Salto X | Guide

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Glossary

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General

ESOP (Employee Stock/Share Option Plan)
A type of long-term incentive plan under which companies grant stock options to their employees and other participants. ESOP usually outlines the main terms and conditions of the option plan and defines, for example, who is eligible to receive the options, what type of vesting is applicable, and how and when participants can exercise their options.

Grant offer
It is the offer of stock options by the company to its employees with details specific to each employee, such as the vesting period, cliff period, strike price, and others.

Grant agreement
A legally binding document that is signed between the company and an employee. It lays out all the employee-specific rules and details about those options, like when they are granted, what the details of the vesting schedule are, and how many options are granted.

Grant date
A specific date when stock options are awarded to an employee.

Option holder (also called a Participant)
A person whom the company has granted stock options. The option holder can be an employee, consultant, director, or any other eligible person as determined by the company in their plan.

Option pool
A designated number of stocks (or shares) set aside by a company to give stock options to participants in the future.

Stock option (also called an Option or Share option)
A right granted by the company to the participant to acquire a specific number of stocks (or shares) in the company at an exercise price at a set time in the future.

Virtual option (also called a Virtual share, Phantom option/share)
A right to receive a cash payment or other equivalent benefits based on the value of the company’s stocks over a specific period. Unlike traditional stock options, virtual options do not give direct ownership of the company’s stocks.‍

VSOP (Virtual Stock/Share Option Plan)
A type of long-term incentive plan with which the companies grant virtual options to their participants.

Vesting

Accelerated vesting
Accelerated vesting means that the previous vesting schedule is disregarded, and the stock options immediately vest for the participants when certain conditions are met, often triggered by specific events like a change in control, merger, or acquisition (selling the company).

Cliff period
A period of time within the vesting period during which a participant won't earn any stock options until the cliff period is over. After the cliff period, the participant earns the stock options according to the vesting schedule.

Vesting
A process where participants gradually earn rights to own stock options. It could be either over a specific period (time-based vesting) or based on predetermined conditions, such as certain targets or milestones (performance-based vesting).

Vesting period
A time period the participant must work for the company in order to receive the rights to the stock options. Usually lasting between 3 to 5 years.

Vesting schedule
A timeline or set of conditions that determine when a participant becomes entitled to receive stock options.

Vesting start date
A date from which the vesting of the stock options begins.

Exercising and Exit

Exercise of the stock options
A process where the participant uses their stock options to purchase stocks of the company at the pre-agreed upon exercise price. Exercising the stock options means that the participant becomes an owner of stocks and, thus, a company shareholder.

Exercise period
A period (a window of opportunity) during which the stock options can or should be exercised; otherwise, they could lapse without compensation.

Exercise price (also called a Strike price or Subscription price)
A price that needs to be paid in order to buy or subscribe for the stocks (or shares), i.e. to exercise the stock options.

Exit Event (also called a Liquidity event)
An event when the existing shareholders of the company “exit” the business by selling the business. The three main methods of exiting are either by (i) listing the company (Initial Public Offering), (ii) selling a substantial part or all of the company's assets, or (iii) selling a substantial part or all of the stocks of the company.

Leavers

Bad leaver
An employee or other participant whose employment or service agreement is terminated under unfavourable circumstances, typically because their acts or combinations of acts are material breaches of laws or contracts with the company. Usually, in such cases, stock options terminate completely and entirely, even with respect to the vested portion of the stock options.

Good leaver
An employee or other participant whose employment or service agreement is terminated under acceptable circumstances, such as retirement, disability, or death. Usually, in such cases, the participant is entitled to all vested stock options, but all unvested stock options shall forfeit.

Tax and Financial terms

Capital gains tax
In the context of stock options, it is the tax you must pay when you sell your stocks or stock options. Capital gain is the profit you make from selling any assets, so the tax is usually paid on the difference between the selling and buying price.

Fair Market Value (FMV)
Value of an asset (e.g. stocks) at the open market. It is the price you could get if you sell your stocks to any independent party. Fair market value is used to determine the amount of the benefit when you exercise your options and get the stocks.

Withholding tax
The amount of tax that must transferred, usually by the employer, to the tax authority. It is not a separate tax but a way of collecting income tax from the source where it is paid from. For example, the employer is usually obliged to withhold income tax on the salaries paid to the employees. It is the tax on the employee's income that employers deduct and pay to the tax authority to simplify tax collection.

Spread
A term often used to describe the difference between the exercise price and the fair market value of the stocks at the time of exercise. The spread represents the potential benefit a participant gets by exercising the stock options.

Fringe benefit
A non-cash benefit that an employee receives from the employer in addition to salary. It is also called benefit in kind or simply - perks. For example, an equity reward or a stock option is a benefit in kind if it is given for free or at a discounted price. The fringe benefits are usually taxed as salary.

Dry income
A non-cash benefit that is considered taxable income while no actual money is received to pay the tax bill. It is often a result of stock option taxation at the time of their exercise. The receipt of stocks is a taxable event, but taxes on it must be paid with actual money.

Legal disclaimer

The tips in this Guide should not be taken as legal or tax advice. Each incentive plan should be carefully planned with legal and tax advisors who are able to take into account your specific situation and circumstances.

Tax

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Taxation may not be the most exciting topic to explore, but it can be even more frustrating when it comes as a surprise. It is crucial to have a basic understanding of when and what will be taxed when setting up an incentive plan.

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Tax laws vary across different countries, so understanding tax implications internationally, especially when employees work abroad or move between countries, is of particular importance. However, the good news is that some fundamental principles apply similarly worldwide.

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Several countries offer tax advantages for employee incentive plans. Find out what the conditions are and take them into account when setting up your own plan. In countries where there are no tax advantages available, alternatives such as phantom equity, also known as a virtual stock option plan (VSOP) might be a better solution.

Tax aspects to consider

Tax residency. Ensure you know the tax residencies of the employees and other participants in your equity plan. If a participant has doubts in regards to their tax residency, they can turn to the tax authorities, who should be able to issue a tax residence certificate if such confirmation is needed.
Country of employment. If the participant's country of residence differs from where they work, familiarise yourself with the tax rules of their country of employment. The country of employment is where income from employment-related incentive plans is taxed.
Requirements for tax relief. Find out if the country of employment offers any tax advantages for employee stock option plans. There are usually several requirements that the stock option plan and participants have to meet in order to get favourable tax treatment.
Employees vs other contributors. It is common that favourable tax treatment is offered to employees and less often to freelancers, contractors, or other participants who are not employees. Sometimes, non-employees are explicitly excluded, and sometimes, the tax laws should be read in a certain way to understand their tax treatment. If you want to include non-employees in your plan, check whether they can be covered by the same tax treatment as employees.
Taxable events. Be aware of the most common taxable events that can trigger taxation in most countries - grant, vesting, exercise, and sale.

When should taxes be paid?

Grant of stock options can be considered as the starting point for taxing them. This is because the employees are receiving something valuable. While some countries delay the taxation until the employees actually buy the stocks using the options, there are still a few countries that haven't clearly explained how they tax the stock options. Such lack of clarity creates a risk of different interpretations of the rules and the need for help from local tax authorities or advisors.
Vesting of stock options can also be seen as a taxable event. Unlike the initial granting of options, which is simply a promise outlined in a signed agreement, the first vested options can actually become tangible assets, especially if the conditions allow them to be traded. In some countries, these valuable assets can be treated as taxable income if there are no specific rules in place to postpone taxation until a later stage.
The exercise of stock options is the most common taxable event for stock options. In many countries, income tax is imposed on the benefit that employees receive when they exchange their options for company stocks. This taxable benefit is calculated by determining the difference between the market price of the stocks and the price the employee pays to acquire them. In simpler terms, payroll taxes are typically applied to the discount that employees receive when purchasing the stocks, as compared to someone else who would pay the full market price.
The sale of stocks is the second most common taxable event in stock option plans. In most countries, with only a few exceptions, the gains from the sale of stocks are subject to taxation. Typically, income tax must be paid at two different points: the exercise of the options and the subsequent sale of stocks. Sound tax systems aim to avoid double taxation that may occur due to these two taxing points. However, the best tax systems are those that allow taxation only at the point of sale, when the stocks are actually sold and the monetary profit from the transaction is realised. These countries help prevent the taxation of "dry income," which is a common result of taxing at the exercise stage where no actual monetary gain is received.

Which kind of taxes must be paid?

The taxes that must be paid depend on the country and its tax system. Different countries may have different names for similar taxes. However, the most common taxes associated with stock options are income tax and social security contributions.

[fs-toc-h2]Income tax

There are usually two types of income tax related to stock options:

Income tax on the benefit. Employees typically pay income tax on the benefits they receive from their employer. In most countries, any form of monetary or non-monetary compensation from the employer is treated similarly to a regular salary. Therefore, if options or stocks are provided for free or at a discounted price compared to their market value, they are usually considered as a bonus and taxed accordingly, using the same income tax rates as regular salary.
Income tax on the profit from the sale of stocks. In some countries, this tax is referred to as capital gains tax, but the idea is the same - to tax the profit obtained from the disposal of (e.g. selling) stocks. The taxable amount is calculated by deducting the purchase price from the sales price. If the stocks were acquired without an exercise price, the entire gain is typically subject to taxation. In many countries, the tax rates for employment income and capital gains differ. A few countries either do not tax capital gains from the sale of stocks or apply tax depending on the duration or amount of the stock ownership.

[fs-toc-h2]Social security contributions

Payments of various social security contributions are usually applicable to active income like salaries or wages. Thus, similarly to the income tax described above, social security contributions are often levied on additional benefits from employers to employees. Social security payments are more common in Europe, where numerous types of contributions are collected to fund welfare, health or medical care, pensions, and support for the unemployed and disabled, among other purposes.

[fs-toc-h2]Other taxes

There are additional taxes that may be imposed, such as taxes on wealth, property, or financial transactions. Also, there may be some taxes that depend on the personal circumstances of the participant, such as municipal income taxes or, for instance, a church tax. However, these types of taxes are less frequently levied, and the tax rates are typically much lower than the average income taxes or social security contributions.

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Some countries may also levy an “exit tax”. This tax applies when someone gives up their tax residency and takes their assets out of that country. Stocks or options can be included among such assets and taxed on their market value.

Who is responsible for paying the tax?

Different taxes have different responsibilities assigned to either the employee or the employer. Additionally, there are some taxes where the employer withholds the tax on behalf of the employee, even though the ultimate responsibility lies with the employee.

The personal income tax is ultimately the responsibility of the employee. However, in many cases, the employer collects the income tax by withholding it from the employee's salary at the time of payment. This withholding tax is not a separate tax but rather a more efficient method of tax collection.
The responsibility for paying income tax or capital gains tax on profits from the sale of stocks often falls solely on the employee. Exceptions to this rule exist, but the seller of the stocks typically possesses the most accurate information about the details of the stock transaction, such as the price and the time of transaction.
Social security payments are often divided between the employer and the employee. The employee part of the contributions is usually withheld similarly to income tax, and the employer pays its part directly to the tax authority. Sometimes the social security payments can be deducted from the individual's income, thereby reducing the amount of income tax. In some rare cases, the social security payments are the sole responsibility of the employer.
The employee is usually obligated or advised to submit an annual tax return to the tax authority, allowing for final adjustments in the income tax calculation based on individual circumstances. This ensures the payment of the precise and correct amount of income tax as required by tax laws.
Attention should be paid to the provisions in the grant agreements since it is pretty common to include a clause that allows the employer to deduct all the taxes from the employee’s remuneration, even if the tax is actually the responsibility of the employer. Some countries allow such taxes to be deducted as expenses before income taxation, but this should be checked with the local tax authorities or advisors.

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Trade

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Once your company becomes successful, it is time to consider if and how to give some value back to its employees and early investors. The most common ways are secondary sales, buybacks, and later going public with an IPO or direct listing. Consider the reasons why you want to have a liquidity event and whether it aligns with the company's overall goals and strategy.

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Since a secondary sale is typically the first liquidity event for participants, we will provide you with an example of the steps involved in such a transaction.

Steps for a secondary sale

[fs-toc-h2]Assess the readiness

Determine whether a secondary sale is necessary for your company:

early investors of the company are interested in turning some of their investments into cash;
the company would like to bring on some new investors;
the founders would like to sell some of their shares;
the company would like to reward its early employees by allowing them to turn some of their options into cash;
the company would like to bring in additional capital with a secondary sale and have it also act as a funding round;
the company is desirable enough to attract (new) buyers;
the company has the resources (time and money) to execute a secondary sale.

[fs-toc-h2]Map out the areas where you need external help

It's important to consult with:

legal professionals who specialise in securities and corporate law.They can help you:
- navigate the regulatory requirements;
- draft necessary documents (such as purchase agreements, shareholder agreements, and disclosure documents);
- ensure that the sale is conducted in compliance with applicable securities laws;
tax advisors to make sure which tax obligations apply and when to expect them;
external partner to execute the sale.

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[fs-toc-h2]Determine the terms

Once you have decided to move forward with a secondary sale, you'll need to determine the terms of the sale. This includes deciding on the:

amount and percentage of equity that will be sold;
who will be eligible to participate;
how the sale will be structured.

[fs-toc-h2]Make a list of and involve all internal teams early on

Create a collaborative environment by involving all relevant internal teams early in the process. This may include representatives from:

legal;
finance;
PR;
HR, and
executive leadership.

[fs-toc-h2]Make a project plan together with all the teams

Develop a detailed project plan that outlines the necessary steps, timelines, and responsibilities for each team involved. Establish clear communication channels, set milestones, and monitor progress to ensure a coordinated and efficient process.

Make a communication plan
Design a communication plan to keep stakeholders informed throughout the secondary sale process. This plan should outline how and when updates will be shared with investors, employees, media and other relevant parties.
Identify potential buyers for the secondary sale, which could include:
- institutional investors;
- venture capital firms;
- private equity firms, or
- individual accredited investors.
Negotiate terms with buyers
Engage in negotiations with interested buyers to finalise the terms of the secondary sale. Usually, it involves discussions on valuation, pricing, rights and restrictions associated with the equity being sold, and any other relevant terms that need to be agreed upon.
Execute and close the sale
Once the terms are agreed upon, execute the sale by completing the necessary legal and financial transactions. This includes executing purchase agreements, transferring ownership of stocks, and ensuring compliance with all legal and regulatory requirements.
Communicate the sale publicly
After the sale is completed, communicate the details of the secondary sale to the public, if deemed appropriate. Craft a press release or media statement to announce the transaction, highlighting its significance and the positive impact it will have on the company's growth and future prospects.

Scale

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As the company grows, its needs evolve, and it may expand to new countries. Scaling an equity program to new countries often requires additional legal assistance. The same is true if the company wishes to broaden its participant pool by adding e.g. part-time employees and contractors as participants of the plan.

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Scaling types

[fs-toc-h2]Scaling to new countries

When expanding your stock option plan to a new country, it is important to understand the legislation of that jurisdiction. Here are some points to consider while scaling your stock option program to other countries:

Familiarіse yourself with the legal and regulatory framework specific to the desired country.
Engage local legal and tax professionals who specialise in the country's regulations around stock options. Try to find specialists who have dealt with compensation equity questions before as in some countries the field is quite new and even legal and tax professionals might be guessing what to tell you.
Find out if it is at all necessary to customise your existing stock option plan to align with local practices or if the current plan could also be used as is. E.g. can you use the strike price you’re already using or do the country’s rules require something different?
Determine the reporting obligations in the new country.
Understand the local tax implications for both the company and the participating employees.
Create a communication plan to educate employees and recruiters about the stock option plan and its benefits in the respective country.
Ensure ongoing compliance and monitoring.

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[fs-toc-h2]Adding new participant types

When scaling your stock option plan to accommodate different participants, like advisors, contractors, and part-time employees, think about factors such as fairness, compliance, and correct implementation. Here are some key points to consider:

Define eligibility criteria for each type of participant. Some of the aspects you can consider are their job level, tenure and other contributions to the organisation.
For example, you might decide that all advisors will receive stock options but only some employees will get the same benefit.

Evaluate the need for distinct plan features or structures tailored to different participant types.
For example, you might wish to have different vesting schedules or exercise conditions depending on the employee type. However, bear in mind, the simpler you can keep your plans, the easier it will be to manage them.

Develop targeted communication strategies to effectively communicate the plan details and benefits to each participant type.
If you have different plan structures for different participant types, you will also need to put thought and care into how to communicate the differences and explain the ‘why’.

Ensure compliance with applicable legal and regulatory requirements specific to each participant type, such as securities laws, tax regulations, and employment laws.
For example, there might be limits as to the maximum % of total employee remuneration that can be given in stock options. Or there might be a requirement on what the minimum part-time % is when offering options of a specific plan.

Run

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There are many day-to-day activities that are necessary to keep running an employee incentive program. The most obvious ones are continuously issuing new grants to employees. But there are also many other tasks that will require your attention.

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[fs-toc-h2]Track the option pool size and plan for pool increases

Continuously track the option pool size to ensure there are enough unallocated options available for granting to new employees or existing participants. Additionally, plan for future pool increases by evaluating the company's growth projections and hiring plans.

[fs-toc-h2]Educate participants

To educate participants of the plan, conduct regular workshops or training sessions about the stock option plan, its benefits, and the mechanics of stock options. Also, provide comprehensive educational materials, including FAQs, guides, and online resources to support employees’ understanding of the plan.

[fs-toc-h2]Answer employee questions

Create communication channels to answer employee questions e.g. a Slack channel or a designated email.

[fs-toc-h2]Manage option exercises

Depending on the terms of the plan, you will need to manage the exercise of the options into actual stocks. That means preparing legal documents for the exercise process, registering new shareholders into shareholders registries, changing the share capital, and notifying local authorities if needed. It is also recommended to coordinate this process with your finance and legal teams to ensure smooth execution and proper handling of the related paperwork.

[fs-toc-h2]Process good and bad leavers

When an employee’s employment contract is terminated, they will become a leaver from the company. In the case of stock options, leavers are divided into good and bad leavers. The policy on who is good and who are bad leavers is determined by the company and can usually be found in the equity plan documents. When someone leaves the company, make sure to mark down whether they are a good or bad leaver and act according to the plan's terms. This means you will need to understand what happens to the leaving employee’s vested and unvested options according to the terms in their options contract.

[fs-toc-h2]Regularly review the plan to ensure compliance

Conduct periodic reviews of your stock option plan to assess its alignment with the company's strategic objectives, local market conditions, and compliance with regulatory requirements.

[fs-toc-h2]Do necessary tax and legal reporting

Coordinate with internal or external tax and legal experts to fulfill all reporting obligations related to the stock option plan.

Launch

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After establishing the legal framework and obtaining all necessary approvals, the company can begin issuing the options. This process is more easily done on a specialised platform, which enables participants to sign and view their agreements directly. Additionally, careful consideration should be given to how this information is communicated in a simple and clear manner.

Choose a platform or other tool

Companies can start out by using only Excel to keep track of the options issued, but it is not recommended as it can easily result in human or calculation errors. Special care should be taken so that the options that return to the pool after employees leave are properly tracked. The employee options information should be regularly updated, and only very few people should have access to editing the file. With an Excel or Google sheet file, there is also the downside that employees will not have a good visual overview of their options vesting.

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Using a specialised platform to manage your grants can help:

streamline the process
reduce errors
increase transparency and employee engagement
keep the information in one secure place

[fs-toc-h2]What to look for when choosing an employee stock option plan management platform?

Functionality.
Is the platform a good fit for your company’s size? E.g. some platforms are meant for bigger companies. They offer a lot of functions which can be overwhelming for a smaller company and cost a lot of money to use. On the other hand, platforms meant for more early-stage companies might have too few functions and possibilities to customise the user journey if the company already has hundreds or even thousands of people.
Extra support.
Is the platform just a tool you can use, or will the provider also be able to help you with any additional questions you might have about stock option plans and their management? Usually, one of the first option plan management tools is Excel. The next step from that is already a whole variety of different platforms where it is possible to either manage employee stock option plan data or also include employees in the process. The best providers offer extra help in the format of either legal or educational support.
Pricing.
Consider the pricing structure as well as the implementation cost. Some platforms have high fees for implementation alone with every additional request adding more charges.
Ease of use.
Not all platforms are intuitive or easy to use. Some are cluttered with legal jargon, others look outdated and difficult to use.
Security.
Employee stock option plans include personal and financial data. If several people in your company need access to the system, check if there are adequate access controls. For the employee side, see if there is a 2-factor verification.
Integration capabilities.
For bigger companies, any possibility of streamlining complicated and bulky processes is a huge win. Integration possibilities with an HRIS can save a lot of time when options are issued in bulk.
Scalability.
If a company is growing at a very fast pace, it is important the platform will able to keep up with the pace of added participants and the increasing complexity of option plans.

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In addition to all the aforementioned considerations, you could get valuable insights by asking to talk to one of the provider’s existing users. It is not always possible to arrange, as not all users are willing to spend their time giving feedback, but it is worth asking.

Create a communication plan

[fs-toc-h2]Define your goals e.g. educating employees on the benefits of the plan

When you’re first launching your incentive plan, you will have to find a good ‘why’. Why is the company offering this benefit? What can the company and employees expect to gain? What is the purpose of it? Once you have the why, find a way to weave a compelling story around it so it would be more easy for everyone to understand something that can often come across as boring legal text. E.g. you can emphasise how everyone will be able to feel as if they are also owners of the company and take responsibility for making sure the company thrives.

[fs-toc-h2]Identify your audience e.g. employees, recruiters, team leads

It’s always good to divide your communication between different groups to make it more useful and easily digestible. Employees will need to know information pertaining to them, team leads will need to know the information about their team and how to handle their questions, and recruiters need to know the best way to sell the incentive plan to candidates and have enough knowledge to answer all their questions.

[fs-toc-h2]Choose your channels such as email, in-person meetings, webinars, or videos.

Each of these categories has their own advantage. An all-company-wide webinar allows for asking questions in a collective setting, and an ‘only leads’ session is better for explaining how to deal with difficult questions e.g. why is my teammate getting more options than I am?

[fs-toc-h2]Craft your messages

Develop clear and concise messages that explain the plan's purpose, benefits, and eligibility requirements. Use simple, jargon-free language and focus on the key information that employees need to know.

[fs-toc-h2]Create grant agreements for signing

Each time options are given out, you need to make sure you are using the correct documents and that they are filled in with the correct information in regard to the participants.

[fs-toc-h2]Decide whether to do this digitally or on paper

In some countries, there can be additional conditions that have to be fulfilled when choosing one or the other. For example, in Estonia, if the grant agreements are not signed digitally, there is an obligation on the company to notify the Tax and Customs Board of issuing the options. It’s worth checking if in your country there are any such requirements.

[fs-toc-h2]Have a plan on where to store the information securely

Whether it is paper contracts in a locked cupboard or digitally signed documents on an options management platform, make sure you think about where and how you store the information for both security reasons as well as easy access.

[fs-toc-h2]Formalise the grant documents and give out the grants

Before giving out the first set of grants, you have to know what needs to happen legally so the process would be correct, meaning that although you have previously acquired corporate approvals for the plan, each grant might also require approval from the board before signing the grant agreements.

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This process differs from country to country and can also differ from company to company in one country. But to give you an idea – one possible sequence of events can be seen below in bullet points.

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This sequence can only happen once the employee stock option plan or other incentive plan has already been approved for use by the company. You have created an option pool and have the necessary legal documents to complete the process.

Gather the information needed to give out the grant: e.g. name, address, amount of options, vesting start date, length of the vesting schedule, whether vesting has a cliff or not, any performance conditions, etc.
Create the necessary board approval documents - a document that can be signed or otherwise approved by the board that holds all the information about the grants you want to issue.
Have the grant agreements ready to be signed by the employee and the company (fill them in with appropriate information).
Have the board approve the issuing of the options to the listed employees.
Give or send out the grant agreements to the employees and the company representative(s) for signing.

Formalise

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Before a company can start issuing options, the incentive plan will first need to be drafted in legal documents and approved by the board and/or shareholders. It might need to adhere to certain regulatory requirements.

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Draft the legal documents or use ready-made templates

You can either go to lawyers who will help you draft the legal documents, or you can also find ready-made country-specific templates online. However, be aware that these templates have not been custom-made for your company, so time should be taken to consider whether the terms in the template work for your company and towards the goal you are trying to achieve with the plan.

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E.g. if part of your objective is to motivate employees, pay special attention to the good and bad leaver terms in any grant agreement. If these terms are very restrictive towards the employee, the option plan can lose its desired effect as a tool of motivation and create frustration instead. If the terms of the agreement force the employees to exercise their options right after leaving the company, the terms will also create a lot of work for the person managing the option plan, as every time an employee leaves, there’s a possibility they have to deal with the process of exercise.

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The documents that are needed for an incentive plan can vary a bit from country to country, however, the usual ones are:

[fs-toc-h2]The grant agreement

The grant agreement is the contract that is signed between the employee (or any other participant) and the company. The grant agreement can include the plan’s terms and conditions, but most importantly, it includes the terms specific to the employee, such as:

the employee’s name and other details, such as their address
the grant date
the number of options
the vesting start date
the vesting schedule
the exercise price
the terms of exercise
any performance conditions

[fs-toc-h2]The plan’s terms and conditions document

This is often called the Employee Stock Option Plan or similar and includes the overall terms and conditions of the plan, which are general to all employees. Some of the terms usually there are:

The granting of options. The procedure that needs to be followed in your company to legally issue the options

The terms and conditions that have to be set at the point of the grant and are usually included in the grant agreement
Who can be granted options, whether just employees or also other types of participants
Any limitations the plan has e.g. due to country-specific tax reliefs
How to set performance conditions within the plan
How the vesting and exercise of options works
How the plan is affected by takeovers and other corporate events
When and how vested and not vested options lapse
How the plan relates to the contract of employment
Data protection
Governing law, jurisdiction, and court for disputes

[fs-toc-h2]The articles of association may need to be updated

In some cases, the articles of association may need to be updated to allow for the possibility of creating and using a share option plan. If a reserve of shares is created for the option pool, then the total amount of share capital needs to be updated.

Obtain corporate approvals to use the documents and the plan.

The type of approvals needed can vary from country to country and depend on your company’s Articles of Association e.g.:

board or supervisory board approval
shareholders’ resolution/decision:

Generally, shareholders are required to pass a resolution or decide on any employee share option plan that the company wants to use. Such a resolution or decision will include key details of the plan and authorise the company to manage the plan.

Check whether you should obtain and use a fair market valuation

In some countries, like the UK, the fair market valuation can be used to offer tax-advantaged grants at a reduced exercise price, namely at the fair market value.

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The fair market value is usually slightly lower than the share price in the latest funding round.

Check whether you need to fulfil certain regulatory requirements

Depending on the local laws and regulations, some actions might be required to ensure compliance. This could be filing and reporting documents with the local tax office, obtaining any required approvals or exemptions, etc.

Design “ The Plan ”

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

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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.

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

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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

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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.

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Advantages

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.

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Disadvantages

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.

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Advantages

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.

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Disadvantages

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.

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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.

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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

Get Ready

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This Guide gives you an overview of the steps needed to create and run an employee equity aka stock option plan.

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To run an employee stock option plan, a company needs to

create a plan or program with terms and conditions
find a platform or tool to manage the plan
communicate the value and risks to employees
run the plan
maintain compliance with regulations.

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If the company is successful, there will be the opportunity to trade for example

a secondary sale or
a sale within the initial public offering of the company’s shares (IPO)

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Creating a stock option plan involves a bit of planning, designing as well as understanding legal and tax nuances. Each step is described in further detail in this Guide.

No results

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

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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.

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

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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.

‍

Advantages

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.

‍

Disadvantages

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.

‍

Advantages

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.

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Disadvantages

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

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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

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Draft the legal documents or use ready-made templates

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The documents that are needed for an incentive plan can vary a bit from country to country, however, the usual ones are:

[fs-toc-h2]The grant agreement

the employee’s name and other details, such as their address
the grant date
the number of options
the vesting start date
the vesting schedule
the exercise price
the terms of exercise
any performance conditions

[fs-toc-h2]The plan’s terms and conditions document

This is often called the Employee Stock Option Plan or similar and includes the overall terms and conditions of the plan, which are general to all employees. Some of the terms usually there are:

The granting of options. The procedure that needs to be followed in your company to legally issue the options

The terms and conditions that have to be set at the point of the grant and are usually included in the grant agreement
Who can be granted options, whether just employees or also other types of participants
Any limitations the plan has e.g. due to country-specific tax reliefs
How to set performance conditions within the plan
How the vesting and exercise of options works
How the plan is affected by takeovers and other corporate events
When and how vested and not vested options lapse
How the plan relates to the contract of employment
Data protection
Governing law, jurisdiction, and court for disputes

[fs-toc-h2]The articles of association may need to be updated

In some cases, the articles of association may need to be updated to allow for the possibility of creating and using a share option plan. If a reserve of shares is created for the option pool, then the total amount of share capital needs to be updated.

Obtain corporate approvals to use the documents and the plan.

The type of approvals needed can vary from country to country and depend on your company’s Articles of Association e.g.:

board or supervisory board approval
shareholders’ resolution/decision:

Check whether you should obtain and use a fair market valuation

In some countries, like the UK, the fair market valuation can be used to offer tax-advantaged grants at a reduced exercise price, namely at the fair market value.

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The fair market value is usually slightly lower than the share price in the latest funding round.

Check whether you need to fulfil certain regulatory requirements

Choose a platform or other tool

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Using a specialised platform to manage your grants can help:

streamline the process
reduce errors
increase transparency and employee engagement
keep the information in one secure place

[fs-toc-h2]What to look for when choosing an employee stock option plan management platform?

Functionality.
Is the platform a good fit for your company’s size? E.g. some platforms are meant for bigger companies. They offer a lot of functions which can be overwhelming for a smaller company and cost a lot of money to use. On the other hand, platforms meant for more early-stage companies might have too few functions and possibilities to customise the user journey if the company already has hundreds or even thousands of people.
Extra support.
Is the platform just a tool you can use, or will the provider also be able to help you with any additional questions you might have about stock option plans and their management? Usually, one of the first option plan management tools is Excel. The next step from that is already a whole variety of different platforms where it is possible to either manage employee stock option plan data or also include employees in the process. The best providers offer extra help in the format of either legal or educational support.
Pricing.
Consider the pricing structure as well as the implementation cost. Some platforms have high fees for implementation alone with every additional request adding more charges.
Ease of use.
Not all platforms are intuitive or easy to use. Some are cluttered with legal jargon, others look outdated and difficult to use.
Security.
Employee stock option plans include personal and financial data. If several people in your company need access to the system, check if there are adequate access controls. For the employee side, see if there is a 2-factor verification.
Integration capabilities.
For bigger companies, any possibility of streamlining complicated and bulky processes is a huge win. Integration possibilities with an HRIS can save a lot of time when options are issued in bulk.
Scalability.
If a company is growing at a very fast pace, it is important the platform will able to keep up with the pace of added participants and the increasing complexity of option plans.

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Create a communication plan

[fs-toc-h2]Define your goals e.g. educating employees on the benefits of the plan

[fs-toc-h2]Identify your audience e.g. employees, recruiters, team leads

[fs-toc-h2]Choose your channels such as email, in-person meetings, webinars, or videos.

[fs-toc-h2]Craft your messages

[fs-toc-h2]Create grant agreements for signing

Each time options are given out, you need to make sure you are using the correct documents and that they are filled in with the correct information in regard to the participants.

[fs-toc-h2]Decide whether to do this digitally or on paper

[fs-toc-h2]Have a plan on where to store the information securely

[fs-toc-h2]Formalise the grant documents and give out the grants

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Gather the information needed to give out the grant: e.g. name, address, amount of options, vesting start date, length of the vesting schedule, whether vesting has a cliff or not, any performance conditions, etc.
Create the necessary board approval documents - a document that can be signed or otherwise approved by the board that holds all the information about the grants you want to issue.
Have the grant agreements ready to be signed by the employee and the company (fill them in with appropriate information).
Have the board approve the issuing of the options to the listed employees.
Give or send out the grant agreements to the employees and the company representative(s) for signing.

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[fs-toc-h2]Track the option pool size and plan for pool increases

[fs-toc-h2]Educate participants

[fs-toc-h2]Answer employee questions

Create communication channels to answer employee questions e.g. a Slack channel or a designated email.

[fs-toc-h2]Manage option exercises

[fs-toc-h2]Process good and bad leavers

[fs-toc-h2]Regularly review the plan to ensure compliance

Conduct periodic reviews of your stock option plan to assess its alignment with the company's strategic objectives, local market conditions, and compliance with regulatory requirements.

[fs-toc-h2]Do necessary tax and legal reporting

Coordinate with internal or external tax and legal experts to fulfill all reporting obligations related to the stock option plan.

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Scaling types

[fs-toc-h2]Scaling to new countries

Familiarіse yourself with the legal and regulatory framework specific to the desired country.
Engage local legal and tax professionals who specialise in the country's regulations around stock options. Try to find specialists who have dealt with compensation equity questions before as in some countries the field is quite new and even legal and tax professionals might be guessing what to tell you.
Find out if it is at all necessary to customise your existing stock option plan to align with local practices or if the current plan could also be used as is. E.g. can you use the strike price you’re already using or do the country’s rules require something different?
Determine the reporting obligations in the new country.
Understand the local tax implications for both the company and the participating employees.
Create a communication plan to educate employees and recruiters about the stock option plan and its benefits in the respective country.
Ensure ongoing compliance and monitoring.

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[fs-toc-h2]Adding new participant types

When scaling your stock option plan to accommodate different participants, like advisors, contractors, and part-time employees, think about factors such as fairness, compliance, and correct implementation. Here are some key points to consider:

Define eligibility criteria for each type of participant. Some of the aspects you can consider are their job level, tenure and other contributions to the organisation.
For example, you might decide that all advisors will receive stock options but only some employees will get the same benefit.

Evaluate the need for distinct plan features or structures tailored to different participant types.
For example, you might wish to have different vesting schedules or exercise conditions depending on the employee type. However, bear in mind, the simpler you can keep your plans, the easier it will be to manage them.

Develop targeted communication strategies to effectively communicate the plan details and benefits to each participant type.
If you have different plan structures for different participant types, you will also need to put thought and care into how to communicate the differences and explain the ‘why’.

Ensure compliance with applicable legal and regulatory requirements specific to each participant type, such as securities laws, tax regulations, and employment laws.
For example, there might be limits as to the maximum % of total employee remuneration that can be given in stock options. Or there might be a requirement on what the minimum part-time % is when offering options of a specific plan.

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Since a secondary sale is typically the first liquidity event for participants, we will provide you with an example of the steps involved in such a transaction.

Steps for a secondary sale

[fs-toc-h2]Assess the readiness

Determine whether a secondary sale is necessary for your company:

early investors of the company are interested in turning some of their investments into cash;
the company would like to bring on some new investors;
the founders would like to sell some of their shares;
the company would like to reward its early employees by allowing them to turn some of their options into cash;
the company would like to bring in additional capital with a secondary sale and have it also act as a funding round;
the company is desirable enough to attract (new) buyers;
the company has the resources (time and money) to execute a secondary sale.

[fs-toc-h2]Map out the areas where you need external help

It's important to consult with:

legal professionals who specialise in securities and corporate law.They can help you:
- navigate the regulatory requirements;
- draft necessary documents (such as purchase agreements, shareholder agreements, and disclosure documents);
- ensure that the sale is conducted in compliance with applicable securities laws;
tax advisors to make sure which tax obligations apply and when to expect them;
external partner to execute the sale.

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[fs-toc-h2]Determine the terms

Once you have decided to move forward with a secondary sale, you'll need to determine the terms of the sale. This includes deciding on the:

amount and percentage of equity that will be sold;
who will be eligible to participate;
how the sale will be structured.

[fs-toc-h2]Make a list of and involve all internal teams early on

Create a collaborative environment by involving all relevant internal teams early in the process. This may include representatives from:

legal;
finance;
PR;
HR, and
executive leadership.

[fs-toc-h2]Make a project plan together with all the teams

Make a communication plan
Design a communication plan to keep stakeholders informed throughout the secondary sale process. This plan should outline how and when updates will be shared with investors, employees, media and other relevant parties.
Identify potential buyers for the secondary sale, which could include:
- institutional investors;
- venture capital firms;
- private equity firms, or
- individual accredited investors.
Negotiate terms with buyers
Engage in negotiations with interested buyers to finalise the terms of the secondary sale. Usually, it involves discussions on valuation, pricing, rights and restrictions associated with the equity being sold, and any other relevant terms that need to be agreed upon.
Execute and close the sale
Once the terms are agreed upon, execute the sale by completing the necessary legal and financial transactions. This includes executing purchase agreements, transferring ownership of stocks, and ensuring compliance with all legal and regulatory requirements.
Communicate the sale publicly
After the sale is completed, communicate the details of the secondary sale to the public, if deemed appropriate. Craft a press release or media statement to announce the transaction, highlighting its significance and the positive impact it will have on the company's growth and future prospects.

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Tax aspects to consider

Tax residency. Ensure you know the tax residencies of the employees and other participants in your equity plan. If a participant has doubts in regards to their tax residency, they can turn to the tax authorities, who should be able to issue a tax residence certificate if such confirmation is needed.
Country of employment. If the participant's country of residence differs from where they work, familiarise yourself with the tax rules of their country of employment. The country of employment is where income from employment-related incentive plans is taxed.
Requirements for tax relief. Find out if the country of employment offers any tax advantages for employee stock option plans. There are usually several requirements that the stock option plan and participants have to meet in order to get favourable tax treatment.
Employees vs other contributors. It is common that favourable tax treatment is offered to employees and less often to freelancers, contractors, or other participants who are not employees. Sometimes, non-employees are explicitly excluded, and sometimes, the tax laws should be read in a certain way to understand their tax treatment. If you want to include non-employees in your plan, check whether they can be covered by the same tax treatment as employees.
Taxable events. Be aware of the most common taxable events that can trigger taxation in most countries - grant, vesting, exercise, and sale.

When should taxes be paid?

Grant of stock options can be considered as the starting point for taxing them. This is because the employees are receiving something valuable. While some countries delay the taxation until the employees actually buy the stocks using the options, there are still a few countries that haven't clearly explained how they tax the stock options. Such lack of clarity creates a risk of different interpretations of the rules and the need for help from local tax authorities or advisors.
Vesting of stock options can also be seen as a taxable event. Unlike the initial granting of options, which is simply a promise outlined in a signed agreement, the first vested options can actually become tangible assets, especially if the conditions allow them to be traded. In some countries, these valuable assets can be treated as taxable income if there are no specific rules in place to postpone taxation until a later stage.
The exercise of stock options is the most common taxable event for stock options. In many countries, income tax is imposed on the benefit that employees receive when they exchange their options for company stocks. This taxable benefit is calculated by determining the difference between the market price of the stocks and the price the employee pays to acquire them. In simpler terms, payroll taxes are typically applied to the discount that employees receive when purchasing the stocks, as compared to someone else who would pay the full market price.
The sale of stocks is the second most common taxable event in stock option plans. In most countries, with only a few exceptions, the gains from the sale of stocks are subject to taxation. Typically, income tax must be paid at two different points: the exercise of the options and the subsequent sale of stocks. Sound tax systems aim to avoid double taxation that may occur due to these two taxing points. However, the best tax systems are those that allow taxation only at the point of sale, when the stocks are actually sold and the monetary profit from the transaction is realised. These countries help prevent the taxation of "dry income," which is a common result of taxing at the exercise stage where no actual monetary gain is received.

Which kind of taxes must be paid?

[fs-toc-h2]Income tax

There are usually two types of income tax related to stock options:

Income tax on the benefit. Employees typically pay income tax on the benefits they receive from their employer. In most countries, any form of monetary or non-monetary compensation from the employer is treated similarly to a regular salary. Therefore, if options or stocks are provided for free or at a discounted price compared to their market value, they are usually considered as a bonus and taxed accordingly, using the same income tax rates as regular salary.
Income tax on the profit from the sale of stocks. In some countries, this tax is referred to as capital gains tax, but the idea is the same - to tax the profit obtained from the disposal of (e.g. selling) stocks. The taxable amount is calculated by deducting the purchase price from the sales price. If the stocks were acquired without an exercise price, the entire gain is typically subject to taxation. In many countries, the tax rates for employment income and capital gains differ. A few countries either do not tax capital gains from the sale of stocks or apply tax depending on the duration or amount of the stock ownership.

[fs-toc-h2]Social security contributions

[fs-toc-h2]Other taxes

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Who is responsible for paying the tax?

The personal income tax is ultimately the responsibility of the employee. However, in many cases, the employer collects the income tax by withholding it from the employee's salary at the time of payment. This withholding tax is not a separate tax but rather a more efficient method of tax collection.
The responsibility for paying income tax or capital gains tax on profits from the sale of stocks often falls solely on the employee. Exceptions to this rule exist, but the seller of the stocks typically possesses the most accurate information about the details of the stock transaction, such as the price and the time of transaction.
Social security payments are often divided between the employer and the employee. The employee part of the contributions is usually withheld similarly to income tax, and the employer pays its part directly to the tax authority. Sometimes the social security payments can be deducted from the individual's income, thereby reducing the amount of income tax. In some rare cases, the social security payments are the sole responsibility of the employer.
The employee is usually obligated or advised to submit an annual tax return to the tax authority, allowing for final adjustments in the income tax calculation based on individual circumstances. This ensures the payment of the precise and correct amount of income tax as required by tax laws.
Attention should be paid to the provisions in the grant agreements since it is pretty common to include a clause that allows the employer to deduct all the taxes from the employee’s remuneration, even if the tax is actually the responsibility of the employer. Some countries allow such taxes to be deducted as expenses before income taxation, but this should be checked with the local tax authorities or advisors.

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General

ESOP (Employee Stock/Share Option Plan)
A type of long-term incentive plan under which companies grant stock options to their employees and other participants. ESOP usually outlines the main terms and conditions of the option plan and defines, for example, who is eligible to receive the options, what type of vesting is applicable, and how and when participants can exercise their options.

Grant offer
It is the offer of stock options by the company to its employees with details specific to each employee, such as the vesting period, cliff period, strike price, and others.

Grant agreement
A legally binding document that is signed between the company and an employee. It lays out all the employee-specific rules and details about those options, like when they are granted, what the details of the vesting schedule are, and how many options are granted.

Grant date
A specific date when stock options are awarded to an employee.

Option holder (also called a Participant)
A person whom the company has granted stock options. The option holder can be an employee, consultant, director, or any other eligible person as determined by the company in their plan.

Option pool
A designated number of stocks (or shares) set aside by a company to give stock options to participants in the future.

Stock option (also called an Option or Share option)
A right granted by the company to the participant to acquire a specific number of stocks (or shares) in the company at an exercise price at a set time in the future.

Virtual option (also called a Virtual share, Phantom option/share)
A right to receive a cash payment or other equivalent benefits based on the value of the company’s stocks over a specific period. Unlike traditional stock options, virtual options do not give direct ownership of the company’s stocks.‍

VSOP (Virtual Stock/Share Option Plan)
A type of long-term incentive plan with which the companies grant virtual options to their participants.

Vesting

Accelerated vesting
Accelerated vesting means that the previous vesting schedule is disregarded, and the stock options immediately vest for the participants when certain conditions are met, often triggered by specific events like a change in control, merger, or acquisition (selling the company).

Cliff period
A period of time within the vesting period during which a participant won't earn any stock options until the cliff period is over. After the cliff period, the participant earns the stock options according to the vesting schedule.

Vesting
A process where participants gradually earn rights to own stock options. It could be either over a specific period (time-based vesting) or based on predetermined conditions, such as certain targets or milestones (performance-based vesting).

Vesting period
A time period the participant must work for the company in order to receive the rights to the stock options. Usually lasting between 3 to 5 years.

Vesting schedule
A timeline or set of conditions that determine when a participant becomes entitled to receive stock options.

Vesting start date
A date from which the vesting of the stock options begins.

Exercising and Exit

Exercise of the stock options
A process where the participant uses their stock options to purchase stocks of the company at the pre-agreed upon exercise price. Exercising the stock options means that the participant becomes an owner of stocks and, thus, a company shareholder.

Exercise period
A period (a window of opportunity) during which the stock options can or should be exercised; otherwise, they could lapse without compensation.

Exercise price (also called a Strike price or Subscription price)
A price that needs to be paid in order to buy or subscribe for the stocks (or shares), i.e. to exercise the stock options.

Exit Event (also called a Liquidity event)
An event when the existing shareholders of the company “exit” the business by selling the business. The three main methods of exiting are either by (i) listing the company (Initial Public Offering), (ii) selling a substantial part or all of the company's assets, or (iii) selling a substantial part or all of the stocks of the company.

Leavers

Bad leaver
An employee or other participant whose employment or service agreement is terminated under unfavourable circumstances, typically because their acts or combinations of acts are material breaches of laws or contracts with the company. Usually, in such cases, stock options terminate completely and entirely, even with respect to the vested portion of the stock options.

Good leaver
An employee or other participant whose employment or service agreement is terminated under acceptable circumstances, such as retirement, disability, or death. Usually, in such cases, the participant is entitled to all vested stock options, but all unvested stock options shall forfeit.

Tax and Financial terms

Capital gains tax
In the context of stock options, it is the tax you must pay when you sell your stocks or stock options. Capital gain is the profit you make from selling any assets, so the tax is usually paid on the difference between the selling and buying price.

Fair Market Value (FMV)
Value of an asset (e.g. stocks) at the open market. It is the price you could get if you sell your stocks to any independent party. Fair market value is used to determine the amount of the benefit when you exercise your options and get the stocks.

Withholding tax
The amount of tax that must transferred, usually by the employer, to the tax authority. It is not a separate tax but a way of collecting income tax from the source where it is paid from. For example, the employer is usually obliged to withhold income tax on the salaries paid to the employees. It is the tax on the employee's income that employers deduct and pay to the tax authority to simplify tax collection.

Spread
A term often used to describe the difference between the exercise price and the fair market value of the stocks at the time of exercise. The spread represents the potential benefit a participant gets by exercising the stock options.

Fringe benefit
A non-cash benefit that an employee receives from the employer in addition to salary. It is also called benefit in kind or simply - perks. For example, an equity reward or a stock option is a benefit in kind if it is given for free or at a discounted price. The fringe benefits are usually taxed as salary.

Dry income
A non-cash benefit that is considered taxable income while no actual money is received to pay the tax bill. It is often a result of stock option taxation at the time of their exercise. The receipt of stocks is a taxable event, but taxes on it must be paid with actual money.

Legal disclaimer

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Guide

Trade

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Since a secondary sale is typically the first liquidity event for participants, we will provide you with an example of the steps involved in such a transaction.

Steps for a secondary sale

[fs-toc-h2]Assess the readiness

Determine whether a secondary sale is necessary for your company:

early investors of the company are interested in turning some of their investments into cash;
the company would like to bring on some new investors;
the founders would like to sell some of their shares;
the company would like to reward its early employees by allowing them to turn some of their options into cash;
the company would like to bring in additional capital with a secondary sale and have it also act as a funding round;
the company is desirable enough to attract (new) buyers;
the company has the resources (time and money) to execute a secondary sale.

[fs-toc-h2]Map out the areas where you need external help

It's important to consult with:

legal professionals who specialise in securities and corporate law.They can help you:
- navigate the regulatory requirements;
- draft necessary documents (such as purchase agreements, shareholder agreements, and disclosure documents);
- ensure that the sale is conducted in compliance with applicable securities laws;
tax advisors to make sure which tax obligations apply and when to expect them;
external partner to execute the sale.

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[fs-toc-h2]Determine the terms

Once you have decided to move forward with a secondary sale, you'll need to determine the terms of the sale. This includes deciding on the:

amount and percentage of equity that will be sold;
who will be eligible to participate;
how the sale will be structured.

[fs-toc-h2]Make a list of and involve all internal teams early on

Create a collaborative environment by involving all relevant internal teams early in the process. This may include representatives from:

legal;
finance;
PR;
HR, and
executive leadership.

[fs-toc-h2]Make a project plan together with all the teams

Make a communication plan
Design a communication plan to keep stakeholders informed throughout the secondary sale process. This plan should outline how and when updates will be shared with investors, employees, media and other relevant parties.
Identify potential buyers for the secondary sale, which could include:
- institutional investors;
- venture capital firms;
- private equity firms, or
- individual accredited investors.
Negotiate terms with buyers
Engage in negotiations with interested buyers to finalise the terms of the secondary sale. Usually, it involves discussions on valuation, pricing, rights and restrictions associated with the equity being sold, and any other relevant terms that need to be agreed upon.
Execute and close the sale
Once the terms are agreed upon, execute the sale by completing the necessary legal and financial transactions. This includes executing purchase agreements, transferring ownership of stocks, and ensuring compliance with all legal and regulatory requirements.
Communicate the sale publicly
After the sale is completed, communicate the details of the secondary sale to the public, if deemed appropriate. Craft a press release or media statement to announce the transaction, highlighting its significance and the positive impact it will have on the company's growth and future prospects.

Pro Tip

Expect many questions from the participants, especially on tax. Decide early on where the line is drawn for free tax guidance vs sending them to a tax specialist they must pay for.