What alternatives are there for options for employees, given our truly sucky tax rules?– Anonymous
Sharing the success of the company through mechanisms such as options is part of compensation, which is a so-called ‘hygiene’ motivating factor.
Hygiene motivating factors are minimum standards for things such as office chairs, health and safety, reasonable bosses and pay that, if not present, are very demotivating.
For rapidly growing companies it’s generally accepted as fair or normal to provide some upside to senior (at least) staff, especially if they are genuinely helping the business deliver.
It’s particularly normal practice when paying lower salaries because you are a start-up, or ‘cool’ company.
Options are used in the US start-up economy but our tax law means employees pay tax on all of the money made when they are executed. So bad.
Meanwhile, it’s not free or easy to give people shares in a company, as those shares are deemed income, and the value of them must be declared and tax (in cash) paid. The company can pay the tax itself, but
sending cash to the IRD is not the smartest thing to do for early stage companies, while shares may end up valueless.
It’s of course acceptable to give away shares when you found a company and it’s also OK to sell shares to employees at a fair market value, even if you lend them money to do so.
In all of these cases, you need to manage what happens when there are lots of employees, when employees voluntarily or involuntarily leave and plenty of tax hooks.
So the right answer is: see your tax lawyer and accountant, of course. Get advice from the pros – this is not something for your family lawyer.