Equity Management Challenges in Global Market Expansion

Expanding into a new market is a crucial stepping stone for any business. Capitalizing on growth opportunities and seeking to win market share from competitors is an exciting step, but entering a new territory also creates challenges for those responsible for equity and cap table management. 

Offering equity to new hires in a new market, or reporting to a new tax authority, carry significant new compliance risks for businesses. When executed well, market expansions can uplevel competitiveness and accelerate growth. But it’s never easier to make a mistake than when you’re dealing with different regulations in new jurisdictions.

Accounting for your new market on your cap table

Many companies approach a new market with the assumption that they will be able to manage equity in broadly the same way they do in their ‘home’ jurisdiction. And sometimes, this is the case. But companies may need to change the parameters of their equity plan quite markedly, often because they need to grant different kinds of equity with different vesting or performance conditions. Companies may take this path either to follow qualitative market norms in a new territory, or to stay on the right side of specific regulations.

Take a hypothetical US company expanding into the UK that wishes to grant equity to employees. What’s the best way to approach this in terms of cap table design? It is usually most sensible to establish one employee option pool at the topco level, which can then be broken out into separate, country-specific share or option plans. This structure is beneficial in a funding round context, as any increases or decreases to the employee equity pool can automatically cascade down to the country-level plans, rather than having to discuss each market individually.

It’s also important to take the unique characteristics of each market into account. In some European countries, most notably Germany, virtual (or phantom) shares are a popular way of granting employees a stake in the success of the business. However, virtual shares do not confer direct equity ownership in the company. Instead, they grant employees the right to economic benefit in the event of an exit, usually by carving out a portion of a founder’s or an investor’s stake for the team which is distributed once a liquidity event takes place. As such, companies may wish to represent virtual stock differently from employee share option plans (ESOP) on the cap table.

Tax and financial reporting

Before entering a new market, companies should undertake careful research into taxation and financial reporting requirements. Tax and reporting are materially affected by operational decisions such as whether or not to establish a legal entity and grant tax authority-approved shares or options, and electing to hire local talent or to relocate employees from (for instance) the US to start up the new go-to-market effort.

A company may wish to continue granting these employees RSUs in accordance with their existing equity grants. In this case, the company may have to adjust withholding amounts according to the new jurisdiction’s requirements. And the IRS levies taxation on worldwide income, which should be communicated transparently to any employees who could be affected.

Amid this complexity, companies are often caught out by the simple things, like managing the financial reporting calendar: operating in two markets means two sets of reporting deadlines and potentially complying with two different accounting standards, after all, with attendant consequences if any deadlines are missed.

Myth busting: can you grant equity if you’re using an Employer of Record service?

Employer of Record (EoR) services, such as Deel or Remote.com, allow companies to quickly hire employees in a country where they do not have a legal entity. But using EoRs raises an additional concern for some companies: can they offer equity through these platforms? 

The short answer is that granting equity while using an EoR is absolutely possible: you just need to think a little more carefully about the type of equity you’re granting, and the tax implications for the people being granted equity. 

For instance, in markets like the UK and France, tax authority-approved equity schemes will normally require people to be directly employed by the company, not an EoR, to receive the full tax incentives of the scheme. People working through an EoR are unlikely to qualify for tax incentives, and will be more likely to pay the full income tax rate for any payout seen as a result of their equity ownership. This is still much better than nothing, but companies need to be transparent with any new EoR hires about the implications of their employment status for any equity stake they’re granted.

Keeping equity fair across markets

When entering a new market, it’s crucial to compare grants and plans across territories, to prevent unfairness and make sure your share or option scheme is in line with market standards.

Being able to offer market-leading equity is vital for many companies who are expanding into a new territory, in order to attract top talent and carve out a reputation as an ambitious challenger brand. But if equity packages in one country are significantly different, without upfront communication and a clear justification for any discrepancies employees may become disgruntled and disengaged.

Companies should research quantitative benchmarks and take the temperature of equity norms in any new markets. Equity is an investment, after all, and people in different markets may have higher or lower risk tolerance when it comes to their compensation packages. Employees in the US are generally perceived as being comfortable with equity taking up a higher proportion of their compensation package compared to employees in Europe, for instance. Understanding these norms and building them into compensation strategies will help companies deal with the hurdles of market expansion while preserving morale and building a cohesive organizational culture across geographies.

In summary: equity can be a valuable lever in effective market expansion efforts

Moving into a new market presents a multitude of considerations for equity management, from structuring plans and understanding taxation to leveraging remote work software and benchmarking effectively. Equity can be a focal point by which companies attract great talent and stimulate growth in a new territory. But failing to establish the proper structures and processes could lead to distracting and financially punitive consequences from a compliance perspective.

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Svein Petter Undheim has almost two decades of experience in international equity and share plan management. Based in Norway, he is Head of Financial Reporting at equity and cap table management company Ledgy, which serves more than 3,500 companies around the world and is backed by investors including Sequoia Capital and NEA. Connect with him on LinkedIn.