Benefits of Options Pools in the UK

If you own a private company and want to implement an employee share scheme (ESS), you must consider how it will impact your ownership rights. This article will explain the concept of an options pool in ESSs and the critical legal and commercial implications.

Overview

Employee share schemes (ESSs) incentivise current and future employees because it aligns the company’s interests with the employees’. If your company gives its employees the option to acquire shares, they become part-owners and can share in its profits. 

However, you should understand the other rights attached, including the right to vote on shareholder resolutions. In principle, you may not object to this. After all, you want them to have effective ownership, and the right to vote on shareholder resolutions is fundamental. Despite this, you should consider that extending shares to your employees may dilute your share of ownership in the company. 

Therefore, many businesses who wish to limit the dilution effect of an ESS use options pools. 

Options Pools

There is no legal definition of an options pool in the UK. However, it is a phrase used by business owners and investors to describe a particular feature of specific ESS structures, such as enterprise management incentives (EMI), limiting the total number of shares issued to employees. 

Example

This is an example of an options pool. Importantly, you do not have to actually issue the shares.  

Commercial Considerations

While the exact type of options pool depends on the ESS used, startup companies generally use them to recruit and retain talent.

As most startups are private companies, owning their shares does not confer the same advantages as public companies. For one, there is rarely a market available for employees to go and sell their shares to a third party. 

Many investors in early-stage financing rounds typically want to maximise their position by acquiring particular shares like preference or convertible shares. They also want to be guaranteed the right to a fixed percentage of the equity shareholding in the company. 

That is why company founders will create an options pool that limits the total number of shares they can issue for the class of shares held by the founders. These are often called “founders shares”. They are distinct from the kinds of shares issued to professional investors. 

Key Takeaways 

An options pool is a mechanism to limit an employee share scheme’s effect on the founders’ ownership. There are various ways to create an options pool, and it will largely depend on what ESS structure you intend to implement. In practice, companies create options pools before they raise their first round of seed funding because the outside investors will not want their shares diluted by any options exercised by employees. 

If you need further guidance, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. So call us today at 0808 196 8584 or visit our membership page.

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