Issuing Stock Options to your Employer of Record (EoR) Employees

In today’s global business environment, companies are constantly looking for ways to attract and retain top talent. Offering stock options is a powerful way to align employee incentives with company goals. But when your employees are hired through an Employer of Record (EOR), how can you ensure they benefit from stock options?

The good news is, issuing stock options to EOR employees is entirely doable, even for employees located across the globe. With the right planning, compliance measures, and support, you can make this process seamless. Let’s break it down, step by step, with a special focus on employees in India.

Step 1: Understand Local Regulations

Before offering stock options, it’s crucial to understand whether your home country allows you to extend stock options to non-traditional employees, such as contractors or advisors.

For instance, countries like the United States permit this, but the rules can differ significantly in other regions. Don’t make promises to employees without first confirming that you can legally fulfill them. It’s always a good idea to consult legal and tax experts to ensure compliance in your home country and the employee’s country of residence.

Step 2: Create a Unified Equity Compensation Plan

Fairness matters when offering stock options to a global workforce. A well-designed global equity compensation plan ensures transparency and equal treatment for employees, no matter where they are.

Rather than having a patchwork of policies for different regions, aim for a consistent plan that aligns with your company’s values and provides clear guidelines for employees.

Step 3: Choose the Right Type of Stock Options

Understanding the various types of stock options is critical to making informed decisions. Here’s an overview:

1. Non-Qualified Stock Options (NSOs):
   • NSOs are one of the most common types of stock options.
   • Employees receive stock at a set price (the grant price). When they exercise these options, the difference between the grant price and the current market value is taxed as income.
   • Later, when the stocks are sold, capital gains tax applies based on how long they were held. For instance, in India, selling within a year is taxed as short-term capital gains, while sales after a year are taxed at lower long-term capital gains rates.
2. Restricted Stock Units (RSUs):
   • RSUs are generally given free of cost but become taxable as income upon vesting.
   • They are more popular with larger, established companies where a clear exit strategy exists, such as a public listing or acquisition.
3. Stock Appreciation Rights (SARs):
   • SARs provide a cash payout based on the increase in stock value.
   • They are ideal for companies that want to avoid the complexities of issuing actual stocks. However, some companies also offer the option to convert the payout into stock, which may then be subject to capital gains tax.
4. Phantom Stocks:
   • Phantom stocks function similarly to SARs but consider the full stock value as taxable income.
   • These are typically designed for cash payouts and can be a straightforward option when equity-based plans aren’t feasible.

Step 4: Collaborate with Your EOR Partner

This is where your choice of EOR partner makes all the difference. While many EOR providers claim to support stock options, not all have the expertise to handle the complexities involved.

A reliable EOR partner can:

• Simplify Compliance:
  They handle withholding taxes, regulatory filings, and ensure local legal requirements are met.
• Guide Country-Specific Processes:
  In India, for example, FEMA (Foreign Exchange Management Act) compliance is required for issuing stock options to employees. An experienced EOR partner can help navigate these regulations and ensure all formalities are completed.
• Offer Seamless Processing:
  From issuing grant letters to tracking vesting schedules and exercises, your EOR partner should stay in the loop to ensure a smooth experience for both you and your employees.

Step 5: Keep Everyone Aligned

Once the compliance and legal aspects are sorted, it’s time to issue the grant letters and set your plan in motion. Here are a few tips to ensure smooth execution:

• Keep your EOR partner informed of key milestones, like vesting and exercise periods.
• Route cash payouts (if applicable) through your EOR to ensure accurate tax withholdings.
• If employees choose to convert payouts into stocks, ensure they receive assistance with tax filings and any country-specific requirements.

Conclusion

Offering stock options to EOR employees is an effective way to attract top talent and motivate your workforce globally. The process may seem complex, but with the right EOR partner, it can be a seamless experience. From managing tax compliance to handling local regulations, your EOR partner plays a crucial role in making this a success.

For a deeper dive into this topic, check out our YouTube video. We discuss real-world scenarios, break down the types of stock options, and provide actionable tips to make your equity compensation plans a success.

Don’t let borders limit your growth—empower your global teams with the benefits of stock options today!