We sometimes get questions from Option Holders who are about to participate in an EMI scheme. Here, we've answered them.
What is an Option?
An option is a right to buy a share at a fixed price.
We use options instead of shares to reduce the tax liability on the individual that can come about on being given shares.
What is vesting, and when do my options vest?
Vesting is how you earn options. Just like you don't get your full salary on day one of a job, you earn over a period of time and/or milestones.
Your options will vest according to the Option Terms at the end of your agreement.
The vast majority of schemes are time based - meaning every month you vest more options.
What does it mean to exercise my options?
When you exercise your options, you are turning your option shares into actual shares - therefore, you become a shareholder at that time and own equity in the company. Pretty exciting!
If you want to exercise your options, check your option agreement to see when you can exercise and how many options have vested, then let the CEO know that you want to exercise.
Do I have to pay any money for these options?
You will have to pay the exercise price in your Option Agreement in order to turn the option into shares.
You do not need to pay anything on the award of the options.
What is a bad leaver?
A bad leaver is someone who is fired through breaking the law, or gross misconduct.
If you are a bad leaver, your options will lapse.
Is there a minimum period that I have to be with the company for these options?
There might be a "cliff" period in your option agreement. If you left within your cliff period, even if you were a good leaver, the option would lapse.
What tax is payable on the exercise of options?
This would depend on the EMI valuation that your company has agreed with HMRC. If the price that you have to pay for your options is the same as the HMRC value - then there's no tax on exercise. If the exercise price is below the EMI valuation - there might be other taxes to pay on exercise (normally income tax on the difference between the price you pay for the option and the EMI value).
What tax is payable on exit?
Provided that you have held your options for at least 2 years, then you'll only pay the 10% entrepreneurs relief rate on any profits that you make from your options. If it's less than 2 years, you'd pay the 20% capital gains tax rate.
What happens if I die?
Your estate has 12 months to exercise all of your granted options, if it chooses too.
If I vest my shares, do I get dividends or voting rights in the company?
No, just because they are vested, the shares don't exist yet. It's only after exercise would you ever have these rights.
However, your shares might not even have these rights after exercise - it would depend on the share class.
Most commonly, B Ordinary shares have fewer rights.
What happens to vesting during an exit/trigger event?
That would depend on whether there is "Accelerated Vesting" in your option agreement.
Most agreements have this - meaning that if you had a 4 year vesting agreement - and had only been working for 18 months when an exit takes place - you'll vest all of your options - because the team has been working towards that goal.
But there is usually a time that you have to work with the acquiring party if they require you to do so too.
How can I make money from an exit?
The acquiring party buys the shares that are under option. Most of these transactions are cashless - meaning that often you don't pay money to exercise your options, simply that the proceeds of the sale come to you, minus the exercise price.
How can I work out how much money I would make from an exit?
There are a few moving parts - the value that the company sells for and whether there are any other transactions for shares in the Company.
We've created an excel template, that you can use to predict your potential exit value.
Can I exercise part of my options?
For most schemes, you can exercise whatever has vested already, but not normally a part of it. Check our 8.6 in your option agreement to check that.
What is the Joint Election form?
It's a form that declares any tax burden arising from the exercise on you, and not your company.
This is only relevant if your exercise price is below the EMI value agreed at the time - placing anything employer National Insurance on you.
But regardless, it's good practice to have this in place in either case.