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How to set-up your share option scheme - The Dos and Don'ts: A blog around how you can use the share option scheme options.

Yiannis Papadopoulos

Jul 4, 2022 14:40 am

Our previous blogs examined the benefits of sharing equity with employees and what that means to each company's growth.

We also discussed the best route to share ownership and compared the Ordinary Share with the Employee Share Options.

Now that you know the benefits ESO schemes can bring your company and what is the best route for your company, it is time to give your team share options.

In order to do that, firstly, you need to create an option pool. That does not mean that you need to create new shares at this point in time, but it does put a formal structure for your bespoke Employee Share Option Scheme tailored to your company, and from there, you can grant your employees share options.

So let us see the steps founders and directors can take to create an employee share option pool and the dos and don'ts.

But what is an Employee Share Option Pool or Option Pool?

An Employee Share Option Pool or Option Pool is bespoke and tailor-made to each company. It is the structure that company equity is granted to the employees.

Share Options are designed so that some achievements are to be made by employees to be granted options. The most usual milestone is the length of services followed by performance-related.

So effectively, if the conditions are met, employees are granted share options that they can exercise with the pre-approved terms attached to the option pool. Otherwise, the share options will be returned to the company. That stops employees from taking ordinary shares without contributing to the company's growth.

An option pool is effectively the terms and conditions that need to be met to get equity.

Dos and Don'ts around ESO Schemes

In order to create an effective Option Pool, some steps need to be taken:

1. Future thinking

It is super important for companies to keep their promises to their employees. Therefore, before creating the Option Pool, they need to consider the company's plans and strategy because the moment you distribute and sign the contracts, there should be no changes.

Also, creating a budget for the share options is critical as you will have a specific number of share options you can grant to your employees. Usually, in the EU, the norm is around 15% of equity to be distributed as share options. However, some countries have specific rules, e.g. in Greece, the SA companies can distribute only 10% of their equity.

E.g. Are you distributing share options only to the founders, the directors of the business, the wider management team, or to all the employees? Because you need the relevant resolutions from existing founders and shareholders.

2. New shares or existing shares

There are a couple of options here; once you understand how many share options you want to grant, then you need to decide if you are giving:

New shares (most common)

Existing shares from existing shareholders

3. The right amount of ordinary shares

Usually, when companies are founded, they have a few hundred shares. However, to make the share options effective, you need to subdivide existing shares into thousands or even millions to provide a small percentage of the equity to people, but also to be good enough to motivate and engage them.

4. Share Class

Every company needs to choose the share class the share options will have. That can be an existing share class or a new one.

You might want to avoid giving voting rights or dividend rights when you provide share options. However, there might be issues depending on the company type.

5. Authorisation

Once all the above steps have been decided, formal resolution from the board and existing shareholders is needed, where specific things are included and seeking authorisation:

Detailed Option Pool (including the milestones, vesting period etc.)

Size of the Option Pool

Wave pre-emption rights from existing shareholders (if you have not done that already)

The last point is essential, so you do not want your employees to get a dilution over their option shares, which can demotivate them and have a reverse effect on the benefits.

After authorisation, you are ready to distribute your share options, but that has much work to do by signing contracts, creating resolutions, keeping an up-to-date company valuation, vesting periods and notifying employees about their rights and many more complexities. Therefore you might need a partner through that journey; we offer a free consultation to ease those complexities and be next to you on the growth journey.