Some of the 2,000+ companies who’ve set up an option scheme with SeedLegals have told us that they want a way to allocate options which recognises that some people add more value to your company than others.
We want to make sure founders can choose how they allocate equity – after all, it’s your company, you should be able to do it your way. And later in 2021, we’ll allocate options to our own team here at SeedLegals so we’ve thought hard about the best way to do it.
Read on to find out about the ways to allocate options with a SeedLegals Option Scheme, and how we’re making it easier for your employees to figure out exactly how much their options might be worth.
What’s wrong with how options are usually allocated?
If you’ve already decided to set up an option scheme, you’ll have noticed that there are limited ways to allocate options. Currently, most schemes allow you to allocate by:
It’s common to give execs, VPs and team leaders more options than junior staff because your senior staff have more experience and responsibility so in theory they’ll contribute more to the success of your company.
- length of service
For example, you might decide to allocate a set number of options after the employee has worked for you for one year. You can also choose to have the options ‘vest’ over a set time so the employee only gets their full allocation after they’ve been with the company for, say, four years.
But if you set out an employee’s option allocation in their Employment Agreement when they join your company, what happens if they turn out to be brilliant and you wish you’d given them more? Or worse: they’re not the sharpest and you regret allocating them the same number of shares as their peers?
Let’s look at an example…
You employ Ravi. In his Employment Agreement, you state his salary and that you’ll give him 0.1% of the company as 1,000 share options in your company’s EMI option scheme, after one year of service, vesting over four years.
Sounds nice. But here are the problems:
- Your employee has no idea what this means
How much is 0.1% or 1,000 options worth? What’s it worth now? And what might it be worth in five years’ time? How can Ravi weigh this up against another job offer with a higher salary?
- You don’t know how well your employee will perform
Will Ravi turn out to be a star, a sloth or somewhere in between?
In addition to this, the maths involved in allocating options can feel like mental gymnastics. Are you giving more or less than other companies? Are you offering a pittance in options? Or too many and your own shares as founder will be disastrously diluted later?
If you and your CFO can’t work out this stuff, what hope is there that your employees will be able to work out how much their options are worth?
New: Allocate options based on performance
We’ve added a new way to allocate options which means you can defer deciding how many options to give an employee until you’ve assessed their performance. And it’ll be easier for you and your employees to work out what their options are actually worth.
How it works for an EMI Scheme
- Create Employment Agreements for new starters
If you decide on Performance Options, you’ll select terms which explain that you’ll allocate options to the employee based on an assessment of their performance after they’ve worked for you for an agreed amount of time.
- Get an EMI valuation from HMRC
We can help you get your EMI valuation but it’s still quite a shlep so we’d suggest you only do this annually.
While you’re getting the valuation…
- Assess your new joiners
Assess all employees who’ve joined your company since the previous EMI valuation and who are eligible for options. Assign employees to one of four categories:
||Your star performers
||Consistently good but not stellar staff
||Average or under-performing employees
||This tier is for staff who won’t be allocated any options. This is likely to be employees who have already given notice to leave, or are on a performance improvement plan.
- Decide the details of your scheme
Here are the choices you’ll need to make:
- names for tiers
You could choose standard labels like Gold, Silver, Bronze. 🥇🥈🥉
Or make something up, like Top Bananas, Outstanding Oranges, Loyal Lemons. 🍌🍊🍋
Choose whatever you like!
- size of each tier allocation
For example, you might decide that for your top tier, you’ll give 50% of the employee’s annual salary in share options, 25% for the middle tier and 12.5% for the lower tier.
- vesting schedule
This is the time over which employees receive the options. For example, they might receive a set amount of options every month over three or four years until they reach their total allocation.
When you have the valuation…
- Grant share options
To work out how many options to grant, use the calculator on SeedLegals. Then go to Share Options and click the button for Grant Options (see image below) to create the document, and type in the number of options and the vesting schedule.
You can only grant options within 90 days of getting an EMI valuation from HMRC. (During coronavirus, this was extended to 120 days – we expect it to go back to 90 days soon.)
Easily work out how much options are worth
Here’s how you and your employees can work out what their options are worth:
- Estimate your company valuation…
Look at the valuation (the actual valuation, not EMI valuation) at the previous funding round and what you expect it to be at the next round. Pick an amount that’s between the two. If your next round is coming up soon, decide on a valuation nearer what you expect it to be after that round.
- … then calculate how much the options are worth
Work out how much one share is worth: divide the estimated company valuation by the total number of company shares.
Then multiply by the number of options the employee holds.
We’ve built a calculator to make this incredibly simple – your employees can log into the option holder portal on SeedLegals and type in any company valuation to find out what their options would be worth. (They can also view the real-time vesting chart of their options but the calculator is more fun.)
Ready to get started?
To set up an Option Scheme for your company, book a call with our experts.
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