Incentive schemes, Warrants, Vesting and KPOs?

We will help you figure out what is what and what is best for your company and employees!

Why Employee Incentives?

Incentive schemes are a good encouragement for employees to join or stay with the company.

The scheme is particularly attractive for start-up companies where the ability to pay a market-based salary can be a challenge, but is equally used by established companies to motivate continued business development. Through an incentive program, your employees can be offered an opportunity to grow with the company and eventually become shareholders. Such programs can take different forms, but there are two common variants in particular: warrant programs and stock option programs. Stock options may be subject to an exemption rule that allows you to issue them to your employees and directors without incurring significant tax costs for either them or the company (so-called qualified stock options - QSOs).

Qualified Employee Stock Options (QSO)

If you meet the conditions, QSOs are in most cases the best option on the market today.

This is because QSOs have the lowest administrative and tax costs and involve the lowest risk for employees. KPOs can be simply described as a promise by the company to issue existing or new shares (through a new issue) at a pre-determined price to employees or directors. A characteristic of QSOs is that they can be granted free of charge (unlike warrants) and that the exercise of the options is conditional on the holder remaining employed by the company for a specified vesting period. Should the person stop working in the company before the vesting period expires, the option, or a certain part of it, may lapse.

See the conditions for QSOs below to find out if your company qualifies.

Conditions for QSOs

The Option issuer

(Requirements apply to all companies in a group)

  • Max 150 employees
  • Maximum net turnover of SEK 280 million per year.
  • Max 10 years old company
  • The company is not in financial difficulties
  • The company is not controlled, directly or indirectly, by public institutes (more than 25% of the shares or voting rights).
  • Company does not carry out exempt activities*

* Excluded activities are the following: banking and financial services, insurance, production of coal or steel, trading in land, real estate, commodities or financial instruments, renting of premises or accommodation on a long-term basis, provision of legal, accounting or auditing services..

The Option holder

  • Has a job/board position
  • Work at least 30 hours a week on average during the vesting period (cf. no corresponding requirement for board membership).
  • Remuneration amounts to at least 13 income base amounts* during the vesting period (cf. 1.5 ibb for board work).
  • Innehar inte mer än 5 % av aktier eller röstandelar (tillsammans med närstående) i bolaget
  • Does not hold options worth more than SEK 3 million when the option contract is concluded (applies 2 years before the option acquisition year up to and including the time of acquisition).

* The income base amount for the year 2022 is SEK 71 000, i.e. SEK 923 000 during the vesting period.

The Stock Options

  • Maximum value SEK 3 million per option holder
  • Maximum value of SEK 75 million on the combined option programs in the company
  • The options do not relate to shares listed on a regulated market or equivalent outside the EEA (applies to the entire group), excluding First North, Nordic MTF.

Benefit 1

An effective and cheap way to attract new skills or retain existing skills for at least three years.

Benefit 2

Can be issued free of charge and therefore involves zero risk for the recipient of the options.

Benefit 3

Not subject to capital gains tax - it is only when the shares are sold that capital gains are taxed.

Benefit 4

Can be put in place quickly and easily, without any formalities or registration with the Companies Registration Office.

Stock options

Warrants as an alternative to those who do not qualify for QSOs.

Warrants entitle the holder to subscribe for shares in the company for a certain period of time at a predetermined price and are acquired at a fixed price paid to the company. Warrants should not be issued free of charge because a free warrant is considered a benefit (the benefit being the difference between the market value of the shares and what was paid, or not, for the warrant). The value of the benefit will then be subject to both benefit taxation and employer contributions. For this reason, it is important to make a defensible valuation of the company before deciding to set up a warrant scheme.

Benefit 1

An effective and cheap way to attract new skills or retain existing skills for at least three years.

Benefit 2

Can be issued free of charge and therefore involves zero risk for the recipient of the options.

Benefit 3

Not subject to capital gains tax - it is only when the shares are sold that capital gains are taxed.

Benefit 4

Can be put in place quickly and easily, without any formalities or registration with the Companies Registration Office.

So what to choose?

In summary, it is important that you find out what the conditions are in your particular case. If you meet the conditions for QSOs, it is in most cases the best option on the market today. Warrants are generally more complicated than QSOs (requires that a valuation of the company is in place, a decision at the general meeting and registration with the Swedish Companies Registration Office) and therefore becomes a more expensive process for both the company and the employees, who are also forced to take a higher risk as the price of warrants must be linked to the company's market value. A final option is to let the employees buy shares in the company directly, either from existing shareholders or through a new issue, but this assumes that you are ready to take in one or more new partners in the company.

LW Advisory has a flexible model for analyzing whether the rules are applicable but also for setting up a staff incentive scheme.

– Peter Hellqvist, CEO – Badberget Advice AB

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We understand there may be many questions. We are happy to help you find out what options are available in your particular case.

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