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An Employee Share Option Pool is often set up to incentivise employees: new joiners, rising stars and key members of staff.
What is a Share Option
A Share Option is the right but not the obligation to buy shares at a date in the future. The Share Option holder will need to pay an amount for these shares, which will be less than market value when they exercise their options (choose to buy shares). The company will need to issue new shares to the Share Option holder if they exercise their option.
Share options are usually awarded to employees, with the Strike Price set to reflect the value of the company when they join (or when the share options are issued). Share Options are often subject to Vesting and Leaver Provisions
When Share Options are awarded to employees, they may be subject to Vesting. This enables the company to reclaim some or all of the options awarded, if the employee leaves. Vesting periods are usually monthly or annual; and are linked to either the anniversary of the date that the options were awarded, or the date that the employee joined the company:
- Annually at end of year: at each anniversary, the employee gets to keep a portion of their Share Options. A typical period for annual vesting is 4 years - so 25% is retained at the end of each year
- Annually at start of year: at each anniversary, and on the date of award, the employee gets to keep a portion of the Share Options. So if the vesting period is 4 years, they get 20% at each vesting date
- Monthly: as above except the employee gets 1/48th of their award every month. This has the benefit of removing any vesting "cliffs" - which make focus an employee (or employers) focus
- Fully vest at exit: the vesting schedule may include a "catch-all" term - if the company is sold and the employee is still at the company, then the employee gets to keep all the Share Options awarded to them - i.e. "Fully Vest"