So you've exercised your options and become a shareholder... now what?
Once you exercise your options, you will become a shareholder in the company. This is when you get to reap the rewards of the company’s share scheme.
How – and when – you can sell your shares goes back to the exercise condition in your agreement.
Whether your exercise condition is “Exercisable” or “Exit only,” there are a few scenarios that can play out once you become a shareholder…
1. The shares are yours to keep
In this scenario, your exercise condition would be “Exercisable” which means there’s no exit clause or obligation to sell the shares once the options are exercised. The shares are yours to keep for as long as you like.
If you want to sell your shares though, you will need to find a willing buyer. This can be done in a few ways:
- A director or other employee buys your shares.
- A third-party investor buys your shares.
- The company offers to buy back your shares.
- In the case of EMI, if your shares are sold back to the company, HMRC will likely treat the buyback as a distribution and you could lose your beneficial EMI tax treatment. Learn more about buybacks.
Companies with share schemes often set up what are called ‘liquidity events’ to give their employees and shareholders the opportunity to sell their shares.
A liquidity event is simply an organised company buyback or investment round. Rather than you trying to sell your shares alone, the company give everyone the opportunity to sell.
It’s also possible that the business does go through an exit event, which is another opportunity for you to sell your shares to the new owners.
If an exit event did occur, you may have to sell your shares:
- If your shares have “drag-along” rights and the majority shareholders want to sell their shares (ie an exit event), then you will have to sell your shares too.
- This is simply a clause that companies add to ensure minority shareholders (employees and other beneficiaries of a share scheme) cannot block an exit event.
If you want to learn more about your options (no pun intended) when selling your shares, it’s best to speak to the company to see what plans they have for the future.
2. The shares must be sold
Conversely to the above, in this scenario, your exercise condition would be “Exit only” which means that means once the options are exercised, the shares must be immediately sold. Essentially, all option holders would exercise their options then sell their shares to the new owner.
Exit only clauses are typically used on share schemes where the goal of the business has always been to go through an exit event. It provides a way for option holders to cash in their chips and reap the rewards of their hard work.
Now you may be wondering: 'what happens if the business is never sold?' Are you stuck with options you can never sell?
Not quite, as most companies will add a clause to the option agreement that states “Exit only” options can become “Exercisable” after a certain period of time in case an exit doesn’t occur. This ensures you can still cash in your equity, so long as the other conditions of the scheme are met.
Your agreement summary will outline your exercise condition and in turn how you can sell your shares.
Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'