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Understanding employee stock options

Tina Nyamache

Hi again! We bring good and bad news.

The good news is that employee options are beneficial for building a company, anywhere and can work in any tech ecosystem.

The bad news is that the laws on how to create and tax employee stock options across many African countries is not clear. Our lawyers have done the research.

This article breaks down some basics about what are employee options, how they work, and how you can use them. We’ll also briefly cover how they could work in some African countries.

Why should you issue employee stock options?

Many early-stage companies won’t have the capital to hire a reliable and experienced team at the beginning of the idea. You need more than money to get that first strong team to join you and your idea. An easy way of doing that is issuing shares to them, in the form of employee stock options.

On our last blog on valuing your startup, we talked about the importance of having a strong team and how it can make the value of your company go up — putting you in a better position to negotiate with potential investors. In the venture capital space, startups with option pools are considered safer bets, because they will be able to attract and retain, talent. For this reason, you will be asked by most VC funds to show your company’s option pool. In other words, if you plan on fundraising, you will need one or have a plan to set aside an option pool before your next round of funding.

What are employee stock options?

Employee stock options are a special kind of shares offered to employees and consultants. The idea is that you’re offering stock options because you may not be able to afford to pay their full salaries in cash. The employees are motivated to work hard to grow the company. When the employee leaves or the company is acquired, everyone could be offered a pretty big cash payment in return for holding the stock options and believing in your company’s growth.

Employee stock options are useful because they distribute ownership across the founders, investors, employees and contractors with one common goal. It encourages everyone to stay with the company longer and grow everything — the product, customer base and revenue.

How do stock options work in Africa?

Stock options are simple — but we’ll have to write an entire article on that topic to get it right. For now, we’ll focus on a more straightforward topic — how stock options work in Africa for private technology companies.

And… the truth is, no-one knows. There aren’t clear rules and regulations for how employee stock options can work for private companies across the continent. In Kenya, for example, there is a pretty clear regime for how to create and maintain employee stock options for public companies listed on the Nairobi Stock Exchange. There is no transparent process for private companies (not listed on NSE).

It is not clear how to tax stock options across the continent. For example, if a U.S. incorporated company issues stock options to a Ghanian employee, would that mean that the employee is now expected to pay taxes in Ghana? Or in America?

Besides, there is no clear way to create value for employee stock options before they’re issued. For example, in Delaware, companies must first create value for the price per share of each stock option by doing a 409a valuation.

In Africa, without clear rules and a process to value stock options — it’s unlikely we’ll see employee stock options anytime soon issued by African jurisdictions.

There is no equivalent 409a valuation for stock options in Africa.

But who knows … it sounds like someone may have to create one someday …

We can do it.

Until the next post! #keepbuilding.

DISCLOSURE: This communication is on behalf of Raise Impact Technologies Inc. (“Raise”). This communication is not to be construed as legal, financial or tax advice and is for informational purposes only. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Raise does not assume any liability for reliance on the information provided herein.

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