Equity Awards at Pre-IPO Companies in France, the UK and the US

Transcript

Christine:
Hello, welcome. We're here to talk to you today about equity awards at pre-IPO companies in France, the UK, and the United States. My name is Christine McCarthy. I'm a partner in Orrick's Menlo Park office in Menlo Park, California.

Anna:
Hi, I'm Anna. I'm the London Compensation and Benefits partner at Orrick.

Jessie:
And my name is Jessie Gaston. I'm a Tax partner in the Paris office at Orrick.

Christine:
We're going to start off today by talking about what types of equity awards we see in our various jurisdictions. So, Anna, what type of equity awards do you see for pre-IPO companies in the UK?

Anna:
So, almost without exception, we see options as the first route. And then we also do see some direct equity ownership as well, mainly for the C-suite executives and that sort of level.

Christine:
Jessie, how about France?

Jessie:
Well, France is, as often, France tends to be a little bit complicated. We have qualifying and non-qualifying awards. But typically, the only type of qualifying award, meaning that it has a tax advantageous position for both the employer and the employee, would be free shares, RSU's. We do see other forms of awards. We do see options, non-qualifying options, and other types of award, phantom shares and the sort, but none of those would be treated anywhere differently than salaries, which tend to be expensive in France.

Christine:
And in the US, for our pre-IPO companies, we often see restricted stock, stock options, which can be either incentive stock options, which is a tax-qualified type of option in the United States, non-statutory stock options, and then for later-stage companies, restricted stock units. So, Anna, do you see different types of awards at different stages of companies in the UK?

Anna:
Definitely, yes. So, we start off with the EMI scheme, Enterprise Management Incentives, which is the best because you can get within the most beneficial tax treatment, even to the extent of potentially getting down to a 10% rate of tax, and that's only when you sell the shares on the first one million of lifetime gains. So, if you can grant EMI options, that's the one to go for. There's a limitation around, there's lots of limitations around the size of the company, the number of shares, the number of employees the company can have as a whole, and there's a qualifying trade test. So, if you can grant EMI options, you do. And then once you've outgrown it, or if you can't qualify because you're carrying on a trade that is not a qualifying trade, you can move on to something called a CSOP, Company Share Option Plan, which is a bit different and has a lower limitation of valuation that you can grant to each employee. You've got a limitation of 60,000 rather than 250,000 for EMI.

Christine:
And Jesse, how about France?

Jessie:
Well, in France, early stage startups tend to begin with a type of stock option called BSPCEs. BSPCEs are very favorable because you have a flat rate of taxation of all the gains, exercise gain and taxable and capital gains, which is a flat rate of 30%, and they are essentially cost free for the company, except for the dilution cost. But as in the UK, you have very strict limitations both in size of the company and in quantum and the sort, which make it an early stage project. So, whenever the company is growing up, we tend to move into more the RSU type of awards, free shares. Free shares can actually be structured somewhat like options because there's a possibility to pay up to 5% of the fair value of that. So, there's a little bit of engineering that is possible to be embedded into plans, especially when they're converting from other jurisdictions.

Christine:
And then in the U.S., for very early stage companies, we often see companies issuing restricted stock. That's the right to purchase restricted stock at a very low purchase price when the company is very young. Once the price starts to increase a bit, we see more often companies granting options. And for employees, companies will grant incentive stock options to the extent that they can. As with the UK and France, we have limits on the number of shares that companies can grant as incentive stock options, but companies will look to maximize that to the extent that they can. And then for mid to later stage companies, companies whose stock prices are increasing to the point where employees maybe think it's less favorable to have to pay an exercise price like you do with an option, companies will start granting restricted stock units, which are like your free shares. So, if you were to provide us with one thing that or two things that companies should know if they're outside of your jurisdiction and coming into your jurisdiction, what would you say? What's the thing to know top of mind?

Anna:
So, I think the main thing is that it shouldn't be too complicated. So, it can be a quite straightforward process. As long as you've got, you're properly advised by someone that has experience of doing these things, it can be quite seamless. There are some things to get used to, different types of valuations, different compliance requirements, etc. The main point is that from a documentation perspective, it can be quite simple, putting in place a short sub plan to say US main plan and then a jurisdiction specific option agreement or RSU agreement, whatever. And yeah, so I think that's the main thing is to, you know, don't be scared. It can be done. Don't overcomplicate it.

Jessie:
Yeah, I agree. I agree. For France, it would be typically the same type of situation. You might have questions about evaluation when you're making certain forms of awards. You can make them fit in terms of the type of product you can make them fit into the existing qualifying or even non-qualifying awards in France. Valuation issues for tax reasons, they need to be more compliant to what the tax administration will require. So in general, 409A valuations tend to work, but it really depends on the timeline and that type of time effect that you might want to add to that. But generally, it is pretty simple. Putting in place a sub plan is something that I have seen American companies tend to look at as, oh, it could be complicated. But in practice, it really is not. It's something that we do on a daily basis. Not only that, but sometimes depending on what your compensation committee has already the power to do. You don't even need to go back to the shareholders to get validation for that. It really depends on what is already in place. So it can be a very, very quick and simple process just to adapt your foreign plan to French regulations.

Christine:
Similar to the UK and France, the US, it's generally pretty easy to come into the US to grant equity awards. For companies that are granting incentive stock options, you will need a sub plan just like in the UK and in France. It's very easy to do if you have good lawyers helping you out and lawyers that have experience doing that. So we could certainly help with that. The big thing in the US often is the valuation, which Jessie referred to the 409A valuation is sometimes something that's new to companies that are coming from outside the US into the US. And that is just a valuation that companies need to get if they want to grant stock options to employees in the US or to any service providers in the US to ensure that there won't be adverse tax consequences when you're granting options to service providers in the US.

Jessie:
Keep in mind that you have a few pointers to keep in mind. It is very easy to do. And we are happy to to answer any questions you might have.

Christine:
Happy to help. Thank you very much.

Jessie:
Bye.

Anna:
Bye.