Legal process for share reservation
- Decide the pool size as a percentage of fully diluted shares, based on a hiring plan.
- Choose or draft an option plan document that sets out eligibility, vesting defaults, exercise mechanics and leaver provisions.
- Pass a board resolution to adopt the plan and reserve the agreed number of shares for it.
- Where required, pass a shareholder resolution authorising the directors to issue shares on exercise, since new shares dilute existing holders.
- Update the cap table to show the pool as reserved but unallocated, separate from shares actually granted.
Selection of tax efficient equity schemes
In the UK, many startups use an EMI scheme because it offers favourable tax treatment for employees and is well understood by investors, subject to company and employee eligibility limits. Where EMI is not available, companies use unapproved options or a CSOP. In continental Europe, plan structures vary by country: some jurisdictions have qualifying regimes with tax advantages, while others rely on standard option agreements without a special tax status, a decision usually made alongside increasing a pool planning for future rounds.
This is general information, not legal or tax advice. Get local advice before choosing a plan structure, since eligibility rules and tax treatment differ by country and change over time, particularly for stock options granted to employees in multiple countries.
Legal documentation for employee option schemes
| Document | Purpose |
|---|---|
| Option plan rules | Sets out how the scheme works: eligibility, vesting, exercise, leaver terms |
| Board resolution | Formally adopts the plan and reserves shares |
| Individual option agreement / grant letter | Confirms the specific grant to an individual employee |
| Cap table update | Reflects the reserved pool and any shares granted |
Setting up a pool for the first time
- Do I need a lawyer to create an option pool?
- It is strongly recommended. Plan rules and grant documents have legal and tax consequences, and mistakes are expensive to unwind.
- Can the pool sit unused for a while?
- Yes. Reserving shares does not require you to grant them immediately. Many companies reserve a pool at a fundraising round and grant options gradually as they hire.
- Does creating a pool dilute existing shareholders immediately?
- Reserving shares for the pool dilutes fully diluted ownership on paper, but actual issued share dilution only happens when options are granted and exercised.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.