Our view is that options can serve as an opportunity to share in the value creation at your company, but also that the effect of an option scheme can act as a lock-in mechanism. The purpose is often to retain qualified employees over time, and the option grant contract and the shareholders' agreement therefore often contain rules on exercise timing and blackout periods for selling shares.
Important to assess the terms
Our advice is that you carefully assess the terms of the option grant together with the contents of the shareholders' agreement in order to make an informed choice about your rights and obligations should you choose to accept the agreement.
- An share option is a right, but not an obligation, to exercise the option into shares at a later point in time at a predetermined price. This price may be at market value, or the option may be free of charge.
- The option must usually be "vested", or earned, before it can be exercised into shares. A typical vesting period might be three years. It is common for options to be exercised into shares, for example with 1/3 being exercisable each year in a predetermined manner.
- On exercising the option into shares, you become a shareholder in the company, with the rights and obligations set out in the shareholders' agreement.
- If you exercise at a price lower than market value, you will have to pay tax on the benefit you have gained, in the form of income tax. The employer usually pays the employer's national insurance contributions on this benefit.
- You will usually have to accede to the shareholders' agreement after exercising your option. You then become bound by the shareholders' agreement in the same way as the other shareholders. The shareholders' agreement typically has its own rules for employee shareholders. These may include the non-compete clause, lock-up clauses restricting when you can sell shares, as well as rules on the price you may receive on a sale. In addition, the company and the other shareholders usually have a pre-emptive right to any available shares.
- Separate rules apply to early-stage companies that fall under the special rules for growth companies. These apply only to options that are exercised into shares in the start-up company at the earliest three years, and at the latest ten years, after the date of grant. The agreed exercise price cannot be lower than the market value of the shares at the time of grant. See the regulations to the Taxation Act, section 5-14-12 (in Norwegian).
