Employee Stock Option Plan (ESOP) is a well know award system around the world. It is a program that allows an employer to motivate their employees and keep talents inside a company without actually giving them another raise. It allows to give them a piece of a company – and work together for something bigger and better. So far, we have shared many articles, breaking down the complex proccess of establishing ESOP structure in startups - explaining the differences between ESOP shares and options, we untangled the intricacies between its definitions, models, CEE realities and market benchmarks as well as shared tips on ESOP communication for employee inclusion. In this article we will dive deeper into the topic of ESOP abroad and consequences for employees in CEE.
We know, that in today’s world, we have a worker’s market. HR companies are outdoing each other just to get new employees. It's difficult for an employer to keep an employee for the long term - without benefits, constant raises, in a wave of rising inflation, etc.
That’s where ESOP comes handy. If it’s well written, it may actually work for both sides. And what’s more important ESOP – mostly in western world – is present not only in big, listed companies but in start-ups as well. According to the Annual Economic Survey of ESOP in European Country in 2021, 88% of all large European companies had employee share plans of all kinds, while 53% had "broad-based" plans for all employees, and 60% had stock option plans.
ESOP abroad
In Poland we can see that ESOP is growing and is present also in more complicated structures that include the acquisition of shares of a parent company that is based in another country. Such benefits are offered by Google Polska, IBM Polska, Accenture Polska, Microsoft, or even Auchan Polska. This may be also true for start-ups that have a parent company, for instance, in the US (Delaware), Malta or Cyprus (tax havens). For those companies, it may be easier to choose a foreign corporate structure for ESOP – as in Poland, it is still not legally regulated… For employees, it may be a chance to get something bigger and more reliable.
Taking up shares in foreign a company may be a scary process but in reality, it is not that complex. There is no need to obtain any license to buy shares abroad. Foreign corporate structures are often easier than the Polish ones, and definitely less formal. Foreign turnover has become an everyday occurrence and does not generate additional costs on the part of the employee (besides taxes). However, even for foreign ESOPs, taxes depend on tax residency. In Poland, a certain barrier is the lack of regulations on the taxation of ESOPs. Tax offices' interpretations vary. Profits from these programs are usually treated as capital income with a 19% tax rate. However, some offices treat them as income with PIT taxation and a Social Security contribution charge. The employee has to reckon with the latter interpretation when the Polish company, not the parent company, bears the cost of the program.
Foreign structure
ESOP abroad may be structured in various ways. However, what we see often is that most ESOP documents like Equity Incentive Plan or Stock Option Agreement are general templates (and only a few things are changed or adjusted individually). To sum up the US ESOP system we can identify (1) Options, including (i) ISOs (incentive stock options); or (ii) NQSOs (nonqualified stock options); or (2) Restricted Stock/RSU. Options are granted to employees (whereas NQSOs are more flexible and cover, for instance, B2B agreements). Options may be exercised by delivery to the company of a written stock option exercise agreement (the “Exercise Agreement”). The Exercise Agreement will state (i) the number of Shares, (ii) restrictions, and (iii) representations regarding investment intent. RSU is an award covering a number of shares that may be settled in cash, by the issuance of those shares at a date in the future or by a combination of cash and shares.
Likewise in Poland, foreign ESOPs are linked to vesting periods (conditions, timeframe, and KPIs that the employee has to meet to be eligible for an award). During this period, some big companies are using also trust funds that will hold the options on behalf of the employee (for tax purposes). Companies may also have dedicated employees’ individual retirement plan accounts. When an ESOP participant retires or leaves the company, he or she receives an ESOP distribution in the form of payment from the company for the fair market value of the vested shares in his or her account or the employee will receive real shares in the company (with full rights to those shares – voting, dividends etc.). There are also several ways for the participant to pay for the shares, for example via cancellation of indebtedness of the company to the participant, by the surrender of shares, by waiver of compensation and any other form of consideration approved by the Board. Lastly, it’s worth remembering that usually foreign options are not transferable.
Is it worth it?
Foreign ESOP may be hard to understand and usually, as employees, we have no power to change certain clauses. However, the structure should be similar to the one we know in Poland and it’s always worth asking the company if some clauses are unclear to us. The employee should definitely verify the conditions, method of exercise, number, and price of each share. It’s good to also figure out the tax consequences that are different for each tax residency. Because usually in foreign ESOP there is a clause that the company is taking no responsibility for tax issues. Nevertheless, it should not be forgotten that the ESOP is created mostly for employees and is intended as an additional incentive asset in addition to regular salary. That is why employees should not be afraid of taking this as an investment opportunity for the future.
Related Posts:
ESOP For Startups: All You Need To Know About Granting Shares And Options (by Teresa Pilecka-Juda, Senior Associate, B2RLaw)
ESOP for Startups: Shares, Options Or Cash Equivalent? (by Joanna Markowicz, Partner, B2RLaw)
ESOP for Startups: How To Structure ESOP For Employee Inclusion And Access To Information? (by Krystyna Jakubowska, Associate/Advocate, B2RLaw)
