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A share option is a way a company can offer certain employees the right to purchase shares at a predetermined price, known as the “exercise price”. Usually, this is after a certain period of time or when specific conditions are met. This provides employees with the potential to benefit from the company’s growth and success by offering them the opportunity to buy shares in the future at a price set when the option is granted. So, when they buy, the shares are at a discounted price.
This gives the potential for significant financial reward if the company does well because, if the company performs well, the value of the shares increases.
There are six things to consider about how they work:
- Granting Options: The company grants the employee the option to buy a certain number of shares at a set price which is set at the value of the shares on the day the options were granted.
- Vesting Period: Often, the employee must wait for a specific period, which is called the vesting period before they can exercise and buy the shares. This encourages employees to stay with the company.
- Performance Conditions are where some options have performance hurdles before they vest and can be exercised, this encourages productivity and success.
- Exercising Options: Once the options are vested, the employee has the right to exercise them, which means buying the shares at the predetermined price, regardless of the market value at the time of exercise. It’s optional, so if the value has gone down, they can choose not to exercise.
- Trigger event: this is the most common type of option we see and work. They are only exercisable at the time there is a total sale of the company. These types of options are designed to encourage employees to help the existing shareholders, often the founders, work towards and benefit from an exit event.
- Selling Shares: therefore, after exercising the options, employees may be able to hold their shares until a sale and can sell the shares at the then current market value, potentially making a profit if the market price at sale is higher than their exercise price.
If you need help with buying or selling your business, or understanding how a share option scheme could work in your company, contact our Corporate solicitors by email or call +44(0)3333 231580.
