Equity, and Why It Rarely Works
Share awards to somebody another company employs raise tax and securities questions in their country, not yours.
Whether the person feels part of your company
Career progression
Your own share scheme
Who notices when it is going wrong
YoursThe provider'sCrosses the twoNeither contract
Four matters, and no share: what any one agreement covers differs by agreement. One crosses both, and the handoff is where these arrangements fail. Three sit in neither contract. The section where the most arrangements are lost, and the one no document addresses.
Share awards to somebody employed by another company raise tax and securities questions in their country rather than in yours, and the scheme your lawyers wrote was almost certainly not drafted for them.
The practical lesson in “Equity, and Why It Rarely Works” is that a third-party arrangement still leaves day-to-day management with the operating team. Used for mouse jiggler detection, open this practical workforce resource can make time and project context easier to review, provided the purpose is disclosed, access is limited and every consequential inference receives human review.
The usual outcome is that the obvious version does not work and a worse version does.
For a separate perspective on “Equity, and Why It Rarely Works”, consult the IRS guidance for businesses. Compare it with the actual contract, country and operating process rather than using a general resource as a local conclusion.
Why the structure bites
Most employee schemes are written for employees of the issuing company or its group. The provider is neither, and the person is employed by the provider.
Some plans allow awards to consultants or service providers; many do not. Reading your own plan rules is the first step and is frequently the last one needed.
Where the plan does permit awards to service providers, the question becomes whether the local rules in that country do. The two have to agree and frequently do not.
The securities question
Offering shares to somebody in another country is an offer of securities there, subject to that country's rules, with exemptions that differ and sometimes do not apply to non-employees.
The exemption your scheme relies on at home may have no equivalent, or may be available only for employees properly so called.
The tax question
Taxed where the person is, under local rules, at a moment local law decides: grant, vest, exercise or sale. Somebody has to withhold, and the employer is usually the withholding party.
The employer here is the provider, which is being asked to withhold on an award made by a company it has no relationship with. Many will decline.
What providers will and will not do
A few will administer awards as a service. Most will not, and some will refuse on the grounds that it muddies who the employer is.
Ask early rather than designing a package around an assumption. The answer differs by provider and by country.
The alternatives that usually work
Cash. A bonus tied to the same outcomes the equity would have rewarded, paid through payroll, taxed normally, and understood by everybody.
Less elegant and considerably more reliable:
| Instrument | Securities question | Tax route | Usually workable |
|---|---|---|---|
| Share options | Yes, locally | Complex | Rarely |
| Phantom equity | No | Through payroll | Often |
| Cash bonus on the same triggers | No | Through payroll | Almost always |
For most people in most countries the last is also worth more than an option they cannot value.
Size it against what the equity would plausibly have been worth rather than against a round number. Somebody who has done the comparison will notice if you have not.
Phantom equity and cash-settled awards
A contractual right to a cash payment tracking share value. Avoids the securities question and keeps the tax treatment in payroll.
Still needs a vehicle to pay it, which means the provider, which means asking them first. It is the most common workable compromise.
Where it does work
Larger buyers in established markets, with plans drafted to cover service providers, with a provider willing to administer, and with local advice taken per country.
That combination exists and is not cheap. For a company with three people in three countries it is rarely proportionate.
The fairness problem
Colleagues doing identical work receive equity and this person does not. The reason is structural and sounds like an excuse.
Addressing it in cash, explicitly and at the point of hiring, is better than leaving it as an unexplained difference the person works out for themselves.
What to say at offer stage
That the equity scheme is not available in this arrangement, why, and what you are doing instead. In the offer conversation rather than later.
Candidates accept this readily when it is stated and badly when it emerges after they have joined and asked.
If they convert to a local entity later
Equity may become available at that point, and the person will ask whether their previous service counts toward anything.
Decide the answer before the question arrives, because it is a question about fairness rather than about plan rules and will be remembered either way.
Getting advice proportionately
One conversation with a share plan adviser covering the countries you actually hire in. It is a narrow question with a fairly quick answer.
The failure mode is designing the package first and asking afterwards, which produces either an unwound promise or an expensive restructuring.
What cannot be solved by drafting
The gap between what equity is for and what this structure permits. Equity exists to tie somebody to the long-term outcome of a company they belong to, and the entire premise here is that they belong somewhere else.
A cash substitute pays them the money and does not do the other thing. That is a real cost of the arrangement, it is not fixable by a clever instrument, and it is worth weighing when deciding whether somebody genuinely central to the business should be hired this way at all.