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… pay attention to this bit … there’s often no reason to buy shares under an option until just before a sale. 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?
What do founders need to know about employee share options?
You have four 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 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?
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.