We have significant experience in implementing unapproved options in a diverse range of sectors to meet wide ranging commercial objectives. 

  • Unapproved options are rights to acquire shares which are granted to employees now but with the actual acquisition of the underlying shares being deferred until certain conditions are met.
  • Employees will be required to pay a price in the future that is set now with the aim being to motivate them to grow the value of the shares and thus the upside benefit they receive.
  • Unapproved options are not tax-favoured and confer little to no tax benefits when compared to cash bonuses.
  • Unapproved options are commercially flexible and can be tailored to the particular circumstances of the company/individuals involved. 

Outline

Under unapproved options, employees are awarded (or “granted”) rights to acquire shares in the company they work for.

The “exercise” of those rights (and the actual acquisition of the underlying shares) is deferred until certain conditions are met. There is significant flexibility in the design of those conditions with the potential for time based vesting, performance and/or an exit event (i.e. a sale/listing) operating as exercise triggers.

Typically, the option price (i.e. the amount the employee pays for the shares) is set at the market value when the options are initially granted. The option price can also be set at a discount or a premium to that value.

The incentive is therefore for the employee to work to generate future growth in value of the underlying shares and thus his or her upside on those shares.

Once the relevant conditions are met, employees will often be given a choice as to when they wish to exercise their options and become shareholders by paying the option price for their shares.

After exercise employees will then become shareholders. There is normally a good degree of flexibility around the rights and restrictions that apply to those shares – with scope for tailoring to the company and employees involved. In particular, specific leaver and transfer provisions can apply and there is also scope for variations in terms of economic (i.e. capital and dividend rights). 

Benefits

Unapproved options are flexible and the commercial terms of both the options and the underlying shares can be tailored to the company’s specific business drivers and the employees in question.

They can therefore be used as a means of allowing employees to become shareholders in the company for a period of time and with a desired level of shareholder rights. Alternatively, unapproved options can be designed as a means of rewarding employees for generating growth in capital value only by allowing them to share in a proportion of the value of the company on an exit occurring.

Unlike HM Revenue & Customs backed option plans (such as Enterprise Management Incentives (EMIs) or Company Share Option Plans (CSOPs) see EMI outline and CSOP outline for more details), no qualifying criteria exist and therefore unapproved options are likely to be feasible for most companies.

Unapproved options are relatively easy to understand and require no employee investment when the options are initially granted. Additionally, no tax costs arise when the options are granted for either the employee or the company.

Unapproved options are therefore risk free with no obligation on the employee to exercise the option if the underlying shares do not grow in value.

As rights to acquire shares (rather than actual shares), unapproved options can easily be clawed back from employees who leave prior to the relevant exercise conditions being met. 

Disadvantages

Unlike EMIs and CSOPs (HMRC backed options plans), unapproved options confer no specific tax breaks. Any gain on the options (i.e. the difference between the option price paid for the shares and the market value of the shares at the exercise date) is subject to income tax (and possibly with National Insurance contributions (“NIC”)) when the options are exercised.

Unlike cash bonuses, though, there is the facility for employer’s NIC to be transferred on to employees, to remove that cost from the business.

Once income tax and NIC have been paid on exercise any subsequent growth in the value of the shares after exercise up until their date of sale should be subject to the more beneficial rates of capital gains tax (typically somewhere between 0%-20%).

Commercially, if unapproved options are granted with a market value (or premium) option price and the share value falls after grant, the incentive effect of unapproved options can also be lost – with the options being perceived as having no intrinsic value. 

How we can help

We have significant experience in implementing unapproved options in a diverse range of sectors to meet wide ranging commercial objectives.