Most people don’t know that when you create a share option pool, you’re getting authority from your shareholders to issue share options from that pool for a certain amount of time, typically 5 years in the UK. After that, the option pool officially expires, and you need to obtain further permission from shareholders to issue options from the pool.
In the UK this isn’t something that most companies bump into very often because each time you do a funding round it will typically renew that authority, so the only companies encountering this would be those who are issuing options more than 5 years from their last funding round.
In this article we explain the background and how the SeedLegals platform helps you stay aware of the expiry dates, and lets you easily shrink, expand or renew your option pool as needed.
1. What is an expired option pool?
When you create or update the size of your option pool, you need to obtain permission from your shareholders. This grants you the authority to grant options from that pool for a specific period. Once that period ends you no longer have legal authority to issue options from the pool. To regain this authority, you simply need to renew it.
2. When does my option pool expire?
In the UK, your option pool expires 5 years after gaining shareholder authority to grant options.
3. How can I regain authority to grant options from an expired pool?
We've simplified the process, with the platform showing the necessary steps and creating the shareholder resolutions needed for this.
Step 1: Go to Share Options (or the Option pool tab on Shares) and select Update Option Pool
Step 2: Choose whether you want to renew with or without documents.
You’ll typically want to select “With documents”, where we’ll create all the legal documents needed.
But, if you’ve already created those documents elsewhere and you simply want to update the numbers on the SeedLegals platform, you can skip creating any documents.
Step 3: Select the date and total size you want the option pool to be.
The platform will do the maths for you and know whether to create resolutions to increase, decrease or just renew the option pool.
Step 4: Create and share the approval documents with your shareholders.
Step 5: Once you have the shareholder approval, click to approve the option pool update.
4. If you’ve already obtained shareholder approval, not on SeedLegals
If you used a lawyer to create the necessary documents, or your last funding round wasn’t on SeedLegals and the authority was provided there, then you can skip the documents here and select to just update the numbers on SeedLegals.
5. If I updated my pool with external documents, where can I find the expiration date?
UK example: Finding the expiry period in the shareholders resolution
The date should be 5 years after the passing of the resolution in the section describing the ‘Authority to allot options’:
6. Not planning to grant more options in the future?
If you have no plans to issue further options, you can remove the expired options from the pool since you no longer have the authority to grant them.
When you create an option pool, its effect is to dilute existing shareholders by the size of the option pool. If you never issue any shares after that and then later on cancel the option pool, no ‘damage’ has been done, the dilution was simple a paper exercise that is now undone. But, if you have issued new shares after the creation of an option pool, those shares will be priced to include the size of the option pool, and will serve to dilute the existing shareholders more than had the option pool never existed.
So be aware that while it makes sense to allow an option pool to expire if it’s not being used, it’s better to not have created it in the first place, or created a smaller pool.
If you have any questions, please reach out to our support team, we’re here to help.