OPTIONS: WHO NEEDS THEM, WHY, AND WHAT ARE THE BENEFITS?
These days, a programmer is rarely awed by a “fancy” office and complimentary cookies. Hearty breakfasts, gaming consoles and ping-pong tables have become the norm, so companies have been inspired to look for new motivators. Especially since brilliant IT minds are in high demand both among tech giants as well as start-ups still looking for their place in the world, who are finding it hard to compete in terms of salary for key employees. If a company cannot pay an employee a market-level salary, it finds alternative means to motivate them and increase loyalty.
Option programmes are a good solution. For a start-up company to grow, its employees need to have a spring in their step, and what could be a better motivator than the opportunity to become a co-owner of a company highly valued by investors (the so-called ownership mentality).
Tech Giants of the IT-industry – Microsoft, Google and Facebook – used option programmes to attract highly qualified specialists when they were still starting out. Robert Noyce and Gordon Moore, for example, made extensive use of this opportunity – they offered options to almost all of their employees at Intel. So, what do we have? Let us look into this in greater detail.
To facilitate start-ups and attract foreign investors to Estonia’s entrepreneurial sphere, in 2016 the government approved tax incentives for option buyers. These days, almost every start-up offers options to its employees. The classical call options have become the most common variant.
A call option is an instrument used by enterprises to motivate their workers and allow them to buy their employer’s or the parent company’s stocks at a specified price (often below the market value) at a certain time in the future. The option doesn’t oblige the employee to buy all or even part of the stocks. It is up to the employee to decide whether to buy them.
An alternative to the call option is an option that can only be exercised upon the sale of the company. These options bring no income until the company is sold. There is also an option where instead of a participation share, the employee can receive a monetary payment once a certain time period expires.
What is important?
A contract containing the option’s key conditions is signed between the employee and the company. From a legal point of view, in addition to the option contract, a stockholders’ decision concerning the increase of the stock capital for the benefit of the employee is also required, since technically every employee becomes a stockholder.
Be prepared for a long-term relationship. It is important for the employer to guarantee that the contract remains valid for at least three years. In this case, the employer does not have to pay any additional taxes (special incentives taxes). Click here to read more about taxes for employers. At the same time, the contract may state that if 36 months have not passed since entering into the contract and the employee decides to exercise their option contract, the employee pays the employer the special benefits tax amount.
The employee’s income tax liability arises after selling the securities. The taxable income (or loss) is the difference between the sales and purchase prices of the stocks. It is important to remember that if you have paid the employer the same tax amount for the special benefit, it is added to the overall purchase price of the securities. For details, see the example on the Tax and Customs Board’s homepage.
Are options really that valuable? One of the strongest arguments in favour of options is that in the long run, company stocks can be worth much more than a good salary earned for the same time period. For example, the employees of Estonia’s fintech Wise (previously TransferWise) can attest to that – the future is more than likely to hold brilliant prospects for them. Wise is growing at a breakneck pace, and its founders have become Estonia’s first billionaires on the Forbes list. Since its foundation, the company has distributed stock options to thousands of its employees, who have become millionaires thanks to that.
In our agency’s practice we come across true success stories from candidates who have already exchanged their options for nice apartments after working in TransferWise and Twilio. We sincerely hope that you will share your success stories with us!