When companies set up an option scheme, they often create a new share class from which the options will be granted.
This is usually done so the share class has no voting rights. Share classes with voting rights are typically reserved for founders, key stakeholders and investors.
It’s worth adding that creating a new share class is only really needed when the option scheme’s exercise condition is “Exercisable” – meaning recipients can exercise their vested options whenever they like.
If you were to set up an option scheme with “Exit only” as the exercise condition, additional share classes aren’t necessarily needed as once the options are exercised, the shares will be immediately sold to the new owners.
If you plan on granting options (or issuing shares for that matter) from a new share class, we strongly recommend creating the share class before granting any options for a few reasons:
The share class and option pool must be authorised first
Authorisation is achieved through directors’ and/or shareholders’ resolutions. Their consent must be granted in order to create the share class and authorise the option pool.
If options are granted to recipients before formal authorisation is received, the options are essentially for shares that don’t exist. This would mean that you would have to obtain authorisation via directors’/shareholders’ resolutions every time someone exercised their options.
Of course, authorisation for the share class and shares can be received after the options are granted, but the Vestd platform is not set up this way, nor is it advised to do it this way.
HMRC pushback
When an HMRC-approved valuation is required for EMI option grants, we have seen HMRC pushback on valuation reports when the share class isn’t already created.
HMRC looks at the company’s cap table and articles of association as part of its valuation approval process, and if the share class particulars aren’t mentioned or are unknown, they may reject the valuation.
It's also essential that you grant the options from the share class mentioned on the valuation report and VAL231 form. Any mismatch can cause issues with HMRC.
Red flags for investors
If you were to issue shares or grant options to investors, but the share class hadn’t been created yet, you may be in for some awkward conversations as the shares the investors want to purchase don’t exist.
In any scenario, it’s best to get your ducks in a row before issuing shares or granting options to anyone – investors, employees, you name it.
What does a successful share issue look like?
Whether you're issuing shares or options, the order of play typically looks like so:
- Subdivision: A subdivision is typically done before the first funding round or option grant to make the company’s share capital easier to distribute. Once a subdivision is complete, it’s unlikely you’ll need another (if done correctly).
- Create share class: It’s worth adding that a new share class isn’t always required for every share issue/option grant, but is often done the first time around.
- Authorise shares: Similarly to the above, getting authorisation to issue the shares beforehand can save a lot of trouble. Once this is achieved the shares are ready to go – which is helpful if you have eager investors or tight deadlines.
- Obtain a valuation: This can be done in tandem with the share authorisation. Whatever the reason for the share issue – option grant or investment round – an independent valuation should be attained and approved by the relevant governing bodies (HMRC in the case of EMI) before any shares are issued.
It may sound like a lot, but the great news is that Vestd does it all for you. All you have to do is answer a few questions to formalise the details of each step and we’ll do the rest. Including sending the required resolutions for signing and filing all the paperwork with Companies House.
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.'