Enterprise Option Scheme

[SEW247]

Been having a look to see how this works and I know not a better place to ask than the HPC Forums

My GF works for a small company and she has been allocated some share options as it is a small startup company. She's been sent the HMRC "Enterprise Management Incentives' form plus an "Option Agreement" from her company which details it all as below:

- "Maximum number of shares over which this option is granted" >>>> 109

- "Class of Shares" >>>> Ordinary Shares of £0.01

- "Exercise price per share" >>>> £0.01

- "Actual market value per share at date option was granted" >>>> £22

My questions:

- Does anyone know how these things work?

- I presume this means she has 109 shares out of a total of shares in the company?

- It doesn't mention the total number of shares in any of the documentation - Does she need to find this out?

- If there are 100,000 shares then her gains in the event of the company being sold for £10 million would mean she gets 109/100,000 x £10 million? i.e. £10,900 (or am I completely wrong)

- Does the £22 mean that her capital gains would be £10,900 minus (22 x 109) = £8,502 - on which she would pay 28% GCT?

Does anyone have any experience with these things or could point me in the right direction or let me know any other questions that she needs to ask before signing the agreement?

All advice much appreciated as always - thanks!

[Nicnic]

Been having a look to see how this works and I know not a better place to ask than the HPC Forums

My GF works for a small company and she has been allocated some share options as it is a small startup company. She's been sent the HMRC "Enterprise Management Incentives' form plus an "Option Agreement" from her company which details it all as below:

- "Maximum number of shares over which this option is granted" >>>> 109

- "Class of Shares" >>>> Ordinary Shares of £0.01

- "Exercise price per share" >>>> £0.01

- "Actual market value per share at date option was granted" >>>> £22

My questions:

- Does anyone know how these things work?

- I presume this means she has 109 shares out of a total of shares in the company?

- It doesn't mention the total number of shares in any of the documentation - Does she need to find this out?

- If there are 100,000 shares then her gains in the event of the company being sold for £10 million would mean she gets 109/100,000 x £10 million? i.e. £10,900 (or am I completely wrong)

- Does the £22 mean that her capital gains would be £10,900 minus (22 x 109) = £8,502 - on which she would pay 28% GCT?

Does anyone have any experience with these things or could point me in the right direction or let me know any other questions that she needs to ask before signing the agreement?

All advice much appreciated as always - thanks!

[Nicnic]

Been having a look to see how this works and I know not a better place to ask than the HPC Forums

My GF works for a small company and she has been allocated some share options as it is a small startup company. She's been sent the HMRC "Enterprise Management Incentives' form plus an "Option Agreement" from her company which details it all as below:

- "Maximum number of shares over which this option is granted" >>>> 109

- "Class of Shares" >>>> Ordinary Shares of £0.01

- "Exercise price per share" >>>> £0.01

- "Actual market value per share at date option was granted" >>>> £22

My questions:

- Does anyone know how these things work?

- I presume this means she has 109 shares out of a total of shares in the company?

- It doesn't mention the total number of shares in any of the documentation - Does she need to find this out?

- If there are 100,000 shares then her gains in the event of the company being sold for £10 million would mean she gets 109/100,000 x £10 million? i.e. £10,900 (or am I completely wrong)

- Does the £22 mean that her capital gains would be £10,900 minus (22 x 109) = £8,502 - on which she would pay 28% GCT?

Does anyone have any experience with these things or could point me in the right direction or let me know any other questions that she needs to ask before signing the agreement?

All advice much appreciated as always - thanks!

Hi,

This is not advice but my own understanding of EMI options. You can find a lot of information on the HMRC website.

There is no reason why she should not sign this. She would not need to exercise until an exit and with an exercise price of £0.01 per share she will only pay £1.09. She will not own the shares until she exercises the options.

The actual market value (AMV) is the value of the shares now. At an exit, hopefully, the price per share will be higher. There will be income tax and NICs to pay on the difference between the exercise price and AMV: 21.99 x 109 = 2,396.91 (this is the figure tax will be paid on). She may also be liable to pay the employers NICs; this should be stated in the option agreement.

There will be capital gains tax to pay if the exit price is higher than the AMV but she will have her annual allowance to take advantage of.

As I have said this is my own interpretation of the rules which are quite confusing. What I can definitely say is she should sign as there will be no liability until the point of exercise and with such a low exercise price she cannot lose. I would not even think about the value at this point, as it is irrelevant. She will be told how much each share is worth at the time of exit.

[SEW247]

Hi,

This is not advice but my own understanding of EMI options. You can find a lot of information on the HMRC website.

There is no reason why she should not sign this. She would not need to exercise until an exit and with an exercise price of £0.01 per share she will only pay £1.09. She will not own the shares until she exercises the options.

The actual market value (AMV) is the value of the shares now. At an exit, hopefully, the price per share will be higher. There will be income tax and NICs to pay on the difference between the exercise price and AMV: 21.99 x 109 = 2,396.91 (this is the figure tax will be paid on). She may also be liable to pay the employers NICs; this should be stated in the option agreement.

There will be capital gains tax to pay if the exit price is higher than the AMV but she will have her annual allowance to take advantage of.

As I have said this is my own interpretation of the rules which are quite confusing. What I can definitely say is she should sign as there will be no liability until the point of exercise and with such a low exercise price she cannot lose. I would not even think about the value at this point, as it is irrelevant. She will be told how much each share is worth at the time of exit.

Nicnic - thanks for your advices. I guess the only thing I need to get my head around is the number of shares.

My concern relates to the total number of shares as effectively the more shares there are, the more her shares are diluted. I'm also concerned that at some point in time, they could turn around and issue more shares (and not issue her any more) thereby further diluting her holding.

Hopefully someone else will be able to shed some light on my concerns over the total number of shares.

[Nicnic]

There is not a lot you can do about dilution. Some option contracts have an anti dilution mechanism but not many. The company may also grant more options if it has a capital increase. If you want to work out what 'stake' she has in the company you need to find out what the fully diluted number is which is shares in issue + options + warrants. You then divide the 109 by this number and show as a percentage. As the fully diluted number increases your relatives 'stake' in the company will decrease unless she is granted more options. The number of issued shares can be found at Companies House but the number of warrants and options in issue is not shown on public record. There may also be loan capital which may cause further dilution in the future.

I would just be happy to have the options. Something is better than nothing!

[rw42]

+1 to nicnic - unless there is an alternative to these options, it's free money as far as i can see.

Or is it a choice of options or a cash bonus?

Regarding CGT, everyone gets an allowance of £10k odd - any profit you make under this is CGT free.

After that (last time i checked, might have changed this tax year), you pay CGT at 18% up until the extra income would take you over the 40% tax band, after which you pay CGT of 28% on the remainder. I think it sucks to get taxed on doing something interesting with your money rather than chucking it in a bank or spending it, but meh.

http://www.hmrc.gov.uk/rates/cgt.htm is a decent place to start.

Unless i'm missing something, there isn't anything that says how the option is triggered - does she have the option to buy these shares straight away, or are there any eligibility criteria after which the option becomes usable?

[Nicnic]

There will be a vesting schedule. Options can vest on date of grant, monthly, annually or be tied to milestones etc. Once they vest they can be exercised but no one would normally exercise them unless the company is being sold and any gain between the option price and the price per share achieved in the sale can be realised. This is the beauty of employee options in the UK, the holder has no liability until they make some money and they have no obligation to exercise the option unless it is beneficial for them to do so. In some EU countries you have to pay a tax up front which is a bit of a bummer if you then leave the company or it goes under.

The only time you would exercise before an exit is if the option is about to lapse. The lapse date will be in the option contract and can be no later than the 10th anniversary of the grant of the option under EMI rules.

Nic