“Our Company would like to issue stock options to a resident of Country X. Anything special we should consider?”
Start-ups are notoriously short on cash. And many use service providers in other countries. Put those two things together, and stock options for everyone seems like a no brainer, right?
Maybe. My advice is always to have counsel in the foreign (non-U.S.) country review the plan and stock option agreement to ensure that (i) no local laws are being violated, and (ii) the grant won’t result in horrible tax treatment to the recipient. This extra legal cost may be enough to dissuade a cash-strapped start-up from issuing options internationally. Particularly if the grants are small and/or there is more than one country involved.
As for tax treatment, some countries have tax-favored options, similar to incentive stock options in the United States. For example, the UK has an “EMI option scheme.” As you might expect, qualifying for those benefits creates extra hoops to jump through.
Even if a company is not too worried about optimizing tax treatment for a foreign option recipient, the first part (compliance with local law) is still relevant. Local counsel in EU countries, for example, usually want privacy language dropped into the form of option agreement.
The bottom line: Before making grants to service providers living outside the United States, a company should decide whether it’s worth the cost of having local counsel involved, or the risk of not having local counsel involved.
Mike Baker frequently advises with respect to stock options. He possesses a breadth and depth of experience in tax and employee benefits & compensation law that spans multiple decades. For additional information, please contact mike@mbakertaxlaw.com.