Design “ The Plan ”

Design “ The Plan ”

To design an employee stock option plan, consider the company's goals and values, as well as the needs and expectations of employees.

Take time to plan the terms and understand the tax implications. They will determine the ease of implementation and the value that the scheme will generate.

Devise an allocation method that is fair, transparent, and in line with the company's broader remuneration and benefits strategy.

Establish the Plan Objectives:

Determine the company's reason for creating the plan, like 

  • attracting and retaining employees
  • incentivising performance
  • aligning employee and shareholder interests
  • providing employees with a sense of ownership
  • conserving cash by using stock options instead of cash compensation
  • creating a culture of ownership and teamwork

Decide on the Plan Type

Plan types can generally be divided into two bigger categories: real equity and phantom equity plans. 

[fs-toc-h2] Real Equity Plans

These plans typically allow the employee to earn the possibility to acquire stocks sometime in the future. 


  • Employees become co-owners of the company and can experience a sense of ownership. Some companies even give out stocks with voting rights, allowing employees to be involved at the decision-making level.
  • Dividends and liquidation quotas create additional value and further financial benefit for employees.
  • Some countries provide tax relief if the equity plan follows local rules and regulations. The specific tax treatment can vary depending on the country and the plan's structure.
  • Liquidity events like an IPO, secondary sale, or buy-back by the company may allow employees to get cash from their stock options.


  • Filings and notifications to local state authorities might be admin-heavy. Depending on the plan type and the country, tax-advantaged stock option plans often require dealings with the local tax authorities.
  • For international teams, if a plan is set up and approved by one local authority, it might not reap the same benefits in other jurisdictions, as there is no universal treatment of equity plans. Therefore, the whole plan might need to be adjusted to local rules in each jurisdiction where part of the team is based.
  • Exercising stock options can be a large expense for an employee, and often there isn’t much time to find the money for the transaction. The time period when an employee can exercise their options is called an exercise period or an exercise window. Such windows are used either because of local tax rules or companies not wanting to deal with leavers all the time. In such a scenario, there is a risk that the option plan does not reward employees as it is supposed to but rather becomes difficult and burdensome for employees to take advantage of.
  • Volatility of the stock price. The price of the stocks can go up and down at any time, and employees might not get any financial gain from their stock options. In some cases, employees may even risk the exercised shares becoming a financial loss if the stock price falls below the exercise price.
  • The liquidity of stock options is limited. The company may not get to an IPO or sell shares to investors in the foreseeable future, and employees could get locked into keeping their stock options. If the plan contains additional restrictions to selling stock options in secondary sales, it might be even harder for them to realise any financial gain from their stock options.

[fs-toc-h2] Phantom Equity type plans

Phantom equity promises a future possibility of receiving a cash bonus. Unlike real equity plans, phantom equity plans don’t give the possibility to buy and sell real shares. 


  • Speed for setting up. Local laws usually do not regulate phantom equity plans. This means phantom equity plans do not require adding specific terms or conditions. They also won’t require filings or notifications to state authorities. They are fairly easy to set up.
  • Little paperwork. Phantom equity plans are about offering a cash bonus sometime in the future. There are no complicated processes like exercising shares and then selling them. So unlike with real equity, there is a lot less admin.
  • No exercise price. Employees do not need to save up money to pay for an exercise price. Even if the company does put an exercise price on the phantom shares to reduce the total gain, the employees don’t have to pay for it out of their pocket. The price can simply be deducted from the future cash bonus. Such an exercise price might be introduced e.g. if the company has several different option plans, including a real equity one, and wishes to equalise the offers by having an exercise price on both.
  • Easy to use with freelancers. Phantom equity can easily be offered not just to employees but also to non-employees, legal persons, and natural persons. The tax consequences will be different for each participant type.
  • Scalable to other countries. In most countries, cash bonuses are treated the same. There are not as many local requirements to follow as there are for real equity plans. Thus phantom plans are easy to apply to team members in many different jurisdictions.
  • No upfront tax. With phantom equity, employees are usually promised that sometime in the future, under certain circumstances, the company shall pay out a cash bonus to them in the amount of the value of company stock. As the value of the promise is usually not determined, most countries do not treat it as a benefit, and it is taxed only when the actual payment is made to the employees.


  • Employees do not become co-owners of the company. With phantom equity plans, employees do not get company ownership, as the final benefit is not shares but a cash bonus.
  • No tax advantages. As previously mentioned, phantom equity is usually treated as a cash bonus. Cash bonuses, however, do not qualify for the same tax relief that in some countries is given to real equity plans. Therefore, it is possible that the phantom shares could be taxed higher than real stock options.

When making a final decision on the plan type, consider the following factors and decide on what is important for your company and team:

  • Would the chosen plan help achieve the company’s goals?

    Consider what your long-term goals for the company are. For example, would the long-term goal be an Initial Public Offering (IPO) or complete sale of the company (in the form of shares or assets) or maybe only funding against part of the company’s shares? How would it affect your employees, and what would be their gain for helping the company succeed at its goals?
  • What are the tax implications for the employees and the company?

    When deciding on an equity plan, consider whether there are any tax-advantaged plans available in your jurisdiction and what would need to be introduced within the plan to qualify for it. Consider the tax consequences in all situations for the company and the employees - at grant, vesting, exercise, and sale in exit or cash bonus at the exit.
  • What are the job market expectations?

    In many countries, there is already a set expectation in regards to long-term incentive plans and what is usually offered by employers. If a company used a different plan from the set expectations, for example, offered VSOP where there is an expectation for ESOP, it could jeopardise the team’s motivation and make it harder to find talent.
  • How flexible is the plan, and does it need to be e.g. offered to freelancers?

    Would you be able to onboard any employee to your company? Is it important for you to be able to offer equity to freelancers or other participants?
  • What are the team members’ locations?

    The location and tax residency of your team members matter a lot. It impacts the taxation of the benefit. Consider the tax implications in each of those locations. Will you strive to qualify for tax-advantaged plans in each of the countries or just some? How many changes or different plan documents will you need?
  • How much will it cost to implement the plan, and what resources will it take to administrate the plan?

    When implementing a plan in one country, costs may be as low as 1,500 EUR (depending on the country). When thinking about group companies and localising plans in each country, the costs will grow significantly. It will become especially pricey if the aim is to qualify for local tax reliefs, as this can involve legal and tax advice, translations, notifications, and similar actions to give legal force to the plan. Additionally, there will be costs to maintaining and administering the plan, e.g. any amendments and legal and tax advice to keep track of any local legislation changes. A human resource (in-house or outsourced) will be needed to manage it all.

Determine Plan Parameters

Decide on the plan's key parameters, such as

  • the size of the option pool
  • the grant conditions
  • any performance or time-based conditions
  • the vesting schedule
  • the exercise price
  • the exercise conditions
  • good and bad leaver conditions
  • exit events

Determine Employee Eligibility

Determine which employees will be eligible to participate in the plan

  • full-time employees
  • executives only
  • part-time employees
  • freelancers
  • advisers
  • other contributors.

Allocation Strategy

In an early-stage startup, the allocation strategy can be very simplistic e.g. a certain % of the company to each employee depending on the value they bring aboard. With A+ series startups and bigger companies, it is more important to have a structured approach to awarding equity. This will help ensure fairness, allow for transparency, and make it easier to run the plan.

Creating this structure can include

  • identifying allocation factors (job title, salary, length of service, or a combination of factors)
  • creating an allocation formula
  • deciding how much flexibility can be used during compensation negotiations
  • understanding the role of equity in the company’s compensation philosophy
Pro Tip
The exercise price can be below or equal to the value of the company shares. Care should be taken when offering below fair market value options as in some countries it can have immediate tax obligations.
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Guide was carefully crafted by Kaisa Luht, former rewards lead at Wise
Kaisa Luht
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