International expansion: 4 equity headaches to avoid
Tech is experiencing a rough patch in terms of investor appetite, fundraising and valuations. But ambitious companies are pushing into new markets. In the last month or two Salesforce announced that it will commit more than £3 billion of investment into the UK; meanwhile, ChatGPT creator OpenAI has announced that its first office outside the US will be in London.
So while the tech sector certainly faces challenges, international expansion is a vital pillar for companies looking to grow market share, take on competitors, and increase the talent pool for new hires. But of course, nothing worth doing ever came easy.
One particular challenge for companies in this position is managing equity. Different countries have their own norms, laws, and expectations, and you’ll need to meet these to hire successfully as you grow.
If you’re preparing to cross borders and plunge into new markets, here are the biggest equity pitfalls to avoid.
About the author
Joe is Ledgy’s Content and Communications Lead. He has over 10 years’ experience working in marketing and communications, in scaling early-stage companies and global professional services firms.
Ledgy is the equity management platform that aligns teams behind a common goal, helping them to achieve more together. The platform lets companies adapt equity plans to their needs, in any country and for any industry.
Expanding into new markets: the equity headaches
No matter how quickly a company scales, moving into a new market is always a leap into the unknown. Take equity, a central component of compensation for millions of tech workers around the world. In Europe, there are no standard rules that govern how to distribute share options to employees. Every country is different, so a company operating across the EU’s 27 markets has to navigate 27 different sets of legal regulations when understanding best practices for running an employee equity plan.
This presents a major headache for a range of teams around the business, from finance to people, operations and legal. The difficulties are technical but also cultural – because if you operate equity plans in some markets but not others, you risk damaging morale and creating disagreements across the different countries in which you operate.
So how can companies make equity work internationally? Here are a few tips.
Get your equity structure right to save confusion down the line
When you’re managing your cap table, you’re likely to have different classes of share and different pools of equity to manage. The pool for investors, who often hold preferred stock, should be situated separately to the option pool for employees and founders, who normally hold common stock.
When you’re setting up an equity plan in a new market, it’s best to set up one employee option pool which can encompass multiple country-specific equity plans. This creates equivalence between each market’s equity grants, and it reduces confusion when modelling future scenarios and speaking to investors about your cap table structure.
You don’t want fines, so understand filing deadlines
This is a simple sense-check to run but it can make all the difference to compliance. When you’re operating internationally, there are even more dates to keep track of, and you need to understand when the key filing deadlines and milestones are in each of your active markets.
Often, equity processes will be time-limited: for instance, when you agree a new EMI valuation with HMRC, it’s valid for 90 days (recently reduced from 120 days which was a contingency extension from COVID). Any ‘late’ grants risk being disqualified from EMI tax benefits, which would be an extremely negative outcome for any employees affected.
Seek rough approximations of the equity plans you already use
You can be the best CFO in London, but when you hire your first employees in Germany and they expect to be granted phantom shares, you may not know where to start. It’s a big help to adopt equity plans that are similar in structure to the plans you already have in your home market.
Salesforce is a good example: the company operates an ESPP in the United States, which shares many similarities with share incentive plans that operate in the UK. (Both involve deductions made from salaries over a period of time which then get converted into equity, usually at a discount.) So if Salesforce’s UK expansion means new hiring, using a share incentive plan might allow equity administrators to keep things simple from an administrative point of view.
Wait until critical mass before setting up a legal entity
Everyone wants the best tax treatment on their equity plans. But in many countries, you have to set up a legal entity based in that territory to access the benefits of tax incentives. Setting up a legal entity is not always easy, and so if you’re moving into a new market with one or two employees, you might want to wait until you’ve proven your expansion thesis and scaled the team a little more.
Now, you’re not out of options if you don’t have a legal entity in a particular market. In fact, it’s usually possible to grant share options even if you’re using an Employer of Record platform like Remote, Oyster, Omnipresent or Deel. Equity granted without a legal entity may qualify for different tax treatment, potentially without the benefits of tax deductions. While this may still be better than offering no equity at all to new joiners, it’s imperative to communicate with those team members that their tax treatment might not be equivalent to their colleagues in other markets. At least then everyone’s on the same page.
International equity: when to take the plunge?
Companies expanding internationally have a lot to think about. All the same, incentivising talent with equity is the best way to make sure you have a top team ready to make waves in new markets.
Just think about the trade-off between the administrative overhead needed to set up equity plans in a new country, and the benefits you’ll receive as a company from giving your team members a stake in the business.
By meeting reporting deadlines, structuring your cap table well, and communicating openly with the team, you’ll give yourself the best chance of making international equity work for you.