First, if you're wondering how options differ from shares then have a look at this article, shares versus options: what's the difference?
We always recommend options to your employees, advisors and consultants for a few reasons:
- Options forward vest, you can issue options when they complete the work and you won't have to complete a share buy back / share transfer if you end the contract in the vesting period.
- You can choose when the options are exercised as a Company allowing you to keep them off the Cap Table so you don't have to revert back to them for shareholder votes and you can keep the voting power within the founding team.
- Options are tax efficient if you are issuing them to employees because they can claim through the EMI scheme.
If you're looking to issue options you first need to have an options pool in place. An options pool is a ringfenced percentage of your share capital which you have authority from your shareholders, board, investors to allot.
In this article below I will go through how to create an options pool in a funding round, outside of a funding round and how to represent that on SeedLegals.
How to create an options pool in a funding round.
If you're a venture backed Company and you're looking to grant options and issue options we always recommend creating an option pool in a funding round. This is the easiest way to create an options pool, you can do it with the click of a button through the SeedLegals funding round products, and it is often expected from investors.
So if you're planning on doing a funding round soon, create your options pool as part of the round! Have a look at this article on how to size an employee option pool, using data from over 200 funding rounds.
How to create an options pool outside of a funding round.
You may want to create an options pool outside of your funding round, maybe you don't plan on raising investment for a while (or ever) and you have some advisors/consultants/employees that you want to grant options to immediately.
1. Check what authority you need to create an option pool.
Make sure you check your current Articles of Association and Shareholders Agreement to check what authority you need to increase your company share capital and create an options pool.
Usually you will need a Shareholders Resolution, which gives authority to allot the extra shares and also disapplies other shareholders preemption right on this share issuance.
You may also need to get investor consent to increase your company share capital, this is usually detailed in your Shareholders Agreement (you will only have this if you have already done a previous round and have external investors).
2. Circulate the resolutions and get the authority
Once you know what documents you need to approve the options pool creation, then circulate them for signature. Once the shareholders resolution has been signed this will need to be filed at Companies House.
If you need help with this documentation drop us a message through our chat bubble on the bottom right and we would be happy to help!
3. Update the SeedLegals platform
Once the consent has been granted by the shareholders you can go to the “Shares” tab on your SeedLegals dashboard, click the three black dots in the top right corner, then Add Historical Round.
Name your round Option Pool, the valuation and the price per share can be £0 (as these values are not applicable outside of a funding round). Under “New Option Pool share options", please enter the number of options you have been given permission to ringfence. Click done. (If you want to calculate the size of the pool based on a percentage, n, then take your total number of fully diluted shares and multiply by n and then divide by 100-n).
If you now go back to Cap Table, and click Event you should see the option pool has been created as an event on your Cap Table.
Congratulations, you have just set up an option pool!
For more guide on everything options and option scheme related visit our help centre.