Valuable Business

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David Norris

ex-Partner @ Forward Partners

For first time entrepreneurs, there's a million things to think about.

At some point, the question of stock option plans will come up. There's a war for the best talent, especially in London. Having a tax efficient stock option scheme is one of the few weapons that startups have in that war. Here's a few basics to get you orientated on share options. If you need detailed advice, you'd need to contact an expert.

ESOP

First of all you will need an ESOP (Employee Stock Option Plan) written up and approved by your board. You'll normally need a good lawyer to draft this. There are specialists. Forward Partners has a draft ESOP standard document that can be used by early stage companies that we invest in.

EMI scheme

You'll probably want the ESOP to be under an EMI scheme. (Enterprise Management Incentive). This is good for UK early stage companies because there is no tax burden on recipients of stock option grants when they exercise their options. The only tax burden is on realisation of the gain (at exit) - capital gains tax. Note that EMI scheme options can only be granted to full-time employees and the earliest possible granting date is the first date of employment. There's a maximum value that can be granted to any individual and there are eligibility criteria for companies to meet.

Valuation

Before you grant any options you'll need to get a valuation that you use for tax purposes from HMRC. Use a specialist lawyer or your accountant to make this application. Keeping the valuation low maximises gains for employees and therefore extends the impact of your stock option pool. A valuation once agreed usually lasts 60 days before it expires.

Documents

For each person you grant options to, you'll need to issue them with copy of the ESOP an option granting agreement (OGA). The OGA contains the vesting schedule . A typical vesting schedule for a UK venture backed startup would be over 4 years. After the end if year one, 25% of the grant vests (the first tranche), the rest would vest in equal amounts (6.25%) every quarter (the remaining tranches). Alternatively you could vest over 3 years. You could also vest the final tranches monthly instead of quarterly.

Registration of grants

The option grants need to be registered with HMRC within 92 days of being granted. Failure to do so would mean the employee not receiving the tax advantage. This must be done through the ERS Online Service. With all of the above be sure to keep detailed records in your data room of who has been granted options and when together with proper files. If you don't you'll regret it down the line. It's important to do all of this right first time.

Further reading

David Norris

ex-Partner @ Forward Partners

Scaleup operations expert, ex-COO of HouseTrip, Bookable and IOVOX, previously eCommerce and Website Operations Director at Expedia.

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