Setting Up Stock Plans for US Employees of a Foreign Company

Authored by Bryan Springmeyer Bryan Springmeyer is a California corporate attorney who represents startup companies. The information on this page should not be construed as legal advice.

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At a very basic conceptual level, a stock plan is pre-authorization from the Board and stockholders of a corporation to issue awards in accordance with the terms of the plan. The most common award for a funded company is stock options.

Stock plans for US recipients, either employees or bona fide consultants, are set up in a way that optimize US tax and securities laws. The beneficial tax treatment of Incentive Stock Options (defined by IRC 422) is available to recipients of corporations that have adopted a Plan and the shareholders of the corporation have approved that Plan. Likewise, the flexible Federal securities exemption that is most ideal for compensatory (i.e., in exchange for services) awards, Rule 701, is only available for awards issued from a duly adopted plan. The plans that lawyers produce are designed to comply with the relevant provisions and intended treatment of these and other tax and securities rules.

When a foreign entity that has employees in the United States desires to issue equity awards to their US employees, they’ll miss out on the optimal tax and securities treatment, unless a US-plan or addendum is adopted. The addendum, which would get added on to an existing foreign stock plan, would contain the language and corresponding awards that would optimize for US legal treatment. Even if the foreign entity creates a US subsidiary to employ their US employees, the equity compensation of an organization would most often come from the parent entity.

One additional note on issuing equity in a foreign entity to US taxpayers is that they’ll be subject to FATCA, a law enacted in 2014 that requires US taxpayers to disclose their foreign holdings if the aggregate value exceeds $50,000.

Related Pages:

Tax Issues for ISOs, NSOs, and Restricted Stock for Employees and Consultants
Restricted Stock in Startups
Section 83(a)
Starting a US entity with foreign founders