data is critical.?

Overall trust in the legal system generally, and with equity specifically

It comes as no surprise that opaqueness in the legal system is a trait not unique to the U.S. This can breed a lack of trust not just in the regulatory system, but a lack of trust in the concept that a piece of paper adequately represents ownership in your company - ownership that can be counted on to build wealth. A company needs to maintain a system that can engender trust that the equity granted will be there for them, and not get stripped away unfairly.?

Conclusion

The complexity of cross-border equity grants can lead to a myriad of overlapping problems due to rules and regulations in each of the countries for which a company wants to grant shares.?

Utilizing smart contracts can alleviate some of these pain points. Automation in a “tamper-proof” environment, the maintenance of a decentralized ledger, and the ability to tie equity grants from the creation (authorization) of the equity to an option grant and exercise, and eventually to sale, creates a powerful audit trail of the steps - legal and financial - that occur during the process. It also can remove or significantly shorten the time from new hire to grant, ensuring that workers in high-growth companies are able to benefit by receiving their equity in minutes…not months.?

It’s this precise speed and security that Dinari offers with its full-stack solution, assisting companies to compliantly offer and manage their equity incentives to employees around the world. We leverage our expertise and blockchain technology to make what was once a very painful, costly, and time-consuming process into a seamless, cost-effective, and dare we say, delightful experience.?

If this all sounds familiar and you are a company looking to attract, engage, and retain a global workforce through your equity incentive plan, let us know! It’s likely we’ll be able to help!