How do domestic internet startups deal with the options of resigned employees?

The termination of labor relations between companies and employees involves a series of legal issues, such as salary, bonus, social security, provident fund, economic compensation, confidentiality, intellectual property rights, non-competition obligations, etc. If these problems are common legal problems, then, with the more and more extensive use of equity incentives in startup companies, options have become an increasingly common new problem of employee turnover, because the potential value of the rights and interests involved in options is large, coupled with the lack of mature legal norms, both companies and employees are often easily troubled by options.

What are the options?

Option is the expected right that the company gives employees to buy shares of the company at a specific price after meeting the agreed conditions. The purpose is to recruit, motivate and retain outstanding talents through equity, which has become a talent incentive method adopted by more and more startup companies and even listed companies. The specific price here is often much lower than the price of other investors buying the company's equity (shares), which reflects the rewards and concessions provided by the company to employees.

Whether to exercise the options in hand is the right of employees, not the obligation. When employees exercise their rights, they shall pay the exercise price according to the conditions and procedures stipulated in the option documents, acquire the company's equity (shares) and become the shareholders of the company; If the employee does not exercise or give up the option, the option will be invalid when it expires.

Simplified method help tip:

If the resigned employee holds the company option, the employee needs to weigh the company prospect and exercise cost (including exercise price and tax burden) when leaving the company. Are they willing to exercise options in order to continue to hold shares in the company after leaving the company? On the other hand, the company needs to consider: are you willing to let the resigned employees continue to hold the company's equity? Do you have the right to recover the options or equity in the hands of the resigned employees through repurchase and other means? How much can I get back? How much will it cost?

Whether in China or the United States, an important function of implementing options instead of restricted stock to motivate employees is to delay paying taxes. Because it is still uncertain whether employees will generate income when they get options (employees will not generate income if they don't exercise their rights), there is generally no tax obligation when granting options. In contrast, when restricted shares are granted directly to employees, they may immediately face tax obligations. In practice, most start-up companies let employees directly or indirectly acquire the company's equity like investors by transferring founding shareholders at low prices or issuing additional shares at low prices. Although it may constitute "wage income" in theory, it is rarely heard that start-up companies withhold and pay personal income tax on "wages and salaries" according to the difference between the equity purchase price and the current market price. Companies can be understood as imperfect laws, and the tax bureau may also be understood as tax evasion.

In view of the fact that China's current tax system for employee equity incentives, including options, is still in its infancy, employees will face heavy tax burden and cash pressure when exercising their rights. Therefore, in most cases, on-the-job employees postpone exercising options to observe the development of the company and decide to wait for the (market) price, and then wait for the (Shanghai) market to sell.

But what should be done with the options of the resigned employees? Giving up the in-situ option, employees must feel unfair; Exercise is faced with high tax burden and cash pressure. The common practice in market practice is to solve the problem through a package agreement when employees leave their jobs, and comprehensively consider the factors such as employee salary, bonus, non-competitive salary, economic compensation, options and so on to form a package solution. Professional lawyers can also use the preferential tax treatment of economic compensation to promote a compliance plan acceptable to both companies and individuals.