Options as a Benefit: What Every Developer Needs to Know Before Accepting a Job Offer
Find out about what to do if your client offers you options
In today's world, there's a plethora of ways to pay for specific work or services. Now, compensation is based not only on cash but also on cryptocurrencies, e-money, securities, and more, including certain rights. The latter might involve compensatory options. Such payments are common practice in international business, and some Ukrainian IT specialists have already received similar remuneration. However, not all developers know how this compensation type works, and instead of enjoying hefty sums, they might find themselves disappointed and entangled in legal troubles. Oleh Danylchenko, Senior Legal Adviser and Corporate Lawyer at Alcor, shared the main points of the options application, particularly as part of compensation, with Mind.
When it comes to options, everyone agrees on one thing: it's a decent opportunity to earn stock in the company you work for in the future. But it's not the only benefit of them. After all, options are just one form of compensation through equity, albeit the most widespread.
Traditionally, options issued by American companies are categorized as either Qualified or Non-Qualified. However, for professionals residing and working in Ukraine, our primary interest lies in Non-Qualified Stock Options. This is because they can be granted not only to employees in the USA (like Qualified Stock Options) but also to contractors located overseas.
As options gradually transition from the realm of novelty to commonplace in employment offers, it is crucial for both employers and developers to discuss the fundamentals. This will help mitigate unforeseen challenges or unpleasant surprises stemming from the intricacies of option implementation.
Options Are Not Company Stocks
There's a misconception that an option is the same as a stock. However, that's not the case.
An option is simply the right to purchase company stocks under specific favorable conditions, which are fixed on the grant date and typically remain unchanged throughout the option's term.
The key terms of the grant include:
- The number of shares the professional can purchase (Number of Underlying Options/Shares) and at what price (Option/Share Exercise Price; corresponding to the Fair Market Value of the shares on the grant date).
- The vesting schedule: one of the primary goals companies pursue when issuing options is to retain professionals for as long as possible. Therefore, options usually vest gradually over a certain period. A standard Vesting Schedule includes an initial Cliff Period (a period immediately following the grant date, at the end of which a significant portion of the options is vested) and three years thereafter, during which options vest quarterly in equal installments.
- The post-termination exercise period: the timeframe during which the purchase of shares is possible after termination. This period may vary depending on the professional's position and the duration of their collaboration with the company. Normally, this period lasts for 30 days after termination, occasionally 60 days, and rarely extends beyond.
- The expiration term/date: the deadline after which the right to purchase shares expires under any circumstance. This cannot exceed 10 years from the grant date and may be shorter.
All these terms must be documented in the Stock Option Agreement, signed between the developer and the company. Additionally, they may be replicated within the professional's profile on Carta or any other equity management system utilized by the company.
Exercising Stock Options Is Not Mandatory
An option is an opportunity to buy company shares, not an obligation. If the trade price of the company's shares is below the investment price required for their purchase, or if acquiring them becomes impractical (or impossible) for any other reason, the option can be disregarded. There's no liability involved: once the option term expires, the professional loses the right to buy company shares, and that's the end of it.
Another crucial point: except for extraordinary circumstances (like the death or incapacity of the developer who received the option), the option cannot be transferred to another person without the company's approval, including close relatives. Only the individual who signed the option agreement with the company can exercise the right to purchase shares under it.
Why Companies Offer Options
For various reasons.
For some, it is a competitive edge and a way to lure in developers. Many startups find it challenging to compete with "big league" companies in terms of compensation, yet they urgently need talent. In such cases, offering an option, the potential profit of which could potentially exceed the usual candidate's paycheck tenfold but currently costs nothing for the company, appears attractive to both parties.
For others, options are a great motivational tool: the developer gives their best, the company's results improve, the price of its shares rises, and along with them, the potential profit of the professional from their sale. It's a clean win-win if everything falls into place.
By offering an option, the company commits to selling a specified number of shares at a predetermined price. That's it. There are no guarantees regarding future profits or compensation. The purchased shares can either skyrocket or plummet to zero – all risks are borne by the option recipient, as with any other investment.
Ways to Use Options
If all goes well, and the developer decides to purchase shares – it’s fantastic. All they need to do is submit an Exercise Notice to the company (either in writing or electronically, depending on the option terms), specifying how many shares they wish to buy and how they'll settle the payment.
Given that the currency restrictions imposed by the National Bank aren’t budging, it may be necessary to rely on a foreign bank account or payment system (like Wise or Payoneer) for buying shares of a foreign company in the next year or two. Unless, of course, the company offers an alternative method for purchasing shares that does not require the developer to transfer funds directly to the company, such as a same-day-sale or sell-to-cover arrangement (but that's a topic for another discussion).
Regardless of whether shares are purchased through a Ukrainian financial institution or a foreign one, they will invariably require supporting documents: from the option agreement and the company's plan under which it was entered into, to the extract confirming the registration of the company whose shares are being purchased. The potential gathering and review of these documents could be delayed by weeks, so keep that in mind.
When it comes to what to do after acquiring the shares – whether to sell them at the earliest opportunity, wait for the price to hit a certain psychologically comfortable level, or hold onto them altogether – that decision rests with the developer.
Important note! If the company hasn't gone public yet, selling its shares can be incredibly tough, if not outright impossible. However, this doesn't mean that the shares are worthless until the company goes public: some companies pay dividends to their shareholders, and yours might be one of them.
Keeping Taxes in Mind
When a professional signs an option agreement, as well as upon the granting and acquisition of options and shares, there are no tax implications in either Ukraine or the USA. We owe this to the conventions on the avoidance of double taxation between the countries and domestic regulations.
Taxes will only need to be paid under the following circumstances:
- Dividend income: In the USA, up to 15% of the dividend amount may be withheld. In Ukraine, individuals will have to pay a 9% personal income tax (PIT) and a 1.5% military fee. However, the amount of tax withheld in the USA can potentially be credited towards the 9% PIT owed in Ukraine.
- Sale of shares: In the USA, there are no tax obligations, but in Ukraine, individuals will need to pay an 18% PIT and a 1.5% military fee on the profit received (i.e., the difference between the sale price of the shares and the purchase cost, taking into account exchange rate differences).
In both cases, reporting is required by May 1 of the year following the receipt of dividends or the sale of shares, and the corresponding taxes must be paid by August 1 of the same year.
Important Note! The rates and rules mentioned above apply exclusively to residents of Ukraine. Different rules apply to those residing abroad for more than 183 days (and in some cases, even fewer, so bear that in mind).
In summary, options are an investment of time and skills that theoretically can generate favorable returns in the future. However, like any investment, they entail risks, so each professional must decide what is personally comfortable for them. With the increasing activity of foreign businesses in our market, options are increasingly mentioned in offers. Therefore, it's worthwhile to at least superficially acquaint yourself with the topic and consider all factors when evaluating the pros and cons.
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