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Going International

Options without borders?

Don’t get hung up on parity

As your company becomes more successful, you’re likely to expand beyond your HQ country. Whether you’re setting up offshore engineering centres or sales and marketing outposts, you’ll need to hire international employees.

This raises some questions:

  1. Do these hires get grant options?

  2. If so, do you use your existing option plan, or a separate one to suit the local market?

  3. What methodology should you use to calculate any grants?

Culturally, you may feel all your employees should be treated the same, regardless of where they are. This is a great starting position, however it’s not always clear what it means. Spending power, taxation, and other benefits such as vacation allowance, healthcare and pensions can – and will – vary considerably from country to country. So don’t get too hung up on equalising your stock option offers between countries.

We have had engineers in both London and Eastern Europe from early on. We had been basing our option grants on salary percentages, but with salaries significantly lower in Eastern Europe, this didn’t feel fair. Now, we assume equivalent salaries for employees in both locations, so we can calculate equal option grants.

UK late-stage startup

On the practical side, regulation and tax requirements around granting options vary considerably between countries. So adapting your ESOP approach may be in everyone’s interest.

Specialised legal advice on making local ESOP arrangements can be costly and time-consuming. If possible, delay setting up a local scheme until you’re confident that you’re going to stay in a particular location.

To help you navigate each market, we’ve laid out the most common expansions in this table:

Country of origin Country of destination Favoured approach
UK US Set up a separate US ISO sub-plan, with periodic 409A valuations (to determine the strike price)
France Either adopt a tax-favoured French sub-plan specific to the subsidiary, else set up a cash bonus scheme for French team
Rest of Europe Grant non-EMI options from the UK plan, else set up sub-plans where rules or tax require it
Rest of Europe US Set up a separate US ISO sub-plan, with periodic 409A valuations (to determine the strike price)
UK Adopt a UK EMI sub-plan, which will allow you to make tax-efficient grants with potentially lower strike prices
France Either adopt a tax-favoured French sub-plan specific to the subsidiary, else set up a cash bonus scheme for French team

Particularities of the French system

France is a curious case with respect to stock options. For startups HQ’ed in France, the BSPCE plan is highly favourable, compared to most other European countries. However, for companies establishing a French subsidiary, it is financially prohibitive to issue options to French employees, and alternatives will need to be explored – such as Free Shares or a cash bonus scheme.

Just Eat: Taking a bite out of Europe

Founded in Copenhagen: 2001

No. Employees: 2,500+

Index initial investment: Series A, 2009

Offices: UK, Ireland, France, Spain, Italy, Denmark, Switzerland, Norway, Australia, New Zealand, Brazil, Canada, Mexico

The first Just Eat website was launched in Denmark in 2001, followed by the UK website which was launched in 2006. They went on to grow across much of Europe – including France, Spain, Italy, the Netherlands, Belgium, Ireland and Norway – as well as into Canada and Mexico.

We did our best to offer options to all non-UK employees.
We set aside £1k in legal costs per employee, in each country, to set up a scheme. Within this budget, we did our very best to create a programme which was tax-efficient overall for both staff and the company.

Each country required subtle nuances of policy, and Just Eat ended up with multiple ESOP sub-plans. After the UK, they found Ireland to be the most option-friendly country, followed by Scandinavia, and then the Netherlands.

France and Belgium presented the biggest barriers. In France, Just Eat were unable to offer options over the group entity, so they set up a specific scheme for the French subsidiary. In Belgium, they structured bonuses that mirrored some of the benefits of an option scheme, albeit with higher taxes and less employee protection. Mike explains:

Even when we couldn’t achieve as good a result in one country as another, people knew we had tried our best, so we still got a motivational benefit.

Just Eat carefully positioned their grants as “something to put in a drawer and forget about for now – but which might be worth something in the future” – rather than as a core part of compensation.

The main benefit was motivational – we were able to talk to all our employees as shareholders, which was great for pulling the team together.

Single or multiple valuations?

Option strike prices can be more advantageous in some markets than in others. An advantageous strike price increases the benefit to your employees of a given grant, and means each of your options ‘work harder’. Obtaining discounted strike prices involves getting locally approved valuations, which can be messy: options will be worth different amounts in different places.

The important thing is to make sure you’ve provided the same inputs for valuation in each country. These may be revenue forecasts or performance metrics. You also need to be consistent with exchange rates, to avoid accounting gymnastics.

The US and UK are the two major markets where you may benefit from discounted strike prices, which are pre- approved by tax authorities. The UK often allows lower fair market valuations (which determine your strike price) than in the US. However, if you expand significantly into the US, you will probably end up applying a US valuation, also known as a 409A, to avoid complexity.

Some European startups apply the 409A valuation methodology to strike prices they use in certain other countries. This can work, but carries the risk that local tax authorities challenge it at a later point. The tax consequences of this can be very significant. We advise specialist legal advice, and consultation with other founders.

Mimecast: Lessons learned from US expansion

Founded in UK: 2003

No. Employees: >1,000

Index initial investment: Series A, 2009

Offices: UK, US, South Africa, Australia

Mimecast makes email and data safer for more than 27,000 businesses and millions of employees worldwide. The company expanded quickly from London, establishing a presence in South Africa, the Netherlands, Australia and the US. They went public on NASDAQ in 2015, with a number of key management positions now residing in Boston. The team learned valuable lessons when extending their stock option programme to employees in the US and abroad.

1. Get used to US expectations around stock options

In the US, the proliferation of successful tech companies means people expect option grants upfront.

All quotes:

Peter Campbell

14th Employee and now CFO, Mimecast

Everyone takes it as a given, and believes they are entitled to them – particularly when your company is smaller.

But even in the US, employees don’t generally understand the mechanics of stock options.

They do not always differentiate between a share and an option or know what vesting or exercising mean. Most employees are not aware of the differences between NSOs and ISOs.

2. Be prepared to adapt your ESOP to suit US policies

As it’s a more mature market, the US tech ecosystem has standardised policies. This meant Mimecast had to adapt their ESOP rules. Vesting schedules and leaver provisions were particular sticking points: established UK policies were seen as prohibitive in the US.

You need to accept there will be differences between geographies. Do what you have to do to run your business well, and to hire the best talent.

3. Give everyone a stake, even in new markets

Mimecast decided to grant options to every employee in each new office, valued or not. Peter explains:

You run into hurdles if you start considering each employee on a case-by- case basis. We wanted every employee to feel as if they had a part in the ownership of the business and its future,We wanted everyone to know that they would have a share in the value that they helped to create.

4. Get an external firm to do your 409A valuation – as soon as possible

At first, the team calculated their own valuation, using the UK valuation and stock price. But this can be risky, and Peter recommends you leave it to the experts.

Don’t go to a Big Four. Smaller firms can do a good job for $5,000. Get your auditors on side for your valuation – it will matter down the road.

5. Keep your option plan as vanilla as you can, and take advantage of employee-friendly regional benefits

Mimecast started operating in the UK and granted stock options from an EMI Scheme.

It is a really beneficial option plan – in a class of its own.

Mimecast moved to the US in 2008, and ended up granting NSOs.

In retrospect, if I was doing it again I would look in more detail at different structures or awards that would create the optimum future value for employees.

Moving people between countries

It’s best to ask a lawyer

If an employee takes up a new role in your company in a different country, tax and legal issues can get complicated. Seek legal advice to avoid nasty surprises. You should also contribute towards the employee’s legal costs.

We wanted to move staff around to help with setup and scaling – but differing rules and regulations made things tricky, even within Europe. Often, we simply couldn’t do it, and were forced to work on a ‘day trip’ basis.

Mike Wroe

Former CFO, Just Eat

Managing scale
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