Share options explained: the essential guide for UK startups
Want to offer your team equity in your company? Our guide covers the facts about share options: how and when to set up a...
To set up a share option scheme in the UK, you need a share option pool. These are the shares you set aside to give as share options later. In this article, we’ll explain exactly what a share option pool is, how it works and what size it should be.
Share options are a way to reward your team with company equity. Companies create share option schemes to give share options to employees, consultants and advisors as compensation for work and loyalty to your company.
Share options give the holder the right to buy shares in your company at a fixed point in the future. You can learn about share options in depth in our article: Share options explained: the essential guide for UK startups
There are two types of option schemes that are most relevant for UK startups:
Enterprise Management Incentive scheme
EMI schemes are popular with startups for the tax advantages for both employees and the company.
‘Unapproved’ means that the scheme isn’t part of the UK government’s ‘approved’ tax-advantaged share schemes.
You only need one option pool. The type of scheme you use – or if you use both – doesn’t affect how you set up the option pool or how it works.
A share option pool is an amount of company shares you set aside to issue to people at some point in the future.
When you grant share options, you use up part of the option pool, but they only become shares when they’re exercised (which means they’re purchased and go from being share options to shares).
The first step to create an option pool is to get permission from the existing shareholders, your board and your investors. They need to agree that the number of shares reserved in the option pool can be issued in the future.
Say, for example, that you want to set aside 10% of company shares in your share option pool. 75% majority of company shareholders must approve – in advance – that you’ll be able to issue those shares when your option holders come to exercise their share options in the future.
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The percentage of a company a shareholder owns is only diluted (the percentage goes down) when shares are issued. Creating a share option pool doesn’t cause dilution, but because issuing the shares will cause dilution in the future, you need shareholder approval to create the option pool.
When your company sells or gives away equity to investors, employees or advisors, you issues new shares (or new options). By doing this, the existing shareholders end up owning a reduced proportion of the company, despite not selling any of their shares. This is known as ‘dilution’.
Many founders think about setting up an option pool before a funding round because the new capital will allow you to hire and a share option scheme makes your company more attractive to top employees and investors. Here’s what to consider:
Whether you create your share option pool pre-money (before investment) or post-money (after investment) is up to you.
If you create your share option pool pre-money, it means that only your current shareholders will be diluted. The new investors won’t be affected because the option pool already existed before they signed the deal.
If you create your share option pool post-money, it means that all your shareholders will be diluted, including your investors.
Setting up an option pool before taking investment capital ensures that you aren’t diluting your investors right after the funding round. Plus, if you’re able to issue the options before the funding round, it means your share option holders will get a much cheaper price for the shares and then gain from the increase in your company valuation after the company receives investment capital.
New Business Manager,
To create an option pool for your company, we recommend you allocate 5 to 15% of the total shares in the company. Our data shows that:
Three-quarters of option pools are less than 12.5%
76.7% of option schemes set up on SeedLegals in 2022 and 2023 chose an option pool of less than 12.5%
Very few companies have option pools bigger than 30%
Only 5.4% of schemes allocate more than 30% of shares to create their pool.
If or when you sell your company, you might have already allocated all the options in the option pool. But if there are any remaining, there are ways for you to cancel the unallocated options or transfer them to the founders. To learn how to do this, read our article: How to get back unallocated options when you sell your company
To create a share option pool, you first need approval from:
You need to pass a Board Resolution. Any time you want to make decisions that affect company equity, you need approval from your board.
You need to pass a Shareholder Resolution. This gives you shareholder approval to create the option pool. The Shareholder Resolution must be filed with Companies House within 15 days of being passed.
If you have investors, you might also need their consent to create a share option pool – check your Shareholders Agreement. Find out more about this in our article: What is investor consent?
When you have approval from the board, shareholders and investors, you can go ahead to create a share option scheme and grant your options.
When you set up your share option scheme on SeedLegals, we automatically generate your Shareholder Resolution, Board Resolution and Investor Consent, ready to share and sign.
Want to learn more about share option schemes? Here are our top resources:
Want to set up a share option scheme quickly and for a lower cost than using a lawyer? Want a demo of how to run a share option scheme on SeedLegals? Book a free call with one of our options experts and we’ll explain how it works.