There is a hike noted in the foreign individuals and companies seeking advice from the China lawyers on the possible steps they can take when a Chinese company offered them stock options instead of cash payment. The exchange of stock for cash is a new culture in the Chinese market. Here we are offering a complete guideline on how swapping of stock for pay works and why foreigners should stay away from it.
An overview of stock for cash phenomenon in China-
Most of the times, it is in the Chinese IT sector where companies offer stock instead of cash option to their foreign employees. This swapping of stock for pay is existed in the USA, but the scenario in Chinese tech sector is totally different. Chinese tech start-ups require overseas talent for their growth and while recruiting foreign nationals, they offer stock options to them rather than paying hard cash. Their argument to entice the foreign employee is, just because they are a start-up they can’t offer you cash, but after their company goes public in the stock exchange and enlisted as an IPO, the stocks will soar in price and the foreign employee can cash in their stock.
The bad news is, this is completely a fake practice as no person from another country can own stake in a Chinese domestic company that is not already listed on a stock market. In China, a foreigner can not have the right to own shares of Chinese domestic company. He/she is not even eligible to become a nominee shareholder.
In spite of the fraudulence, it is noted by the China lawyers that often foreign employees lured by the stock offer and accept it. This is seen most commonly in the fin-tech sector.
There are two primary reasons why Chinese companies adopt this cheating option-
- By providing stock options to their foreign employees, Chinese firms don’t have to bear hefty salary package. And since the founders stock/stock option scheme was void from the start, there is nothing the foreigners can do to enforce their rights in China, because they never had any such rights.
- It enables them to lure the employee for huge money and making excellent use of their talent for building up uber-cool software product that may cost them thousands of dollars if built in an honest way.
What China lawyers are suggesting to avoid the stock for cash pitfall-
By reading out the above portion of the article you may feel every company that offers stock for pay option in China is fraud. But it is not the truth, in many cases, it has been noted that the Chinese firm was completely ignorant about the legal irrationality of stock option scheme in China and their real intention was not bad. Whatever the reasons may be, China lawyers strongly recommend foreign individuals and companies not to accept stock options or stock in a Chinese company in place of employment compensation or payment for services.