When Talent Requires Motivation: A Story of Successful Implementation
In the world of IT industry, the battle for talent is becoming increasingly fierce. This especially concerns Ukrainian developers, who are renowned for their expertise worldwide. But how can an American company not just attract, but also retain the best specialists?
The secret is simple, but implementation is complex: give people the opportunity to become true business owners. Not just promise a “bright future”, but actually share company stock. Sounds simple? Try doing this when your employees live in Ukraine, and the company is registered in the USA!
A fast-growing technology company from Delaware faced exactly this dilemma. Having ambitious plans for scaling and future IPO, the founders understood: without an effective motivation system, the best Ukrainian developers could simply leave for competitors with better offers.
Challenges That Seemed Unsolvable
When You Want to Do Good, But Laws Get in the Way
Imagine the situation: your best developers work remotely from Kyiv, Lviv, Kharkiv. You want to give them company shares so they feel like true partners. What could be simpler?
Now add to this equation American corporate law with its SEC requirements, Ukrainian tax legislation, NBU currency regulation, and various forms of cooperation – from full-time employees to individual entrepreneurs (FOP). A headache is guaranteed!
First Challenge: Jungle of Two Legal Systems
PandaDoc management came to us with a simple question: “We want to give our Ukrainian guys and girls shares. How do we do this without violating laws in either the USA or Ukraine?”
Behind this “simple” question lay a whole series of problems:
- How to combine US corporate law requirements with the Ukrainian Tax Code?
- What to do if some people work as full-time employees of a subsidiary in Ukraine, while others are engaged as FOPs?
- How not to scare people with the complexity of tax consequences?
Second Challenge: When Buying Shares Becomes a Quest
One thing is to give a person the right to buy shares. Quite another is to actually let them do it under Ukrainian currency regulation conditions.
Imagine: an employee finally matured to exercise their options and buy shares. And then a real odyssey begins:
- Need to go to the bank with a pile of documents
- Bankers look at you like an alien: “You want to buy WHAT?”
- NBU has its limits and requirements
- Every document needs to be translated and apostilled
Third Challenge: What If the Company Changes?
The IT world is volatile. Today your company is a startup, tomorrow – a unicorn, and the day after tomorrow it might be bought by Google or Microsoft. What happens to employee options? What if the company goes IPO? What if it’s restructured?
Employees shouldn’t lose their rights due to corporate decisions beyond their control.
Our Approach: From Chaos to System
Stage 1. Untangling the Legal Knot – or “Measure Seven Times, Cut Once”
What Is a Stock Option Anyway?
Before dealing with legal nuances, let’s clarify the basics. Employee Stock Options are not a free gift, as many think. It’s a right (not an obligation!) to buy a certain number of company shares at a predetermined price by a certain date.
The most beautiful thing about this is that the price is usually lower than market price. Imagine: when you were given the option, the share cost $10, and three years later it’s already $50. You can still buy it for the same $10! The $40 difference is your profit.
Understanding American Types of Options
In the USA, there are two main types of employee options, and the difference between them is not just a legal formality. It’s a question of how much tax your employee will pay and when.
Let’s break down this difference with a simple example:
| Question | ISO (Incentive Stock Options) | NSO (Non-Qualified Stock Options) |
|---|---|---|
| Who can receive them? | Only full-time employees (strict Americans!) | Anyone – employees, FOPs, consultants, even the director’s wife |
| How much can be given per year? | Maximum $100,000. Everything above automatically becomes NSO | Unlimited (well, almost) |
| When to pay taxes in the USA? | When selling shares (if following the rules) | When buying shares (exercise) |
| Can the company write off expenses? | No, it cannot | Yes, it can reduce taxable income |
| How much time to buy after termination? | 3 months (strict!) | Usually until the end of option validity |
Why Only NSO Works for Ukrainians?
There’s an interesting nuance here. Most of our Ukrainian IT talents work as FOPs – it’s convenient for both them and companies. But American tax legislation is strict: ISOs can only be given to official employees. FOPs under American law are contractors, i.e., “third parties”.
So, for Ukrainians working as FOPs, only NSOs are available. But that’s not bad! NSOs are more flexible, and for the company, they’re even more advantageous from a tax perspective.
Legal Analysis – Assembling a Puzzle from Different Countries
Now that we’ve figured out the types of options, it’s time to dive into legal details:
- Delaware State Corporate Law – the most liberal in the USA for business, but with its peculiarities
- US Federal Securities Laws – here the SEC doesn’t joke, especially when it comes to reporting
- Ukrainian Tax Code – our native, but sometimes unpredictable
- USA-Ukraine Double Taxation Avoidance Convention – a real treasure trove for tax optimization
Stage 2. Creating Documents That Actually Work
Most legal documents resemble spaceship instructions – technically correct, but absolutely incomprehensible to ordinary people. We decided to break this tradition.
Stock Option Plan – The Constitution of the Option Program
This is the main document that establishes the rules of the game for everyone. Here we wrote not just dry legal formulations, but real principles by which the program would live.
What makes a good option plan special? It should answer employees’ most painful questions:
“What happens if I go on maternity leave?” – We specified that this is a “good leaver”, rights are preserved.
“What if I get sick and can’t work?” – Also a “good leaver”, plus the possibility of transferring rights to heirs.
“What if Google buys us?” – We detailed all corporate event scenarios.
Individual Stock Option Agreement – Personal Approach to Each
Each employee received an individual agreement. Why not make one standard contract for everyone? Because a Senior Developer with 5 years of experience and a Junior developer have different value to the company, and this should be reflected in the number of options and conditions.
Vesting Schedule – The Art of Gradual Treasure Revelation
Vesting is the process of gradual “maturation” of your stock rights. Sounds complicated? Actually, it’s like opening a treasure chest in parts.
The standard schedule looks like this:
- First year (cliff): you cannot buy any shares. This is like a probationary period – the company sees if you suit them, and you see if you like the job.
- End of first year: 25% of your options “unlock”. Hooray! You can buy a quarter of the promised shares.
- Next 3 years: monthly, a few more options unlock. After 4 years, you have access to all 100%.
Why exactly this scheme? The first year shows both sides the seriousness of intentions. And gradual revelation motivates staying with the company longer.
Notice of Stock Option Grant – Your Ticket to the World of Shareholders
This is a document that announces: “Congratulations! Your options have matured, now you can buy them!” Received such a notice? Time to celebrate and make decisions.
Exercise Agreement – When Words Turn into Actions
This is the last document in the chain – an agreement for the actual purchase of shares. Here you specify how many shares you want to buy right now (not necessarily all available), and the payment process is launched.
Stage 3. Tax Planning – Turning Headaches into Advantages
When people hear “taxes on stock income”, many start to panic. “How much will I have to pay? Won’t they take everything?”
We decided to dispel these fears with concrete numbers and strategies.
Ukrainian Tax Realities – Not as Scary as It Seems
Let’s examine a concrete example. Suppose Alexey received options for 1000 shares at $10 per share. Three years later, shares grew to $40, and he decided to sell all shares.
What happens step by step:
- Option exercise: Alexey buys 1000 shares for $10 = $10,000. At this stage, there are no taxes in Ukraine! This is just an investment.
- Share sale: Alexey sells 1000 shares for $40 = $40,000. Profit: $40,000 – $10,000 = $30,000.
- Taxes in Ukraine: 18% income tax + 5% military levy = 23% of $30,000 = $6,900.
- Net profit: $30,000 – $6,900 = $23,100.
Dividends – Another Pleasant Opportunity
If the company pays dividends, the rates here are even more pleasant: 9% income tax + 5% military levy = 14% total. This is less than tax on bank deposits!
Secret Weapon – Double Taxation Avoidance Convention
Here begins the real magic of tax planning. If taxes were already withheld from your income in the USA, you can count them in Ukraine! That is, not pay twice for the same income.
Income will need to be declared.
Stage 4. Currency Regulation – From Bureaucratic Nightmare to Streamlined Process
The NBU and its currency requirements can frighten even experienced businessmen. But we found a way to make this process as simple as possible.
Documents for the Bank – Standardizing Chaos
Initially, each employee went to the bank with their own set of documents, and each banker looked at them like a curiosity. We changed this.
Created a standard document package:
- Option agreement and Exercise Notice – show the bank that this is a legal operation and reveal its essence
- American company certificates – Certificate of Good Standing and Certificate of Tax Residence
- Translations and apostilles – everything according to Ukrainian legislation rules
- Income certificates – confirm the source of funds for investment
Stage 5. Technical Magic – Carta as Command Center
Carta is not just a platform for managing shares. It’s a real command center that makes complex processes simple and transparent.
What makes Carta indispensable:
Automatic vesting tracking: Forget about Excel tables and calendar reminders. Carta itself tracks when you get new options for exercise.
Transparency for everyone: Each employee sees their progress in real time. How many options are already available, how many are still “maturing”, what’s the current share value.
Simplicity of exercise: When you’re ready to buy shares, just a few clicks in a convenient interface are enough. No paper forms and faxes.
Navigating Carta – simple as 1-2-3:
- Holdings tab – your main dashboard with all option information
- Details tab – details about the number of options and exercise price
- Vesting Schedule tab – schedule of your option maturation
- Exercise Periods tab – timeframes when options can be exercised
Solutions That Changed the Rules of the Game
Employee Protection – Investment in Long-term Relationships
“Good Leaver” vs “Bad Leaver” – Justice Above All
Life is unpredictable, and a good option program takes this into account. We detailed what happens to options in different life situations.
“Good Leaver” – when circumstances are stronger than us:
- Maternity leave (even dad has the right!)
- Serious illness
- Military service (especially relevant for Ukraine)
- Death or disability
In all these cases, option rights are preserved fully or partially, depending on circumstances.
“Bad Leaver” – when the employee is at fault:
- Termination for labor discipline violations
- Disclosure of trade secrets
- Moving to a direct competitor with contract violation
Transfer of Rights to Heirs – Care for Families
An especially important issue for older people or those with serious health problems. We prescribed the possibility of transferring option rights to spouse and children. This significantly increases the value of options in employees’ eyes.
Corporate Events – Ready for Any Changes
The IT world is volatile. Today your company is a private startup, tomorrow – it might become part of a large corporation or go public. We anticipated all main scenarios:
During merger/acquisition:
- The new company takes on all option obligations
- Or pays fair monetary compensation
- Or offers equivalent options in the new structure
During IPO:
- Options automatically convert to public stock options
- All sale restrictions remain according to regulatory requirements
During stock split/consolidation:
- Number of options changes proportionally
- Exercise price is adjusted accordingly
Company Protection – Smart Restrictions Without Abuse
Transfer Prohibition – Options Not for Speculation
Options cannot be sold, gifted, or transferred to a third party (except heirs). This guarantees that the program works exactly as an employee motivation tool, not as a speculative instrument.
Right of First Refusal – Control Over Share Capital
If an employee wants to sell their shares after exercising options, the company has the right to buy them first at the same price. This protects against unwanted minority shareholders.
Clawback – When Trust Is Broken
In cases of serious violations (fraud, embezzlement), the company can buy back shares from a former employee even after their purchase. This is an extreme measure, but it must be specified.
Unexpected Program Bonuses
Team Effect: Employees began more actively discussing company strategy, proposing ideas for product improvement. They started thinking like owners, not employees.
Recruitment Improvement: Options became a powerful recruiting tool. Candidates often agreed to slightly lower salaries in exchange for participation in the option program.
Business Transparency: So that employees understand the value of their options, the company became more open about financial indicators and development plans.
Lessons That Changed Our Approach to Corporate Law
What Makes an Option Program Truly Successful
Lesson #1: Simplicity in Complexity – The Highest Mastery
Even the most complex legal constructions can be explained in simple words. The main thing is that people understand not only “what” they receive, but also “why” it’s needed and “how” it works.
We realized: if an employee can’t explain the essence of options to their spouse in 5 minutes – it means we did our job poorly.
Lesson #2: Transparency Breeds Trust
No hidden conditions, no unpleasant surprises in fine print. Everything should be honest and open. When people understand the rules of the game, they play better.
Lesson #3: Flexibility Within the Law – The Art of the Possible
Legislation provides a framework, but within this framework, you can create very flexible and beneficial conditions. The main thing is to know where these boundaries lie.
Lesson #4: Human Factor Weighs More Than Legal Perfection
The most beautiful document from a legal standpoint is worthless if people don’t understand how to use it.
Risks Worth Considering (and How to Minimize Them)
Regulatory Changes – A Constant of Instability
Legislation changes, especially in Ukraine and especially in the tax sphere.
How we solve this:
- Monthly monitoring of legislative changes
- Flexible formulations in documents that allow adaptation to changes
- Constant communication with tax consultants
Human Factor – When Emotions Are Stronger Than Logic
Not all employees immediately understand the value of options. Someone wants “live money now”, not “possible money later”.
How we work with this:
- Regular educational sessions
- Concrete examples and cases
- Individual consultations for each employee
What This Means for Ukrainian IT
This project became a catalyst for the entire industry. Other American companies saw that options for Ukrainian employees are not a theoretical possibility, but a real, proven tool.
Over the past year, 5 more international IT companies approached us with similar requests. Ukraine is becoming not just an outsourcing center, but a true partner in creating global technology products.
Ready to Create an Option Program for Your Company?
Dextra Law – your experts in international corporate law. We don’t just know the laws – we know how to make them a tool for achieving your business goals.
Contact us:
- Free consultation to assess opportunities
- Detailed analysis of your situation
- Step-by-step plan for implementing an option program
- Full support from idea to implementation
