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In this podcast series we will be addressing some of the most common questions founders have when running their business.
In this episode we will be discussing shares v options and considering:
- What is the difference between shares and share options?
- What are the pros and cons of each?
- How can a company use these to incentivise employees?
Listen now to learn the answers to these questions and much more.
Mei Chung is an Associate in the Corporate, Commercial and Finance team. She advises entrepreneurs, investors, startups and established businesses across a variety of sectors on a broad range of corporate and commercial matters.
Transcript
As a way to reward employees or to compensate consultants or other advisors for their services to the company, start-ups will often offer equity, most commonly by way of granting shares or by granting share options. But what is the difference between shares and share options?
Shares are essentially units of ownership in a company. Shareholders are able to benefit from the company’s success and they can exercise the rights attached to the shares they hold. Start-ups will not typically have a lot of cash on hand to pay much-needed employees or service providers and granting shares can be an effective tool to aid retention and recruitment. Shares may be issued or transferred to the recipient and they can come with certain restrictions or conditions. It is common to see start-ups grant growth shares (which are shares that don’t have the usual voting rights or rights to dividend but only have rights to allow holders to share in the future growth of the company if an exit valuation/price is met) or to grant shares that are subject to vesting provisions (which is where holders only receive the full rights to shares over a set period of time or where a milestone has been reached, encouraging holders to remain with the company and commit to the company’s growth).
Another popular method of incentivising employees and service providers is by granting share options. Share options grant the recipient the right to purchase shares in the company at a specific price in the future. The option holder does not have shares in the company when the option is granted and will not become a shareholder until they decide to exercise the option and the shares are granted. Share options are often offered to enable option holders to purchase shares in the company at a pre-set price (the “exercise price”), with the idea that the option holder can chose to exercise the option when the exercise price is less than the market value of the shares allowing them to benefit from the difference. Share options are usually granted with conditions for example, there may be a minimum period of time that the option must be held before it can be exercised. There are a number of ways share options can be structured and founders can choose who to grant options to, at what price and set conditions for exercise and restrictions on option holders. There are also various share option schemes which can offer tax advantages for both the company and the option holders including the Enterprise Management Incentives Scheme (EMI).
It will ultimately be up to the founders of a company to decide how and when equity is released and what works best for your company and your team will depend on the company’s overall objectives and what will achieve the best outcome for and from your team.
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