The Process for Qualified Employee Stock Options

The OptionsAutomat is a safe and smart solution for start-ups that want to implement an incentive program at a reasonable cost.

By providing a standardized solution delivered in a digital workflow, we can offer a fast and cost-effective administration of qualified employee stock options.

 

Take our online test and get an instant answer on whether your company can for participate in the program.

Which incentive programme should you choose?

Incentive programmes can be a good motivation for employees to join or stay long term at a company. Through the programme, employees are offered an opportunity to grow with the company and eventually become owners. There are various incentive programmes, but two in particular are common - share warrants and employee stock options. Since 1 January 2018, there is also an exemption rule that is designed to benefit young and innovative companies - qualified employee stock options. LWA explains how share warrants, employee stock options and qualified employee stock options work - as well as the advantages and disadvantages of the various options.

Why qualified employee stock options?

On 1 January 2018, new rules were implemented that affects the taxation of employee stock options. The tax relief is directed at companies with a maximum of 50 employees. There are also other criterias that must be met. In short, you can distribute employee stock options to employees without any tax effects for the employees or the company. It is not until the shares in the company are sold with a possible profit that taxation occurs.

The option programme has been developed by LegalWorks lawyers and with the advice of Svalner regarding tax issues. The digital solution has been developed together with GreenCounsel.

Take our online test and get an immediate answer if your company can participate in this program. If you have any questions, please contact us on 08-7290050 or optionsautomaten@legalworks.se

GreenCounsel

The Options Machine is a very affordable and easy-to-use solution that quickly compiles options contracts. Since the whole process is on-line, including the digital signatures, we are saved from both time and hassle and the whole process was really appreciated by our employees, management and board.

Kristofer Cook

Carbiotix

Here's how it works

YEAR 1

  • Optionsprogrammet beslutas av styrelsen med tids- och beloppsramar.
  • Styrelsen fastställer lösenpriset för en aktie.
  • Aktieägarnas godkännande inhämtas.
  • Optionsavtal utfärdas till befintliga anställda med 3 års intjänandetid.
  • Anställda behöver inte betala något i detta skede.

YEAR 2-3

  • Optionsavtal för ev nyanställda utfärdas inom ramen för programmet.
  • Att villkoren för kvalificerade personaloptioner är uppfyllda behöver kontrolleras innan nya optionsavtal utfärdas.

YEAR 4-

  • Efter 3 år från optionsavtalets ingående kan anställda påkalla konvertering.
  • Nyemission av aktier till anställda sker normalt en gång per år på årsstämman.
  • De anställda betalar lösenpriset för aktierna.
  • Beskattning sker först när aktier säljs.

You will receive a record of options issued and we will have a closing meeting.

1

OptionsAutomaten collects information from you.

2

We have a debriefing meeting.

 

3

You book a tax meeting if you want to sort out your tax issues.

4

The OptionsAutomat generates information for the Board and shareholders.

5

OptionAutomaten issues option contracts for employees.

6

You will receive a record of options issued and we will have a closing meeting.

PRICING

Starting package year 1:

Starting fee SEK 9 500 and SEK 1 500 SEK per employee. For option agreements issued at a later date, a starting fee of SEK 2 500 is added, and SEK 1 500 per employee. Tax advisory meeting 2 500 SEK with Svalner. Service agreement as quoted.
Supportavtal enligt offert.

STARTER PACKAGE

- All documentation required to issue option agreements.
- E-signing of minutes and documents.
- Issuing of option agreements in year 1.
- Advice and assistance in year 1.
- Cost of company-specific tax advice will be charged additionaly.
– E-signering av protokoll och dokument.
– Utfärdande av optionsavtal år 1.
– Rådgivning och support år 1.
– Kostnad för ev bolagsspecifik skatterådgivningtillkommer.

SERVICE AGREEMENT YEAR 2 & 3

- Advice and assistance with option agreements.
- Issuing of option agreements.
- Support in relation to conversion of shares (draft resolution and registration with the Swedish Companies Registration Office).

BOARD AND SHAREHOLDER ISSUES

- Does the company meet the requirements for qualified stock options?
- Do employees meet the working hours and salary requirements?
- How much dilution are you prepared to tolerate?
- How should the redemption price be set?
- Which employees should receive awards?
- Is a 3-year vesting period appropriate for your company?
- Deadline for conversion (maximum 10 years)?
- Do all shareholders support the programme?

FAQ

Qualified employee stock options

An employee stock option is not a security in itself, but an opportunity for an employee to purchase securities (usually shares) in the future at a predetermined price or otherwise on advantageous terms. Employee stock options are characterised by restrictions on transferability, e.g. they may not be transferred or pledged, and they can only be exercised after a certain vesting period. The term of the option is long and usually expires if the employment is terminated. The employee stock option has no economic value for the employee until the vesting period has expired and the employee can exercise the option and acquire shares.

Prior to the introduction of the qualified employee option rules, the holder of an employee option was always subject to service tax at the time of exercise. The taxable amount was the difference between the acquisition price and the market value of the shares. The employer also had to social fees on this amount.

On 1 January 2018, the taxation of certain employee stock options (qualified employee stock options) was reduced. The holder of qualified employee stock options is not subject to income tax at the time of execution if certain conditions are met by the company entering into the option agreement, the employee stock option and the employee stock option holder. Consequently, the employer is not required to pay social fees on the amount. Taxation takes place under capital income, and not until the employee transfers the shares acquired through the programme for qualified employee stock options.

 

As the rules aim to help small, young, innovative companies to recruit and retain key staff, specific requirements must be met in order for qualified employee stock options to be issued. The requirements refer to the company, the qualified employee stock option and the holder of the employee stock option (the employee).

 

1.3.1. The company


1.3.1.1. The company must be of limited size

In the tax year immediately preceding the year in which the option agreement is concluded, the following must be met:
• The average number of employees and partners working in the company shall be less than 50, and the net turnover or balance sheet total is not more than SEK 80 million.
• If the company is part of a group of companies, the above threshold values shall be calculated for all the companies in the group together.

 

1.3.1.2. Företaget får inte kontrolleras av offentliga organ

Ett eller flera offentliga organ får inte direkt eller indirekt kontrollera 25 procent eller mer av kapitalet eller rösterna i företaget när optionsavtalet ingås. Om företaget ingår i en koncern gäller kravet för varje företag i koncernen.

 

1.3.1.3. The company's shares shall not be admitted to trading on a regulated market

No shares in the company may be traded on a regulated market or an equivalent market outside the EEA (e.g. Nasdaq Stockholm or NGM Equity). If the company is part of a group of companies, the requirement applies to every company in the group.


1.3.1.4. Företaget ska huvudsakligen bedriva rörelse

Företaget ska under intjänandetiden huvudsakligen bedriva rörelse.

During the vesting period, the company must be mainly engaged in business activities. Wit business activities means mainly activities other than the holding of cash, securities or similar assets. However, if such assets are held as part of the business, the holding counts as part of the business. It is intended that the management of securities and similar assets should not be included in the concept of business activities. If the company is part of a group of companies, the requirement applies in aggregate to all companies in the group.

If the company is part of a group of companies, the requirement applies in aggregate to all companies in the group.

 

1.3.1.5. Företaget får inte bedriva viss verksamhet

Syftet med reglerna är att endast företag som är innovativa ska omfattas. Detta har inneburit att företag som huvudsakligen bedriver viss verksamhet har undantagits.

For the rules to apply, the company must, during the vesting period, be mainly engaged in business activities other than:

1) banking or financial activities,
2) insurance business,
3) production of coal or steel,
4) trading in land, real estate, natural resources or financial instruments,
(5) the long-term rental of commercial or residential premises; or
(6) legal, accounting or auditing services.

If the company is part of a group of companies, the requirement applies in aggregate to all companies in the group.

 

1.3.1.6. The company must not be more than 10 years old.
The rules should only apply to relatively young companies. This means that at the time of the conclusion of the option contract, the company must not have been in business for more than ten years, calculated from the end of the year in which the business was started.

If the company has acquired 25 per cent or more of the shares of the company from another company, the option agreement must be entered into within ten years of the end of the year in which the acquired business originally commenced (if the acquired business commenced before the company started trading).

If the company is part of a group of companies, the requirement applies to every company in the group.

 

1.3.1.7. The company shall not be in financial difficulties
The company must not be in financial difficulty at the time the option agreement is entered into. This means that the company must not be:
1) obliged to produce a control balance sheet,
2) subject to corporate reconstruction,
3) insolvent; or
4) subject to an outstanding recovery order following a previous decision of the European Commission declaring an aid illegal and incompatible with the internal market.

If the company is part of a group of companies, the requirement applies to every company in the group.

 

1.3.2. Employee Stock Options
The value of the option holder's qualified employee stock options, together with the value of any other employee stock options that also give the right to acquire shares in the company and that the company has contracted for, may not exceed SEK 75 million at the time the option agreement is concluded.

The value of all the option holder's qualified employee stock options, which carry a right to acquire shares in the company and for which the company has entered into an agreement, may not exceed SEK 3 million when the option agreement is concluded.

If the company is part of a group of companies, these value thresholds apply in aggregate to all companies in the group.

 

1.3.3. The employee

 

1.3.3.1. Employment and work on a temporary basis
The option holder must be employed by the company during the vesting period. During this period, the working hours must be at least 30 hours per week on average. Working hours include paid holidays and absences due to sickness, parental leave and other similar conditions covered by the social security system.

If the company is part of a group of companies, the requirement to be in employment applies to any of the companies in the group. The working hours requirement applies in aggregate to all enterprises in the group.

 

1.3.3.2. Amount of compensation
During the vesting period, the option holder must receive remuneration (taxed in the income category income of service) amounting to at least 13 income base amount (Sw: "inkomstbasbelopp")(SEK 812,500 according to the income base amount for 2018). Remuneration does not include reimbursement of expenses or amounts that are included in income from services in accordance with the rules on prohibited loans (21 kap ABL). The income base amount for the year in which the option agreement is concluded is used to calculate the remuneration.

In the event that the option holder, during the vesting period, receives compensation under the social security system as a result of illness, parental leave or other similar circumstances, the claim for compensation from the company shall be reduced in proportion to the period of such compensation. If the company is part of a group of companies, the entitlement to benefits applies in aggregate to all the companies in the group.

 

1.3.3.3. Limited previous ownership
The option holder, together with any close relative, may not directly or indirectly control shares in the company, representing more than five per cent of the capital or votes of the company. This restriction applies during the two years preceding the year in which the option agreement is concluded and the year in which the option agreement is concluded.

If the company is part of a group, the restriction applies to every company in the group.

Yes, but not under the rules on qualified employee stock options, which apply only to employees. Please note that the OptionsAutomaten only applies to qualified employee stock options.

There are no tax consequences for either the company or the employee.

The acquisition of the company does not directly affect the option agreement. However, in the event of a acquisition, the seller needs to ensure that the new buyer commits to the option programme. Otherwise, there may be difficulties in completing rights issues to employees, either by failing to meet the qualified majority required to make a rights issue or by a new minority shareholder challenging the decision. Nor does a listing during the vesting period affect the option agreement. Note that the option agreement gives the company the right to invoke the exercise of the option programme provided that the vesting period of 3 years has expired.

The consequence of the Company not meeting the conditions is typically that the option is treated as a normal employee option for tax purposes. This means that the employee is subject to income taxation on the difference between the share price and the market value. Furthermore, the Company will be obliged to pay social fees on that amount. Under the option agreement, the Company has the right to terminate the option agreement if the Company determines that it will not meet these requirements.

The tax consequences of the employee not meeting the conditions is that the option is typically treated as an ordinary employee option. This means that the difference between the share price and the market value is subject to income taxation. Furthermore, the Company will be liable to pay social fees on that amount. According to the option agreement, the option right will expire for employees who do not meet the requirements.