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What is the Employee Share Options Scheme and How does it work?

Yiannis Papadopoulos

Mar 17, 2022 8:08 pm

Nowadays, there is an increased interest in Employee Share Option Schemes (ESO Schemes), and many companies of any size across the world started incentivising their team members with ESO. The USA started well before the rest of the world, and it was mainly for tech companies, but that has changed; Europe is catching up, and any type and any size of business now use this tool to incentivise their talented people.

But what this ESO Scheme is exactly?


In simple terms, a company is sharing ownership among their talented people. You can reward any key person with equity in the company or all your employees. All that, of course, are happening for many reasons (which we will explore the next time). Happier employees, attracting and retaining the best talent, increasing the productivity and performance of the people, improving employee engagement, relieving cashflow pressure, and increasing the overall business value.

Choosing whom to give equity to is just as important as selecting the suitable scheme of sharing ownership, which is bespoke for your needs and where your company wants to go. There is where things are getting complicated as there are plenty of options to choose from, and each one has pros and cons.

How do employee share schemes work?

Literally, you can create any share scheme that fits your needs. Before designing your bespoke scheme, you should think about your own motivations for giving people equity:

  • Do you want to give your people shares right away, or would you like them to buy at some point in the future?
  • Do you want to offer shares to your management team only or to all of your employees?
  • Do you want to attach the shares with performance milestones?
  • How do you see the future of your equity after the people with shares/options leave your company?
  • How big is your company, both in terms of team size and asset value?
  • How would you feel if your people had ordinary shares with voting rights?

Answering the questions will help to get to the bottom of what your future looks like and the things you are trying to accomplish by launching your bespoke share options scheme.

Also, by answering the questions, you will be able to whittle down your possible choices and introduce the best working share scheme for your business.

There are two ways of sharing ownership: Shares and Share Options, in which there are several scheme types that you can build.

So, before we explain how share options work, it might be helpful to talk about the differences between shares and share options and why you might choose one over the other.

Difference between Shares and Share Options


There is always the option to share ownership with actual shares at any given moment or choose to issue share options that provide the right to exercise the share options at some point in the future (becoming shares either then or at the time of an exit event).

If you give shares now, you can provide ordinary shares (the typical shares of businesses that the owners and investors hold) or Growth Shares.

By doing that, you are giving your talent the following:

  • You can offer shares to anyone.
  • You are providing your talent actual ownership immediately.
  • Recipients can benefit from dividends directly.
  • Recipients can receive voting rights.

Share Options

Share Options allow recipients to buy a share later (in small batches or full packages after a vesting period) at a pre-approved price.

By doing that, you are giving your talent the following:

  • Share Options can be granted to people that work permanently with the company.
  • Share Options are not real shares (meaning they don't have the above benefits) until exercised when they are becoming shares.
  • Share Options create a tax liability on exercise for the Employee; depending on the company structure, it might be payable on the same tax year or deferred until the sale of the share takes place.

Example of Share Options

Let's see now how the Share Options work in the following simple example:

After taking the Annual General Meeting, Company A decided to use the share options scheme to incentivise their employees to increase their overall business value. Among the employees that participated in the scheme was employee B.

Company A has €10.000.000 Net Assets and 1.000.000 shares.

The scheme suggests that it will provide a Share Options Scheme of a total of 100.000 shares for €10 per share (the limit is 10% of the total equity of the business). The vesting schedule will be 5% per quarter and allow you to exercise up until 3 years after the vested date.

Company A started circulating the options and gave on 01.01.2020 (Grant Date) Employee B 1.000 share options as per the above schedule.

At this point, the Employee has no shares; employee B has only the right that could potentially exercise the vested share options to become a shareholder.

On 01.01.2021, company A had Net Assets of €15.000.000, meaning €15 per share. Employee B has 20% of his 1.000 share options vested equals 200 Share Options. Meaning at this stage, Employee B can exercise the rights to buy the share options and become a shareholder. Employee B decided to exercise the rights and paid the company €10 * 200 = €2.000 for getting in exchange the 200 shares and not €15 * 200 = €3.000 that is the value per share of the company at the time of exercise.

At this point, the company has 1.000.200 total Shares.

On 01.01.2022, Company A had Net Assets of €30.000.000, meaning €29.99 per share. Employee B has another 20% vested share options but decided not to exercise.

On 01.01.2025, Employee B needs to decide if will purchase the share options vested on 01.01.2022 (as per above), or those will be released back to the company due to the share options scheme rules. If Employee B chooses to exercise his/her rights, the same €2.000 (200 shares * €10 per share) will be payable to the company in exchange for another 200 shares.

That is just a simple example of how the Employee shares option scheme works.

* We provide a free consultation to any Greek SA/PC (AE/IKE) company to help you understand the processes and the benefits of sharing ownership with your talent. Book your free discovery video call today.