Do You Have Company Share Options?
How do they work? What are the tax advantages?
Picture the scene. You’ve just joined a cool new tech startup but because in the early days they can’t afford to pay you your full worth, they offer you share options. Maybe 10,000 shares in what should one day become a very successful company. Sounds great, huh? But what does it really mean?
What is a stock option?
There are two main types:
- A share option scheme is the right to buy a certain number of shares, at a fixed price, sometime in the future. You have to wait for a “vesting period” (sometimes linked to sales and productivity) and then you are entitled to cash in your options. At this point you can choose to keep the shares or, if the market for them has gone up, sell them at a profit.
- A share award is when you are given actual shares instead of the option to buy them later.
Questions you should ask
What portion of the company do my shares actually represent? That 10,000 figure might sound pretty big, but if there are ten million shares in total, it doesn’t count for much.
Your employer’s answer to this question should include how much debt the company has (because that’ll have to be paid back before you take your slice of the pie) and also what proportion of the shares issued are “preferred” and “common”. Preferred shares are for the top tier of investors who get their money back first, leaving the employees (that’s you, common people!) to divvy up the rest.
You should also ask about how much the start-up has raised in total, and how that amount is arranged across different types of shareholders. If it’s mostly the preferred and common ones mentioned above, that’s a positive sign. If they have raised a lot of “participating preferred” shares that could be a warning sign that the investors aren’t confident about this business, so have set up some strict rules to ensure they get their money back if the start-up goes bust.
There are multiple advantages and pitfalls in the taxation of shares, so as ever it’s best to check out the official HMRC web guide here.
Basically, if the shares are offered through the SAYE (Save As You Earn) program or other similar employee-shareholder arrangements, you could be eligible to pay no income tax or national insurance on their value. Nice.
And you’ve probably heard of SIPs (Share Incentive Plans) – these lock your shares in for 5 years but then offer you a hefty tax rebate including no capital gains tax when you sell them.
Under these plans, you are allowed to transfer £20k in to a tax free ISA, but you must do so soon after being issued the shares, so don’t delay! Arm yourself with the facts and start that conversation with your boss now, before it’s too late.
And as always, this depends on your personal situation so do contact an independant financial advisor.