The option is one of corporate techniques to motivate employees. Under an option, an employee acquires a right to obtain, under certain circumstances, an equity interest in the company. Normally, this means that such employee acquires some shares of the company or a right to participate in incomes in case of successful sale of business. Thus, an option does not always imply acquisition of shares/stocks, however option’s earning capacity is always linked with the development of business.
When an employee acquires an equity interest in any form whatsoever, he/she is motivated to contribute to the development of such business as if it were his/her own business. Accordingly, such business will grow faster, as more people get directly involved in it.
When an option is executed, an employee may obtain the following benefits:
Thus, at the initial stage of company development, an employee may, under an option, acquire a right to 100 stocks worth 1 US dollar each. In a couple of years, one company stock will be worth 100 US dollars, and the employee will sell his/her 100 option stocks at the price of 10,000 US dollars. The total pretax profit will amount to 9,900 US dollars.
Such employee will be able to receive dividends, however, this is peripheral, as, firstly, dividends (especially in foreign companies) are distributed (normally) quite rarely, and, secondly, the percentage of employee’s share and respective dividend share will be quite small.
An option does not actually provide an ability to exercise control, as (according to normal market practice) option stocks will not empower an employee to participate in rendering crucial decisions.
In legal terms, an option programme is a certain suite of documents comprising principally:
with a particular employee specifying particular terms and conditions for each particular employee (specific amount of stocks/shares, vesting schedule, and others).
Normally, an option plan/agreement shall stipulate at least the following terms and conditions:
1. What employees actually get: real freely transferable stocks or a right to participate in company’s incomes in future. Normally, this is subject to whether the company intends to make a certain employee a full-scale participant of its business (a decision-maker), or to limit employee’s motivation by monetary means only.
2. Who will be entitled to obtain options: many jurisdictions allow granting options not only to employees, but to contractors as well.
Moreover, you can establish any criteria for employees participating in an option plan:
3. Also, it is important to specify: whether all qualifying employees participate in your option programme, or each particular employee has to be approved by company management. The first variant is relevant for very big companies where managing officers do not know each employee in person.
4. Terms and conditions for option implementation.
It is important to realise that obtaining an option and implementing an option are different things. Thus, obtaining an option implies the conclusion of an agreement only, while implementing an option involves actual transfer of stocks or a right to profit-sharing to employee. Normally, when an option agreement is being concluded, an employee does not immediately obtain stocks, but such agreement only establishes employer’s obligation to transfer a certain agreed amount of stocks to employee in future under certain contracted terms and conditions (for instance, provided certain KPIs have been reached). For example, qualitative indicators (reaching a certain sales objective, profit, number of clients, etc.), or record of service in the company, or both.
5. Cliff and vesting.
Vesting is established in an option agreement to create employee’s motivation to continue working in the company. Vesting is a period within which the employee is entitled to implement the option. Often, an option may be implemented within such period by parts, as various terms and conditions stipulated by the agreement occur. The standard vesting period is 4 years, including 1 year for the ‘cliff’ (a period from the date of conclusion of an option agreement and till the date of empowering the employee to implement the first portion of the option) and 3 years for ‘vesting’.
For example, you have promised an employee 4,800 stocks, upon condition of 1 year cliff and 3 years vesting. In 1 year your employee will “obtain” 25% of stocks, 1 year later – another 25%, and so forth. Normally, within the vesting period stocks are “granted” once per months/quarter (that is, accordingly, 1/12 of all promised stocks each month or 1/4 each quarter). In 4 years, your employee will be able to obtain all 4,800 stocks.
Should the employee quit your company before the 4 years term ends, then, provided all stipulated KPIs has been reached, he/she will be able to receive a portion of promised stocks, however only to the extent it is subject to vesting by the date of dismissal (but you can also stipulate that such employee ceases to be entitled to option implementation in case of dismissal – this is also possible).
Also, there is accelerated vesting, where an employee may obtain stocks faster than initially stipulated. It requires a certain trigger – and most often company sale is such a trigger. For example, you have a vesting period of 4 years, however you have agreed that in case of company sale within the next 2 years, employee shall obtain all stocks (that is, earlier). This is beneficial for employees, as he/she is motivated to work better to enable the company to attract an investor faster. However, this is not beneficial for an investor, as an investor acquiring a company needs company employees to continue working. However, once the employee has already obtained all option stocks by way of a swift procedure, this kind of motivation will not work for him/her, and the investor will need to grant another option or choose other employee retention techniques.
6. Stocks purchase price.
An option does not always imply that an employee receives stocks free of charge (as stated above, an employee is motivated by other reasons).
You may grant stocks free of charge or at a price below market value, however this might entail negative tax consequences for both employee and the company. Legislation of some countries basically prohibits transfer of stocks under certain types of options at a below the market price. The optimum alternative is transferring stocks to employee at a market value.
7. Can an employee sell stocks after receiving them.
Any business strives to control its shareholders, otherwise competitors may penetrate. This and other reasons set certain restrictions for employees in terms of managing stocks, such as:
– employees may sell stocks, however only upon company’s consent, and the company shall have the pre-emptive right to buy-out any and all seizable stocks,
– employees may sell stocks only under certain circumstances (selling to company),
– employees may sell stocks only upon expiry of a certain time-frame.
8. What happens to stocks after employee’s dismissal.
Where an employee quits your business, you may not be interested to have an alien person among your shareholders. That is why you may stipulate in advance, that in case of dismissal you company shall buy-out all employee’s stocks, or the employee shall keep the stocks subject to all stipulated sale restrictions.
This is a minimal set of terms to be stipulated in an option agreement, regardless of jurisdiction, however it may be augmented to a scope fitting your business.
This situation is quite topical for Belarusian companies having foreign parent companies. Often, foreign parent companies desire to expand their option plans onto employees from all jurisdictions, including Belarus. Can Belarusian employees participate?
The answer is: yes, they can, however you must make sure that the option plan proposed by a foreign company does comply with Belarusian legislation. For example, such option plans often stipulate that the price of stocks to be transferred will be withheld from employee’s salary, however this is by no means always possible in accordance with Belarusian law (there are some restrictions with respect to grounds for withholdings, withheld amounts, etc.).
Where a Belarusian employee (or a resident of the Republic of Belarus) has obtained an option from a foreign company, once it has been implemented, it is important to make sure that various regulatory requirements have been met. The crucial thing is, of course, tax payment. Tax consequences, normally, occur when dividends are received or when stocks are sold. Also, tax implications may take place when stocks are being acquired (where employee receives stocks free of charge). Anyway, an employee must notify a local tax inspectorate of acquiring stocks of a foreign company within 10 business days.
Yes, the Belarusian legislation does provide norms allowing doing that. Thus, Hi-Tech Park residents were granted the right to provide options already in 2018, and 2021 saw the promulgation of a dedicated norm allowing all Belarusian employers to provide stocks/shares to employees (see detailed information on providing options to employees of Belarusian companies here: https://revera.legal/en/info-centr/news-and-analytical-materials/772-republic-of-belarus-business-will-have-the-right-to-grant-shares-to-its-employees/.
