Option strategies to suit your business goals
Optimal Solicitors will help you understand these agreements and deal with the entire process for you - including the decisions related to put and call options, compliance, and any tax implications.
We’ll take care of the paperwork and make sure you avoid common option agreement pitfalls. So you can do a good thing for your people and business, without putting extra pressure on them.
Option agreements explained
What is an option agreement?
Essentially, they are legally-binding contracts between a company and a third party (the ‘option holder’). When used in the workplace, they explicitly give employees the ‘option’ to purchase shares. If the option holder decides to exercise their right, they can then buy these shares (which are also referred to as ‘option shares’) in the company.
It’s important to note that how they work will depend on whether the agreement involves a call or put option:
How does an option agreement work?
- The grant of the call or put option
- The shares in question that are subject to the option
- Details of any payment when the option is exercised
- Information around any conditions which need to be met before the option holder exercises their right
- An exact time period for the option holder to use the option
- Details of the method for exercising the option
- The option price and its calculation details (this could be a fixed price, or a particular formula may be used)
- Information around the circumstances where the option would fall through
- Whether the shareholder will give warranties for the shares
- Any limitations on the shareholder while the option is in use
- If any reorganisation of share capital would impact the option
What is the difference between shares and options?
With reverse vesting, the shares are given upfront but vesting is reversed: if the employee leaves the company prior to the end of the vesting period, they have to sell the unvested shares to the company. This is generally at no profit. It protects the company from an employee unexpectedly departing and taking a large stake with them.
For forward vesting, the options holder has options incrementally. This protects the business – the options holder is motivated to stay, as the longer they do, the more options they can receive.
There is initially no tax paid on options. Depending on the individual circumstances (the background and type of share scheme), once the option has been converted there could potentially be Income Tax due as well as NICs. Once the shares are sold, the employee may have to pay CGT.
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Work out your option strategies with Optimal Solicitors
These types of contracts are incredibly complex, however. From deciding on put and call options, to making sure you correctly follow the rules and processes around option agreements, to knowing the difference between shares and options and the resulting tax implications, there’s a lot to consider.
Therefore, make sure you have every angle covered and that the agreements work in your favour. For this, it’s always sensible to seek legal advice. Optimal Solicitors have a decade of experience in this area. We’ll support you every step of the way, drawing up the necessary paperwork, and making sure that everyone knows their rights and obligations.
What’s more, we make the entire process straightforward – removing the complicated legal jargon, and cutting costs where we can. We even offer other corporate law services [LINK: Corporate Law] and provide a free initial consultation.