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The Joy of Enterprise Management Incentives
Read our free guide to the UK's most tax-efficient share scheme.
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What are share options?

Discover the different types of share options available in the UK, how they work, the tax implications and how to set up a share option scheme.

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Rachel Krish
Written by Rachel Krish

Rachel Krish is an Equity Consultant at Vestd.

Page last updated: 23rd November 2023

If you're a business owner or an employee who wants to learn more about share options, you’ve come to the right place. This guide has all the information you need. 

Share options explained

Share options are a type of equity-based compensation that companies use to incentivise their employees. With some options, it’s possible to reward those who aren't necessarily employees too.

What’s the difference between shares and options?

Giving someone shares means they become a shareholder immediately and often (but not always) gives them rights to other things too, like voting and dividends. Whereas awarding someone options gives them the right to buy shares in the future.

Options give someone the right to buy shares in your business later if they wish.

Both shares and options allow someone to have a real stake in the company, just at different times.

Think about it this way. With shares, you can enjoy a slice of the pie now. With options, there’s a slice with your name on it, but you can’t eat it just yet.

How do options work?

A share option gives the holder the right, but not the obligation, to purchase a specific number of shares in the company at a predetermined price, known as the 'exercise price', or the 'strike price'.

Exercise price: the price per share that option holders pay to buy their options which converts them into actual shares.

To grant options, whoever’s in charge first needs to set aside a portion of the company’s total equity and put it into a share option pool. 

Who can receive options?

Depending on the type, options can be granted to employees, directors, and non-employees like advisors, consultants and freelancers.

What’s an option pool?

An option pool is a drop of equity reserved for recipients of one or multiple option schemes. Whatever is in the pool is distributed among employees as part of a company share option scheme. It’s also known as a ‘stock option pool’ or ‘equity pool’.

What’s an option scheme?

A share option scheme outlines when and how someone earns their options and later turns those options into shares that they can buy, keep or sell. Option holders sign an agreement which details all of this and other criteria such as a vesting schedule.

What option schemes are there?

The four main share option schemes available in the UK:

Let’s take a quick look at what these are.

Enterprise Management Incentives

EMI is the UK’s most tax-savvy share option scheme by far. But it’s only for UK-based startups and SMEs with fewer than 250 employees (other criteria apply).

Take our two-minute quiz today to see if your company could set up an EMI scheme.

Unapproved share options

Unapproved options are the free spirit of the equity world. Super flexible, unapproved options are an easy way to reward employees and non-employees with equity.

Mainly because, unlike EMI, you don’t need to get a valuation from HMRC. But unlike EMI, it doesn’t have the same brilliant tax benefits. 

Company Share Option Plan

A CSOP is another tax-advantaged share plan where employees can purchase shares in the company at a pre-determined price.

Save As You Earn

SAYE lets employees buy shares with their savings for a fixed price.

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The Complete Guide to Company Share Schemes

Learn all about share and share option schemes.

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The benefits of share options

Why startups love options

Share options are a way cash-strapped (or cash-savvy) startups can reward key people for their hard work and loyalty, and attract new talent.

Not all startups can stretch to a super competitive salary, so offering equity as a means of compensation can sweeten the deal.

Another reason why startups award options, is to improve retention. In the early days in small teams, everybody chips in. And if one person leaves, it can cause serious bottlenecks.

By setting up a share option scheme, startups can encourage team members to stick around for longer, because the longer they stay, the more options they’ll earn. And those options could be worth a significant sum one day.

Options are also an incentive that an inexperienced founder could use to tempt an experienced entrepreneur to come out of retirement and play a supporting role in their new venture.

Why employees love options

In a world where salaries don’t always keep up with inflation or the cost of living and pension pots don’t look promising, having shares in a business could prove to be financially beneficial in the future.

Then there are the tax benefits. Depending on the type of share options, employees can delay paying taxes on the value of the shares until they sell them and even pay a reduced rate.

Skip to the tax implications of share options.

When can employees exercise options?

First of all, even if a company grants an employee share options, they can decide whether they want to exercise them at all.

Exercise = convert options into shares to buy, keep or sell.

But as for when they can exercise their options, well that depends on a couple of things:

  1. Is the scheme exit-only or exercisable?

  2. Is there a vesting schedule?

An exit-only scheme means that employees have to wait until an exit event occurs, like a sale, merger or acquisition.

If it’s an exercisable scheme, employees don’t necessarily have to wait for an exit but they have to complete or pass key dates outlined in a vesting schedule before they can do anything.

A vesting schedule outlines when and how often options vest (earn their value) as well as when and under what conditions the employee can exercise them.

Note: a vesting schedule can be part of an exit-only scheme too.

If you're set to receive options, read your option agreement thoroughly to make sure you fully understand what you’re signing up for. How much you ultimately pay for your options depends on the exercise price set and tax.

Are options better than shares?

It depends. We’ll walk you through it.

So ordinary shares are what people tend to think of when they think of shares. They’re what most companies are founded with and what most companies will issue.

That’s fine, and required in certain situations, but for business owners, it’s not without its risks.

Let’s say you bring someone in who promises the world but then doesn’t deliver and you, being the generous person you are, already gave them ordinary shares. Anyone with ordinary shares gets to keep those shares, whether or not they deserve them. Unless you go through the complicated process of trying to buy them back.

So if you’re a founder who wants to incentivise key people with equity, but have control over when they get to have those shares and benefit from them, then options are the way to go.

You can set conditions to protect your business and the interests of existing shareholders.

Download our conditional equity milestones guide. You’ll find examples of conditions that you could include in your share options agreement for peace of mind.

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26 Conditional Equity Milestones

Practical ideas for your share options scheme.

Examples

How are options taxed?

Now for the boring but important bit.

Share options are subject to tax in the UK. The exact tax treatment depends on the type of option, the exercise price, and the time period over which the option is held.

Here’s a brief overview of the tax implications of each.

EMI options

With EMI options, no income tax or National Insurance (NI) contributions are due when employees receive the initial grant.

Paying tax comes later when (or if) they decide to exercise their options, and even then, the rate of Capital Gains Tax (CGT) they’ll pay is 10% instead of 20%*.

*If the exercise price is below the actual market value (AMV) of the options at the time they were awarded. Read everything you need to know about EMI and tax.

EMI benefits companies too, as they can usually claim corporation tax relief on the full amount of an employee’s option gains.

I want to learn more about EMI.

CSOP options

CSOP options are subject to income tax and NICs when the option is exercised.

But CSOP options are eligible for tax relief, which is based on the difference between the exercise price and the market value of the shares at the time the option is granted.

SAYE options

SAYE options are not subject to income tax or NICs when the option is granted or when the savings are made. Those taxes apply when the option is exercised.

Like with CSOP options, the amount of tax due will depend on the difference between the exercise price and the market value of the shares at the time.

There may also be capital gains tax (CGT) implications when the shares are sold.

Unapproved options

Unapproved options are subject to income tax and national insurance contributions (NICs) when the option is exercised. 

How to set up an option scheme

If you’re thinking about setting up an employee share option scheme, here are the first steps you need to take:

  1. Decide how much equity to give 

  2. Decide which option scheme is right for you

These initial steps are arguably the hardest part, but once that’s out of the way, you can move on to designing, launching and managing your options scheme.

Use our free calculator to work out how many shares to set aside for your team.

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Equity Sharing Calculator

Wondering how many shares to give to your team?

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How to manage option schemes

You’ve come to the right place. While you could ask an accountant or a lawyer to manage a share option scheme for you, there’s a far more cost-effective choice.

Vestd is the UK’s original share scheme and equity management platform. We’ve helped thousands of business owners not only set up option schemes but manage them effectively too.

Set up your EMI option scheme, CSOP or unapproved option scheme today.

 

Why Vestd?

Design share option schemes with ease.

Create and manage option pools.

Set your own vesting schedule and conditions.

Review and approve option agreements electronically.

Personalised dashboards to show value and maximise engagement.

100% accurate cap table updates in realtime.

Five-star service and support.

Digitally exercise options into shares.

Talk to an equity consultant

Book a free call to explore:

  • Your business, goals and motivations
  • The best ways of sharing ownership
  • How to set the right kind of conditions
  • Costs and tax implications
  • Why a digital platform makes life easy

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