A SAFE AND SMART SOLUTION FOR START UPS

Automated Qualified Employee Stock Options (incentive program)

AutomatedOptions (Swe: “OptionsAutomaten”) is an effective, safe and smart solution for start-ups who want an incentive program in place at a reasonable price. By standardizing a solution delivered in a digital workflow, we can offer a quick and cost-effective process from start to finish.


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COST / FAQ / THE PROCESS

Which incentive program should you choose?

An incentive program can be a good way to keep or attract new employees to a company. Through the program, they will be offered an opportunity to grow with the company and eventually become owners. There are various types of incentive programs, out of which two are particularly common – warrants and employee stock options. Furthermore, since the 1st of January 2018, an exception rule in favour of young and innovative companies applies to employee stock options. LWA explains how warrants, employee stock options and qualified employee stock options (the exception rule) work and what advantages and disadvantages there are for the different alternatives READ MORE HERE.
 

AutomatedOptions (Swe: “OptionsAutomaten”) is an effective, safe and smart solution for start-ups who want an incentive program in place at a reasonable price. By standardizing a solution delivered in a digital workflow, we can offer a quick and cost-effective process from start to finish.

Why qualified employee stock options? January 1st 2018, a new regulation was introduced, affecting the taxation of employee stock options. The tax reliefs apply to companies with no more that 50 employees. There are also additional criteria which must be met. In short, you can grant employee stock options to employees without any expenses for taxation, neither for the company or the employees. Only when the shares in the company are sold with capital gain, the capital gain will be subject to taxation.

This stock option program is developed by LegalWorks’ lawyers together with laywers from Svalner, who has assisted in tax related matters. The digital solution is developed together with GreenCounsel.

Try our self-assessment test for free and receive an immediate answer if this program is suitable for your company. If you have any questions, contact us at 08-7290050 or optionsautomaten@legalworks.se.


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  • Kristofer Cook
    Optionsautomaten är en väldigt prisvärd och lättanvänd lösning som snabbt sammanställer ett optionsavtal. Eftersom hela processen är on-line, inklusive de digitala signaturerna, så besparades vi från både tidsutdräkt och andra besvär, och hela processen var verkligen uppskattad bland våra anställda, ledningen och styrelsen.
    Kristofer Cook
    Carbiotix
THE PROCESS

The process of AutomatedOptions, from start to exit

1

AutomatedOptions collects your data.

2

We arrange a reconciliation meeting.

3

If you wish for further advice on questions regarding tax, you book a specific tax meeting.

4

AutomatedOptions generates the documentation needed for the Board and the shareholders.

5

OptionsAutomaten issues option agreements to the employees.

6

You receive a register of issued options and we arrange a closing meeting.

 
PRICING
Starting package year 1: Upfront fee SEK 9500 and, additionally, SEK 1500 per employee. For subsequent issuing of option agreements an upfront fee of SEK 2500 is added and SEK 1500 SEK per employee.
Tax advice meeting with Svalner: SEK 2500
Support agreement in accordance with quotation.
STARTING PACKAGE
- All documentation required for issuing option agreements.
- E-signing for protocols and documents.
- Issuing of option agreements during year 1.
- Advice and support during year 1.
- Costs for company-specific tax advice are added separately.
SUPPORT PACKAGE YEAR 2 & 3
- Advice and support regarding option agreements.
- Issuing of option agreements.
- Support in converting options to shares (recommendation for decision and notification to the Swedish Companies Registration Office (Bolagsverket)).
QUESTIONS FOR BOARD AND SHAREHOLDERS
- Does the company meet the requirements for qualified employee stock options?
- Do the employees meet the requirements for working hours and salary?
- How much dilution are you willing to accept?
- How should the exercise price be determined?
- Which individuals should be awarded options?
- Does a vesting period of 3 years suit your company?
- When is the last day for conversion (maximum 10 years)?
- Do all the shareholders support the program?
 
Q&A

AutomatedOptions - Qualified Employee Stock Options

 
1What are employee stock options?
An Employee stock option is not in itself a security but an option which gives an employee the right to acquire securities (usually shares) in the future at a specified price or otherwise on favourable grounds. The employee stock options are characterized by the fact that they are given with certain conditions linked to the right of disposal, e.g. that they may not be freely transferred or pledged, and that they can be exercised only after a certain qualification period. The option agreement runs for a long time and the options usually become invalid if the employment is terminated. Employee stock options do not generate any financial value for the employee during the qualification period. Instead, the worth arises when the qualification time has expired and the employee may exercise the option and acquire shares.
2How does the taxation work for qualified employee options?
Before the regulation of so-called ‘qualified employee stock options’ was introduced, the holder of an employee stock option was always liable to pay tax, as for income, at the exercise occasion, on the difference between the exercise price and the fair market value of the shares. Furthermore, the employer was liable to pay employer social security contributions on this difference.

On January 1, 2018, tax reliefs were introduced for the taxation of certain employee stock options (qualified employee stock options). A benefit of these employee stock option shall not be subject to taxation as income If certain conditions are met by the issuing company, the holder of the option (the employee) and the stock option. Neither is the employer liable to pay employer social security contributions. Instead, the benefit is subject to taxation, as capital gain, only when the holder sells the shares that have been acquired through the exercise of the qualified employee stock options.
3Which conditions have to be met for the beneficial rules to be applicable?
Since the purpose of regulation is to help small, innovative start-up companies to keep and recruit key employees, certain conditions have to be met before the company can issue qualified employee stock options. The conditions are related to the company, the employee stock option and the holder of the option (the employee).

1.3.1. The Company
1.3.1.1. The Company must be of limited size

During the fiscal year preceding the conclusion of the option agreement, following conditions shall be met:
• The average number of employees and partners working in the company must be less than 50, and the revenue or total assets must fall below SEK 80M.
• If the company is part of a group, the limitations above should be calculated together for all companies in the group.
1.3.1.2. The Company must not be controlled by public bodies. One or more public bodies cannot directly or indirectly control 25 percent or more of the capital or the votes in the Company when the option agreement is entered into. If the Company is part of a group, the condition applies to each company in the group.

1.3.1.3. The shares of the Company must not be admitted to trading on a regulated market.

No shares in the Company may be admitted to trading on a regulated market or corresponding market outside the EEA (eg. Nasdaq Stockholm or NGM Equity). If the company is part of a group, the condition applies to each company in the group.
1.3.1.4. The Company shall mainly conduct business. During the vesting time, the Company shall mainly conduct business.

‘Business’ primarily refers to activities other than holding cash, securities or similar assets. However, if such assets are held as part of the business, the holding is included in the business. The purpose is to exclude administration of securities and other financial assets from the business concept.

If the Company is part of a group, the condition applies to all companies in the group together.

1.3.1.5. The Company may not pursue certain activities. The objective of the regulation is that only innovative Companies should be included. This has led to the exclusion of Companies that mainly conduct certain activities.

In order for the regulation to be applicable, the Company must, during the vesting period, mainly conduct businesses other than;

1) banking or financing,
2) insurance,
3) coal or steel production,
4) trading of land, real estate, commodities or financial assets,
5) long-term leasing of premises or housing, or
6) services related to legal advice, accounting or auditing.

If the Company is part of a group, the condition applies to all companies in the group together.

1.3.1.6. The Company must not have conducted business for more than ten years.
The regulation only targets relatively young companies. Hence, the Company, at the conclusion of the option agreement, must not have conducted business for more than ten years, counted from the end of the year in which the business was commenced.

If the Company has acquired 25 percent or more of the business from someone else, the option agreement must be entered into within ten years counted from the end of the year in which the acquired business was originally commenced (if the acquired business was commenced before the business in the Company).

If the company is part of a group, the condition applies to each company in the group.

1.3.1.7. The Company must not suffer from financial hardship.
The Company must not suffer from financial hardship at the conclusion of the option agreement. This means that the Company must not be:
1) liable to prepare a control balance sheet,
2) subject to corporate reorganisation,
3) in a state of insolvency, or
4) subject to payment requests due to previous decisions of the European Commission declaring an aid illegal and incompatible with the internal market.

If the company is part of a group, the condition applies to each company in the group.

1.3.2. The employee stock option.
The value of the employee’s employee stock options, together with the value of other employee stock options that gives the employee the right to acquire shares in the company and for which the Company has entered into an agreement, may not be more that SEK 75M at the conclusion of the option agreement.

The total value of the employee's stock options, which give the employee the right to acquire shares in the company, may not be more than SEK 3M at the conclusion of the option agreement.

If the Company is part of a group, these limitations applies to all companies in the group together.

1.3.3. The employee

1.3.3.1. Employment and hours of work
The holder of the options must be employed by the company during the vesting period. The hours of work must, during this period, amount to at least 30 hours per week in average. ‘Hours of work’ includes paid annual leave, absence due to illness, parental leave and other similar circumstances covered by the social insurance system.

If the Company is part of a group, the conditions for employments applies to each company in the group. The conditions of working hours apply to all companies in the group together.

1.3.3.2. Compensation
The holder of the options must, during the vesting time, receive compensation (subject to taxation as income) corresponding to at least 13 income base amounts (Sw: inkomstbasbelopp, SEK 812 500 year 2018). Compensation or amounts subject to taxation as income or according to the rules on prohibited loans or micro and small companies (Sw: fåmansföretag). When calculating the compensation, the income base amount of the year when the option agreement is entered into should be used.

If the holder of the options, during the vesting time, receives compensation from social insurance system due to illness, parental leave or other similar circumstances, the condition regarding compensation from the company shall be reduced with such insurance compensation, in proportion to time. If the Company is part of a group, the conditions for compensation applies to all companies in the group together.

1.3.3.3. Limited previous ownership
The holder of the options (including family) must not, directly or indirectly, control shares in the company corresponding to more than five percent of the capital or the votes in the company. This limitation applies during the two years immediately preceding the year in which the option agreement is entered into.

If the company is part of a group, the condition applies to each company in the group.
4Can stock options be issued for consultants?
Yes, but not according to the regulation on qualified employee stock options, which only applies to employees. Note that OptionsAutomaten only targets qualified employee stock options.
5What happens if the holder of the option (the employee) does not exercise the employee stock option?
Nothing. No tax-related consequences arise if the employee choses to not exercise the option, neither for the company nor the employee.
6What happens if the company is acquired or listed during the vesting time?
An acquisition of the company does not affect the option agreement directly. However, in the event of an acquisition, the seller must ensure that the new owner undertakes to fulfil the option program. Otherwise, it might be problematic to issue new shares to the employees, either because the requirement of a qualified majority, a condition for directed issue of new shares, is not met or because a new minority shareholder may challenge the decision. Nor does a listing of the company during the vesting period affect the option agreement. Note that the option agreement entitles the company to require the exercise of the option programme, provided that the vesting period of 3 years has expired.
7What happens if the company does not meet the conditions when the option is exercised?
If the Company does not meet the conditions, the options are typically considered as ordinary employee stock options for tax purposes. Consequently, the employee will be liable pay tax, as for income, for the difference between the exercise price and the fair market value. Further, the Company will be liable to pay employer social security contributions on the same amount. According to the option agreement, the Company has the right to terminate the option agreement if the conditions will not be met.
8What happens if the employee does not meet the conditions regarding working hours or salary?
If the employee does not meet the conditions, the options are typically considered as ordinary employee stock options for tax purposes. Consequently, the employee will be liable pay tax, as for income, for the difference between the exercise price and the fair market value. Further, the Company will be liable to pay employer social security contributions on the same amount. According to the option agreement, the right to exercise the option expires for the employee who does not meet the conditions.
 
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