Global Equity Compensation Tax Guide for Founders: Valuations, Payroll, Mobility Risks

Global Equity Compensation: A Tax Planning Guide for Founders

Your startup is growing, and your first international hires are coming on board. Offering equity is a core part of your compensation strategy for attracting top talent, but the moment you grant options to an employee in another country, you step into a new world of complexity. The excitement of hiring a key engineer in the UK or a sales lead in the US can quickly turn into confusion over different tax rules, valuation requirements, and reporting obligations. For founders managing finance on QuickBooks or Xero without a dedicated CFO, navigating how to handle stock options tax for employees in different countries feels daunting.

This guide provides a practical framework for early-stage SaaS, Biotech, and Deeptech startups to manage cross-border stock options. We will focus on the common US and UK corridor to illustrate the critical compliance challenges you will face and how to solve them.

When Does International Equity Become a Problem?

Answering “How much do I need to worry about this right now?” depends on your company's stage. The complexity of international employee equity does not hit all at once; it grows with your team. Understanding this staged evolution helps you allocate resources effectively.

Stage 1: The First International Hire

The reality for most early-stage startups is more pragmatic: you solve the problem in front of you. For your first international hire, the focus is singular. You need to get the valuation and grant right for that one jurisdiction. If your first overseas hire is in the UK, this means understanding the Enterprise Management Incentive (EMI) scheme and its specific valuation process with HMRC. If they are in the US, it means commissioning a 409A valuation. At this stage, you are likely tracking everything in spreadsheets, which is fine for one or two people.

Stage 2: The Small, Distributed Team (5-10 Overseas Employees)

As you grow to a small, distributed team, spreadsheets become a liability. This is the point where mismanaging tax withholding and reporting rules across UK, US, and other employee locations can trigger hefty penalties and unexpected payroll liabilities. Imagine tracking vesting schedules for employees in three countries. One employee moves, but the spreadsheet is not updated. At exercise, you might withhold tax for the wrong jurisdiction, creating a payroll nightmare and a potential tax debt for both the company and the employee. It becomes crucial to adopt a system, like cap table software from Carta or Pulley, to maintain a single source of truth for your international employee equity.

Stage 3: The Globally Scaling Company (Series A and Beyond)

By the time you are a globally scaling Series A or B company, this is no longer an occasional task but a core operational challenge. Managing equity grants for remote teams and mobile employees requires a robust process. It impacts your ability to hire and retain talent, your financial reporting, and your overall compliance posture. Without a scalable system, you risk creating frustrating tax problems for your team, undermining the value of their equity, and creating significant compliance risks that will be scrutinized during future funding rounds or an acquisition.

Challenge 1: Getting Valuations Right for Cross-Border Stock Options

One of the first hurdles is understanding that a valuation in one country does not automatically work in another. A common question arises: “My US hire is asking about their strike price and 409A, but my UK hire mentioned an ‘EMI valuation.’ Are they the same thing?”

The short answer is no. Granting options without timely, jurisdiction-specific valuations risks losing favorable tax treatment and can even invalidate the entire scheme. The two valuations are for different purposes and follow entirely different rules.

Valuations in the United States: Section 409A

In the US, the process is governed by US IRS Section 409A, which covers non-qualified deferred compensation, including stock options. To comply, companies must set the option's strike price at or above the Fair Market Value (FMV) on the date of grant. A 409A valuation provides a 'safe harbor' strike price for options based on the company's Fair Market Value (FMV). This valuation must be performed by an independent appraiser.

These rules exist to prevent companies from issuing deeply discounted options that function as tax-deferred salary. Consequently, 409A valuations are required at least every 12 months or after a material event (e.g., funding round). A material event is any activity that could significantly change the company's value. Getting this wrong can result in severe penalties for the employee, including immediate income tax on vested options plus a 20% federal penalty.

Valuations in the United Kingdom: The EMI Scheme

In the UK, many startups use the highly tax-efficient Enterprise Management Incentive (EMI) scheme. This is a government-approved, tax-advantaged employee share scheme, but it comes with strict qualification requirements for both the company and the employee. Crucially, to qualify for an EMI scheme, a valuation must be agreed upon with the UK tax authority, HMRC, before granting options.

This is not just an independent appraisal; it is a formal agreement with the government. The company submits a valuation report (often via a VAL231 form), and HMRC either accepts it or negotiates. This process provides certainty that the strike price is compliant, securing the scheme’s tax benefits for both the company and the employee.

A Practical Example: US vs. UK Valuations

Consider a Biotech startup with its headquarters in the US and a new research scientist in the UK. To grant options to its team, the company must run two parallel processes. For its US employees, it engages a valuation firm to produce a detailed 409A valuation report to set a compliant strike price. For its UK scientist, the company’s advisors must prepare a separate valuation, submit it to HMRC for pre-approval, and wait for confirmation before issuing the EMI options. Using the 409A valuation for the EMI grant would invalidate the scheme.

Challenge 2: How to Handle Stock Options Tax at Exercise

After granting options, the next critical event is exercise. When an employee exercises their options, the key question becomes: “Do I need to run payroll or file a form?” The answer depends entirely on the type of option and the employee’s location. A scenario we repeatedly see is a founder getting caught off guard by the payroll implications of an option exercise, creating urgent and stressful work.

Tax Withholding in the United States (NSOs)

For US employees with Non-Qualified Stock Options (NSOs), the exercise triggers tax on the 'bargain element' at the time of exercise. The bargain element is the spread between the Fair Market Value (FMV) of the stock and the employee's strike price. For example, if the FMV is $10 per share and the strike price is $1, the bargain element is $9 per share. This gain is treated as ordinary income.

As the employer, you have a direct role to play. For NSOs, employers must withhold income and payroll taxes (Social Security, Medicare) and report the income on the employee's Form W-2. This means you must process it through your payroll system, like QuickBooks Payroll, just as you would a cash bonus.

Tax Withholding in the United Kingdom (EMI vs. Unapproved)

In the UK, the treatment differs significantly based on the type of scheme. For employees with options from a qualifying EMI scheme, the tax impact at exercise is much simpler. For qualifying EMI options, if the strike price was at or above the market value agreed with HMRC at grant, there is no tax due at exercise. This is a major advantage of the EMI scheme. The employee will typically pay Capital Gains Tax only when they sell the shares.

However, if the UK options are not part of a qualifying scheme (for instance, if the company is too large for EMI or the grant is for a contractor), they are considered 'unapproved' options. For these, the rules are more like US NSOs. For UK 'unapproved' options, the bargain element is subject to income tax and National Insurance Contributions (NICs) at exercise. Consequently, for unapproved options in the UK, employers must operate Pay As You Earn (PAYE) and handle NICs through payroll. This would be managed in a system like Xero Payroll. Furthermore, UK employers have annual reporting requirements for all types of share schemes via the Employment-Related Securities (ERS) return, adding another layer of compliance.

Challenge 3: Managing Expat Tax Implications for Mobile Employees

As your startup grows, so does the mobility of your talent. What happens when your head of engineering moves from San Francisco to London? How does that affect her outstanding stock options? Overlooking employee moves or remote hires between countries creates exposure to double taxation and complex apportionment rules that frustrate both founders and staff.

Apportionment and Double Taxation on Stock Options

When an employee works in multiple countries while their options are vesting, the tax authorities in those countries may both claim a right to tax the gain. To prevent double taxation and correctly source the income, the gain is often “apportioned” based on the number of workdays spent in each location between the grant and vesting dates.

Here is a simplified example. An employee at a SaaS company is granted 10,000 options that vest over four years. She works for two years in the US and then moves to the UK for the final two years of the vesting period. When she eventually exercises all 10,000 options, the gain is split. Roughly 50% of the gain is apportioned to the US and is subject to US tax rules. The other 50% is apportioned to the UK and is subject to its tax laws. While a US-UK tax treaty helps prevent the employee from being taxed twice on the same income, it does not remove the employer's compliance burden.

This creates a complex withholding and reporting situation. The employer must calculate the tax due in both countries, withhold the appropriate amounts, and report the income to both the IRS and HMRC. This is where spreadsheets fail spectacularly. Accurately tracking an employee’s location throughout the vesting period and correctly calculating the tax withholding for each jurisdiction upon exercise is nearly impossible to do manually without errors. This challenge is a primary driver for adopting robust cap table and global payroll compliance solutions.

Practical Takeaways for Founders

Navigating cross-border stock options requires a shift from a domestic to a global mindset. Here are the most important takeaways for early-stage founders building multinational startup compensation plans:

1. Valuations Are Not Universal. A US 409A valuation is for US tax compliance and does not satisfy UK HMRC requirements for an EMI scheme. Always secure jurisdiction-specific valuation advice before granting international equity.
2. Plan for Payroll at Exercise. An option exercise is often a taxable event that requires employer withholding. Understand the rules for US NSOs and UK unapproved options so you are prepared to process the transaction through payroll correctly.
3. Track Employee Location Diligently. Employee mobility creates significant tax complexity. Use your HR information system or cap table software to maintain an accurate, dynamic record of where your employees are working from grant to vest.
4. Communicate with Your Team. Be transparent with your international employees about their equity. Help them understand the type of grant they have, the potential tax implications in their country, and what the process looks like for exercise.

Next Steps for Your Global Equity Strategy

Before issuing your first international equity grant, engage with tax advisors who specialize in global mobility and equity compensation. These experts can help you design a scalable equity framework that complies with local laws and provides a positive experience for your team. Proactive planning is far less expensive and stressful than reactive cleanup. Getting the structure right from the start protects both the company and your most valuable asset: your team.

Frequently Asked Questions

Q: Can I use my US 409A valuation for UK EMI options?
A: No. A US 409A valuation is an independent appraisal for IRS compliance. For a UK EMI scheme, you must agree on a valuation directly with the UK tax authority, HMRC, before granting the options. Using a 409A for EMI would invalidate the scheme's tax advantages.

Q: What is the biggest mistake startups make with international employee equity?
A: The most common error is assuming that the equity plan that works in their home country can be used everywhere. This leads to non-compliant grants, loss of tax benefits, and unexpected payroll tax liabilities. Each country requires a specific approach to valuations, grant types, and tax withholding.

Q: Do we still have to withhold taxes if a former employee exercises their options?
A: Yes, typically. The tax withholding obligation is usually tied to the income generated, regardless of the individual's current employment status. For both US NSOs and UK unapproved options, you would likely still need to report the income and manage withholding, which can be complex for ex-employees.

Q: How are stock options for international contractors different from employees?
A: Granting options to contractors adds another layer of complexity. In the UK, contractors are not eligible for the tax-advantaged EMI scheme. In the US, the tax treatment can differ. It is critical to get legal and tax advice, as misclassifying workers can create significant risks for the company.