The Americans call them Stock Options. We call them Share Options. Either way, they let you give employees, consultants and advisors the right to buy shares in the company in the future, at a specified price. Options are unissued shares.
To be able to give share options to your team you need to do three things:
Create a Share Options Pool
- Create an Options Plan (aka scheme)
Create the option agreements for your team (note for EMI options you will need a valid EMI valuation first)
A Share Options Pool is simply getting the permissions of existing shareholders to reserve shares that can be created and issued in the future. No shares exist when the options pool is created, and there's nothing to file with Companies House. Think of them as virtual shares, waiting to be created when an employee exercises their share options.
But, importantly, creating this reserved pool of shares dilutes the existing shareholders. As an example, if there were 100 shares in the company, and you create an options pool of 10 shares, the shareholders now own 100 out of 110 of the what's known as the fully diluted capital in the company (which just means the shares plus the reserved options pool).
Because creating a share options pool dilutes the existing shareholders, it therefore needs the consent of the shareholders to create that pool of reserved shares. And the most convenient time to do that is as part of a funding round, where the shareholders in any event need to vote to approve the creation of new shares for the new investors.
And that's why you'll usually hear people talking about "a 10% pre-money options pool" - i.e. they're reserving an options pool that's equal to 10% of the shareholding in the company prior to the funding round (our SeedLegals data shows that around half of companies create an options pool in their first round, and the most common size is 10% pre-money). By creating the option pool just before the new investors get added in the new round, it's only the existing shareholders who get diluted by the options pool... which is generally what the new investors are going to insist on (you're promising them a particular % of the company for their investment, if you then tell them, oh, it's actually 10% less than that, you got diluted already, well, that's not something they're generally expecting, unless by prior agreement). Here is an interesting article on how to size an employee option pool.
Now you've decided how big the option pool is going to be, simply hop on our platform and go to the Option Pool tab.
Create a new pool if you haven't yet received any of the necessary consents from shareholders, investors, and board members. We'll provide you with those docs.
Update Option Pool if you have already received those consents and you're ready to proceed with the scheme. Then you're all set!
When creating a new Option Pool:
1. You may need investor consent to create the Option Pool, please check your Shareholders Agreement or Articles for this. If no consent is needed, you can skip the investor consent form.
2. Your Board of Directors must approve the pool so please hold a Board meeting and sign the Board Resolution provided.
3. As mentioned earlier, the existing shareholders must approve the pool. It is important therefore that at least 75% of the voting shareholders sign the Shareholders Resolution. Please file this resolution to Companies House within 15 days.
4. Hit 'approve'. This will archive the documents and ensure no changes are made.
Okay, so having created a share options pool and then promised share options to team members in their team agreements, there's one more thing to do, which is to create a Shares Options Scheme. The scheme rules govern how the options vest and when they can be exercised.
Importantly, whenever you give someone shares or share options in return for work they do (as opposed to for a cash investment), those shares or share options should always be granted according to a share or share option vesting schedule. That means if the person leaves within, say, 3 years, they need to give back some fraction of the shares or lose the unvested share options. It's really important you do this, as without a vesting schedule if a founder, employee or advisor leaves the company they'll still own a chunk of the company's equity - which not only will be personally really annoying to the remaining team members, but if it's a big % of the equity can make the company un-investible in the future.
You can set up an EMI Options Plan on SeedLegals, dramatically better, faster and cheaper than the usual several thousand Pounds charged by accountants.
Log in to your Seedlegals account to get started or book a free demo with one of our option scheme specialists.
For more guide on everything options and option scheme related visit our Help Centre.