Key Features of a Share Option Plan for a Privately-Held Company.
Share Reserve: Typically 10% to 15% of the company’s total issued share capital.
Class of Shares: Generally, the shares underlying employee share options are of a separate class to the founders’ and investors’ shares and carry no voting rights.
Exercise Price: Generally, the fair market value of the underlying shares on the option grant date. (Options may be granted at a discount from the current market value but that may result in a tax liability to the employee)
Term: Seven or ten years (subject to the optionholder remaining with the company).
Exercise/Vesting Schedule: Three, four or five years.
Leavers: Usually, options lapse upon the optionholder ceasing to be employed by the company. In the case of death, disability or redundancy, a period of six or 12 months after cessation is typically allowed for the exercise of vested options.
If an individual exercises an option during his employment, thereby becoming a shareholder, the company may reserve the right to buy back his shares when he leaves, at the current market value or a price calculated based on a pre-determined formula.
Effect of a Company Sale: The plan should address how options will be treated if the company is sold. For example, unvested options may accelerate and become vested. Options may be exercised or settled in cash or may be assumed by the acquirer and converted into options over its own shares.Managing Employee Shareholders: The company will need to ensure the participation of employee shareholders in any company transaction. This may involve obtaining a power of attorney from each employee who exercises an option or setting up a standalone management or nominee company that will hold the legal title to all employee shares and is empowered to transact those shares on behalf of employees in any company transaction.
Taxation of Share Options (held by employees subject to taxation in Ireland.
Grant: No tax (unless the exercise price represents a discount from the current market value of the underlying shares and the term of the option is more than seven years).
Vesting No tax.
Exercise: Income tax (41%), employee PRSI (4%) and USC (7%/8%) chargeable on the excess of the market value at the time of exercise over the exercise price paid.Sale Capital Gains Tax (33%) on any additional profit (ie amount realised less the market value on the date of exercise).
Share options offer the employer a saving in that employer PRSI (10.75%) is not payable on the gain on exercise.
Employees who are generally subject to taxation in another country but who work in Ireland while holding share options may be subject to Irish taxation on their share option gains.
Prospectus and Revenue Commissioner Obligations.
Employee share options are generally not subject to the EU Prospectus Directive as they are not transferable securities so it is not necessary to prepare a prospectus.
Employers must make an annual filing with the Revenue Commissioners of Ireland to report all options granted to and exercised by Irish employees and directors.