Learn about the different conditions you can set and how they translate to your business goals.
Every company is different, and what suits one may be totally wrong for another. We have put together some examples below to help explain some of the choices you need to make in broader commercial terms, such as who you are giving these options to, when you want them to benefit, and what kinds of conditions you want to set.
It might be worth having this guide open alongside to remind you what the scheme design process actually looks like on the app. Remember to look at the tool-tip (the little "i") next to each question, as this will provide some additional context.
You may also find this article helpful to read first, as it outlines the key high-level questions you will need to answer internally before getting into the details of scheme setup.
Before we get to the "templates" you can use to start setting up your scheme, a few disclaimers:
Disclaimers
- Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal or financial advice.'
- These are suggestions of commonly used options and are in no way intended to tell you what is best for you company. You must assess each element and determine if this is in fact the best option for your company, or if a fully bespoke design would be better.
- Just because something is commonly used or has been used by companies at a similar stage to yours doesn't necessarily mean it is the right choice for you.
- The choices of standard "templates" in no way constitute commercial, legal, or professional advice as to which option to take. They are simply illustrative examples.
- If there is any uncertainty around whether the standard designs would work for you, seek advice and create a bespoke scheme.
With all that fun stuff done, here is how you can break down the decisions you need to make, and some ways to think about the questions:
Exercise price
Most common choice
Most schemes set the Exercise Price of the options at the Actual Market Value (AMV) agreed with HMRC.
When it might not apply to you
Would you like the recipient to benefit from the growth in value of the company from Day 1, or from some date in the past?
If so, setting the AMV at nominal value or the value of the shares at a given date may be better.
Would you like to set a “floor” to the recipients’ benefit, such that the company still has to grow before they get to participate?
If so, setting exercise price at some value above today’s AMV may be better.
Exit only vs exercisable
Most common choice
Most of our customers set their schemes up as Exit Only
When it might not apply to you
Do you ever plan to exit?
If not, Exercisable options may be better.
If so, Exercisable may be better, since Options do not have rights to dividends or voting, only shares do.Would you like recipients to benefit from the rights associated with shares before an exit (e.g. dividends, voting)?
Vesting structure
This is by far the most open-ended of the decisions that you will need to make, so there isn't one right answer here. With each of the factors in the scenarios below, you can tinker with each setting to something that feels right.
Scenario 1: Setting up a company-wide share scheme, only time-based conditions.
Structure
- 4-year vesting duration with a vesting schedule
- No back-weighted vesting
- 12 month cliff of 25%
- Monthly vesting
- "As you go" distribution of partial shares
- Automatic vesting
Scenario 2: Team-specific schemes, vesting based on annual performance reviews
Structure
- 4 year Vesting Duration with a vesting schedule
- No back-weighted vesting
- No cliff
- Yearly vesting
- "As you go" distribution of partial shares
- Manual vesting
- Specific annual criteria will need to be entered for each team's scheme, or for each recipient
Scenario 3: Key early-joiner being rewarded for contributions they have already made
Structure
- 0 year vesting duration, no vesting schedule
- No back-weighted vesting
- No cliff
- Any vesting frequency (this won't matter here)
- Any "distribution of partial shares" (this won't matter here)
- Automatic vesting
Scenario 4: Performance-based scheme, vesting based on fixed milestones
Structure
- No vesting schedule
- Manual vesting
- Specific criteria will need to be entered for each scheme, with explicit reference to the number of options to vest as each milestone is met.
Other decisions
Some decisions that you will need to make we have not touched on here. Some of them we already have some information on, and some we cannot provide any guidance on:
How much equity should I give to my team?
This is a purely commercial decision, but this article might help you with the maths.
What if we don't sell the business?
If an exit event isn't guaranteed, it is possible to add a condition that allows the options to be exercised after a certain period of time.
Days' notice for an exit event
You will need to provide option holders with notice of an exit event to allow them time to decide whether to exercise or not, this is typically 14 days but you may need to lower this if the exit is commercially sensitive.
What conditions should I set?
This article might help.
Accelerate vesting on an exit event?
When an exit event occurs, do you want to allow accelerated vesting and vest all the options? Or just allow the options that have already vested to be exercised? Any unvested options will be cancelled.
When should the options be granted?
Setting the grant date to the day before your valuation expires will simplify your initial notification to HMRC. If all options are granted on the same date they can be submitted via a single file.
The downside to this (in the case of EMI) is that the 24-month period for employees to claim Entrepreneur's Relief will start on the grant date.
For information on why we default to this please take a look at our help guide on grant dates.
Good leaver/Bad leaver
The Scheme Design page explains thoroughly what the definition of each is in our standard agreement, as well as the options you get to select from.
Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'