Stock Options for Your Team: ESOPs in a US Corporation With Global Staff

One of the main reasons founders choose a US C-Corporation is the ability to share ownership with the people who build the company. Stock options let you attract talent you could not otherwise afford, and align everyone with the company's long-term success. With a team spread across India, Europe and elsewhere, a few extra considerations apply.

The building blocks

Option pool

A block of shares the board reserves for employees, advisers and contractors, typically 10% to 20% of the company. Investors often ask for a pool to be created or expanded before their investment.

Stock options

An option is the right to buy a number of shares in the future at a fixed price, the exercise price (or strike price). If the company's value grows, the option holder can buy shares at the old, lower price.

Vesting

Options are earned over time. The most common schedule is four years with a one-year cliff: nothing vests in the first year; after twelve months, 25% vests at once; the rest vests monthly over the next three years. If someone leaves early, unvested options lapse.

Exercise price and valuation

In a US corporation, the exercise price should be at least the fair market value of a share on the grant date. Startups usually obtain an independent valuation (commonly called a 409A valuation) to support the price, especially once they have raised money. Grants priced below fair value can create tax problems for US-taxed holders.

Types of options

• Incentive stock options (ISOs): a US tax-advantaged type available only to employees and with specific conditions. Mainly relevant to US-taxed staff.
• Non-qualified stock options (NSOs): the flexible type, which can be granted to employees, contractors, advisers and directors anywhere.

For a team mostly outside the USA, NSOs are usually simpler.

Team members outside the USA

Granting options to people in other countries is common, but each country taxes options differently:

• some tax when the option is granted,
• many tax at exercise, on the difference between market value and exercise price,
• some tax only when shares are sold, and
• some countries have securities or foreign-exchange rules on employees holding shares in foreign companies.

For key hires, get local advice in their country before granting, and consider country-specific terms in the plan. In some cases, alternatives such as phantom shares or cash-settled awards are simpler.

Founder vesting

Investors often ask founders to put their own shares on a vesting schedule, frequently with credit for time already served. It protects the company, and the remaining founders, if a co-founder leaves early. Founders receiving restricted shares in a US corporation may want US-specific advice on elections relevant to US taxpayers; foreign founders should check how their home country treats vesting shares.

Board approval and records

Every grant should be:

1. approved by the board (by resolution or written consent),
2. supported by a valuation of the exercise price,
3. documented in an option agreement under the company's equity incentive plan, and
4. recorded in the cap table.

Investors check these records closely during due diligence. Missing approvals or undocumented promises of equity are common deal problems.

Contractors and advisers

Contractors and advisers can receive NSOs or restricted shares. Make sure their agreements also assign any intellectual property they create to the company.

Common mistakes

• Promising equity by email without board approval or paperwork.
• Granting options without a supportable exercise price.
• Ignoring the local tax and legal position of team members abroad.
• Granting from an LLC (options are complex there; convert first). See converting an LLC to a C-Corp.

Start with the right structure

A clean share structure at incorporation makes the option plan easy later. See authorised shares and par value, directors, officers and shareholders and raising investment as a foreign founder.

How UCB helps

We incorporate your company with an investor-ready share structure, prepare board resolutions, and keep your corporate records and filings in order. For the equity plan itself and country-specific employee advice, we work alongside your lawyers and local advisers.

Planning to give your team equity? WhatsApp us at +91 8105 199 399 or email info@ucbsolutions.com.