Grant types

Ledgy allows you to grant different subtypes of equity to your employees. Some of them are country-specific, while others are used worldwide.

Option

An option is a form of employee compensation that gives the right, but not the obligation, to buy shares at a certain price before the expiration. The price that one needs to pay to buy one share (or exercise one option) is called exercise or strike price. The right to exercise options often depends on the vesting schedule that can be time-based or performance-based.

Exercising an option can (but doesn't need to) involve issuing new stock at the time of exercise. Shares can come from a pool of:

  1. Existing (reserved) shares or
  2. New shares that are pre-approved by the shareholders (authorized or approved capital), after which it is not necessary to get additional approval when exercising.

Taxation and specificities of the contract depend on the country the company or its subsidiaries are based in, and the residence of the employee.

Note: In Ledgy, you can specify the following country-specific types of option plans: CSOP, EMI, ISO, and NSO. More information on these plans can be found below.

Phantom or Virtual

A phantom or virtual plan gives employees the benefit of stock ownership without giving them the company stock. Employees receive cash payments based on the price movements of the actual stock and are usually not entitled to dividends. Phantoms are often tied to a liquidity event, but the company can decide to offer the cash settlement before these events occur.

Taxation and specificities of the contract depend on the country the company or its subsidiaries are based in, and the residence of the employee.

Stock

Within the stock plan, employees can directly purchase company stock, usually at a discounted price. Taxation and specificities of the contract depend on the country the company or its subsidiaries are based in, and the residence of the employee.

Warrant

Warrants are a type of employee compensation that gives the right, but not the obligation to buy equity at a certain price before the expiration. In that way, it is similar to options (see above). When a warrant is issued, it has a strike price at which the stock can be purchased and expiration date. In the US, warrants can be exercised at any time before the expiration date, whereas in Europe it is more common that warrants are only exercised on the expiration date.

Warrants are issued directly by the company. Exercising a warrant causes dilution because the company is obligated to issue new stock. The proceeds of the exercise are a source of capital for the company.

Taxation and specificities of the contract depend on the country the company or its subsidiaries are based in, and the residence of the employee.

BSPCE (FR)

Bons de souscription de parts de créateur d’entreprise (BSPCE) are a special category of stock options, used by companies based in France.

Workflows and limitations

Only employees, founders, and board members are entitled to receive BSPCE. Consultants, freelance, non-employed contributors can get Bons de Souscription d'Actions (BSA).

Companies eligible to give BSPCE need to be incorporated less than 15 years ago, have a valuation lower than €150 million and be privately held by individuals with a minimum shareholding of 25%.

Employee taxation

BSPCE benefit from a favorable social and income tax treatment. If the beneficiary stays in the company for at least 3 years, they are entitled to a reduced flat tax treatment (including social security charges) of 30% on any gain from selling the shares.

CSOP (UK)

The Company Share Option Plan (CSOP) is commonly used by companies based in the UK. CSOP scheme is H. M. Revenue & Customs (HMRC) approved and tax-efficient option plan.

Workflows and limitations

To define a strike price that will enable employees to have taxation benefits, the company needs to request a valuation from the SAV team of the HMRC. The lower boundary of the strike price is defined as the unrestricted market value (UMV) of the valuation. CSOP options need to be granted within the timespan specified on the valuation documentation (most commonly 60 days). They are registered with HMRC on or before the 6th of July following the tax year in which options are first granted (i.e. on or before 6 July 2021 for options granted in 2020/21).

CSOP is available for executive directors (provided that they work at least 25h per week for the company) and employees (no restrictions on the working hours). Each person can only be granted up to £30,000 worth of shares (defined as a number of shares times UMV at the date of grant). Employees eligible for CSOP need to be employed in the UK and employed during the time of grant and exercise. For good leavers, the exercise can be prolonged up to 6 months after the termination.

Employee taxation

Upon exercise of these options, there is no income tax or National Insurance on gains as long as the strike price is not less than the market value of the shares at the time of grant, and the options were held 3 to 10 years from the date of grant. When these shares are sold, capital gains tax will be due to the difference between the sale price and the exercise price.

EMI (UK)

The Enterprise Management Incentive (EMI) is commonly used by smaller companies based in the UK. The EMI scheme is H. M. Revenue & Customs (HMRC) approved and tax-efficient option plan.

Workflows and limitations

To define a strike price that will enable employees to have taxation benefits, the company needs to request a VAL231 valuation from the HMRC. The lower boundary of the strike price is defined as the actual market value (AMV) of the valuation. EMI options need to be granted within the timespan specified on the valuation documentation (most commonly 90 days). In addition, HMRC needs to be notified within 92 days of the date of the grant through submission of the EMI01 form.

Companies that qualify need to have assets lower than £30 million, and less than 250 employees (part-time employees are calculated as fractions). You might also want to check the excluded activities, and disqualifying events. In case a disqualifying event happens in the future, keep in mind that all options need to be exercised within 90 days of the event.

Each employee can only be granted up to £250,000 worth of shares in 3 years (defined as a number of shares times unrestricted market value (UMV) on the day of grant). Employees that qualify for the EMI need to work for the company at least 25h per week or 75% of their paid working time. Non-executive directors or consultants, as well as employees that own ≥30% of the company, cannot be granted EMI options.

Employee taxation

Upon exercise of these options, there is no income tax or National Insurance on gains as long as the strike price is not less than the AMV of the shares at the time of grant. When these shares are sold, capital gains tax will be due to the difference between the sale price and the strike price. However, if the employee continued working for the company and held the shares for at least 2 years after the date of the grant, the capital gains tax will frequently be reduced to 10% (in comparison with 20% for a higher rate taxpayer).

ISO (US)

Incentive Stock Options (ISO) are an alternative form of compensation usually only offered to key employees and top-tier management. They are commonly used by companies incorporated in the US or companies with subsidiaries in the US.

Workflows and limitations

ISOs require a plan document that clearly outlines the number of options given to an employee. The vesting period should be at least two years, and expiration not longer than 10 years from the date of grant. To qualify for more favorable tax treatment, ISOs must be held for more than one year from the date of exercise, and two years from the date of grant. If these conditions are not met, they will be treated as non-qualified stock options (NSO)

ISOs can only be granted to employees. The strike price cannot be less than the fair market value at the time of the grant. If an employee owns more than 10% of the voting power of the company or any subsidiary, the strike price must be increased to at least 110% of the fair market value, and expiry set to a maximum of 5 years from the date of grant. Each employee may only vest $100,000 of ISOs each year (based on the fair market value at the time of grant). The vested amount over this threshold is treated as an NSO.

Employees can exercise their options up to 90 days from the date they leave the company, or one year in case disability was the reason why the employee left. If the exercise period is prolonged, the ISOs will be treated as NSOs.

Employee taxation

Employees have the right to buy shares of company stock at a discount price at a future date. They have more favorable tax treatment than non-qualified stock options (NSOs) in part because they require a longer holding period. There is no taxation on the exercise of ISOs and the profit on the sale is usually taxed at the capital gains rate, rather than as an ordinary income.

NSO (US)

Non-qualified (or non-statutory) stock options (NSO, NQO, NQSO, NSSO) are an alternative form of compensation usually offered to all employees at a company, including consultants and directors. They are commonly used by companies incorporated in the US or companies with subsidiaries in the US.

Workflows and limitations

The strike price of NSOs should be the same as the market value of the shares on the grant date. Strike prices lower than the fair market value will be subject to section 409A of the Internal Revenue Code. This means that both company and the option holder can be subject to significant tax consequences: taxation at the time the option vests (even if unexercised), a 20% exercise tax, and a penalty rate of interest on any underpayments of tax.

There are no restrictions on the amount of NSO that can be given to an employee, consultant, or director.

Employee taxation

NSOs do not offer beneficial tax treatment. Employees need to pay ordinary income tax on the difference between the strike price and the market share price of the stock when the option is exercised. Once the options are exercised, the employee can choose to sell the shares immediately or retain them. If the stock was held for more than one year after the exercise, the sale is taxed at a capital gains rate.

RSA (US)

Restricted Stock Award (RSA) is a form of equity compensation used in stock compensation programs. They are commonly used by companies incorporated in the US or companies with subsidiaries in the US.

Workflow and limitations

The RSAs are commonly issued to corporate affiliates, such as executives and directors. Once the employee is granted an RSA, they need to decide if they want to accept the grant. In case they accept it, they might be required to pay a purchase price at the fair market value. The rights of the employee are restricted until the shares are completely vested or there is a lapse in the restrictions. In this case, the restricted period is the same as the vesting period.

Employee taxation

The RSAs are not taxable at the date of grant, but are taxable as ordinary income in the year they vest and as capital gain or loss when they are sold. Ordinary income tax is calculated as the difference between the fair market value of the stock on the date it vests and the purchase price. The capital gain or loss is based on the difference between the stock's price on the date it vests and the date it is sold.

Note: The employee may do a Section 83(b) election, and use the fair market value on the grant date (and not the vesting date) to calculate ordinary income tax. The tax bill, in that case, needs to be paid at the grant date but might be lower. However, if the employee leaves the company before the shares vest, the shares are forfeited, and taxes that have been paid are non-refundable.

SAR (US)

Stock Appreciation Rights (SAR) are a type of employee compensation that is settled in cash or (less frequently) in stock. They are commonly used by companies incorporated in the US or companies with subsidiaries in the US.

Workflow and limitations

SARs offer the rights to receive proceeds from the stock price increases without having to pay the strike price. Upon exercise, the employee will receive the difference between the current fair market value and the strike price (usually fair market value on the grant date). Often, SARs will be issued "in tandem" with the stock options to help employees pay the strike price for the stock options.

Employee taxation

There is no taxation on grant or vesting dates. However, the proceeds on exercise are recognized as the ordinary income and calculated based on the fair market value of the amount received at vesting. In case the stock is received and sold, the capital gains will be calculated on the difference of the proceeds and the fair market value at exercise.

Frequently asked questions

Ledgy is not offering the grant type my company is using, what should I do?

In case your company is running an equity plan that is not specified in Ledgy, you can use common categories such as option, warrant, phantom, or stock. In addition, we kindly invite you to send your feedback to feedback@ledgy.com explaining which grant types are missing.