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.
Want to know how other startups structure their share option schemes? Download the 2023 UK Share Option Schemes Report.
What are share options?
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
Types of share option schemes
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 scheme
‘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.
Build a share option scheme in minutes
Dream scheme for your dream team
On SeedLegals, it’s easy to create and manage an employee share option scheme tailored to your business.
Learn more
What is an option pool?
A share option pool is an amount of company shares you set aside to issue to people at some point in the future.
How does an option pool work?
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).
Ria SangalThe 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.
Senior Options Expert,
Does a share option pool dilute ownership?
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’.
Need to get your head around dilution? To learn more, read our article:
Dilution: how it works
Dilution: how it works
When to set up a share option scheme
Wondering when’s the best time to create your option pool and set up a scheme?
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:
Pre-money or post-money?
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.
Pre-money valuation is the value of your company before receiving investment.
Post-money valuation is the value of your company after receiving investment.
The post-money valuation is therefore higher than the pre-money valuation.
Post-money valuation is the value of your company after receiving investment.
The post-money valuation is therefore higher than the pre-money valuation.
Mo SaedSetting 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,
What size should your option pool be?
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.
Deciding how many shares to set aside for your option scheme?
Read more in our post: How to size an option pool
Read more in our post: How to size an option pool
What happens to unused share options?
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
How do you create an option pool?
To create a share option pool, you first need approval from:
✅Your board
You need to pass a Board Resolution. Any time you want to make decisions that affect company equity, you need approval from your board.
✅Company shareholders
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.
✅Investors
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.
More resources
Want to learn more about share option schemes? Here are our top resources:
- Share options explained: the essential guide for UK startups
- EMI or unapproved share option scheme- which is best?
- UK report 2023: How does your share option scheme compare?
- Guide to Option Scheme Rules (Vesting & Exercise conditions explained)
- Give share options to customers and social media influencers
Talk to an expert
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.
