What’s the point of employee share options?
Employees with shares perform better. That’s because they can see that if they generate more sales or save costs, there will be a direct impact on their own wealth.
Employees and founders benefit when employees get shares.
Why options, not a gift of shares?
If a founder simply gifted an employee shares, they would be treated as a bonus with high tax. The employee could be stuck with a tax bill they couldn’t afford.
An option is a right to buy shares at a fixed price, in a period specified by the founders. If the purchase price is artificially cheap, there’s still tax to pay, but at least the employee can decide when to pay it, by choosing when to buy.
And… this bit’s important… there’s often no advantage to using an option straight away. The purchase price is the same whether you buy the shares when they’re worth pennies at the start, or worth thousands just before a sale! So why pay the purchase price or tax until you absolutely know the shares subject to your option can be sold immediately for a good price? The financially savvy thing to do with an option (assuming it costs nothing to hold it) is to hold it unexercised until an exit.
What do founders need to decide about employee share options?
You have five big decisions to make:
- the total slice of the company to give away
- the total slice of the company to give to each employee
- the purchase price to set for each option
- when each option can be used to buy shares (e.g. must the employee wait until they’ve completed a minimum length of time in employment, or hit performance targets)?
- what happens when the employee leaves? Do they keep all, some or none of their options? Do they keep dividends and shares resulting from their options?
What do employees need to know about employee share options?
Employee share options are almost never a bad thing, but are they worthwhile?
How much are you likely to make from your option based on the founder’s projections? Do those projections seem realistic?
Even if those projections are realistic, how likely are you to receive anything? What happens to your shares if you leave? If there are minimum periods for employment or performance target, how likely are you to achieve them?
Some helpful content
How much to give away:
Setting the purchase price and valuation:
When each option can be used (vesting):
What happens when the employee leaves:
Still have questions?
Granted can answer them. We have the UK’s most experienced team of employee share option specialists, with the efficiency and great value of an online service.