OptionsOslo Business Region | September 2016

A primershare options //

A Share option is a right to acquire shares in the future (no obligation)

The price per share is called Strike Price

- Normally set as market price at time of allocation, but can be set at lower value

Options give upside similar to owning shares in the company, but no downside

- Key differences are cash exposure and tax

Options normally vest over a period of time

- Typically with 1/3 over 3 years

The duration – or time to expiry – of an option is an important part of its value

One key challenge in start-ups is that there is no liquidity in the shares

- Makes it difficult to exercise options that are “in the money” due to tax

Options are taxed as income (~47%), not as capital gains (~25%) in Norway

- Not start-up friendly

- Taxed when you exercise option, not when you are allocated an option.

An exampleshare options //

You are allocated 10 000 options

Strike price is NOK 10 with vesting 1/3 over 3 years

- NOK 10 is equal to share price at time of allocation

After 3 years, the share price has increased to NOK 100

You then exercise all options, i.e. you buy 10 000 shares at NOK 10

Your gain is NOK 90 per share, in total NOK 900 000

You are taxed as if it was income in Norway (~47%)

- Even if you don’t sell the shares

The company has to pay “arbeidsgiveravgift”

If you can sell the shares immediately, that is an advantage, because you will

need money to pay the tax bill

Any later gains on shares owned will be taxed as capital gain (~25%)

What we typically seeshare options//

In Norway, a typical option pool represents ~10% of shares, often less

- In the US, typically 15-20%. Employees in US start-ups expect an option plan

Size of program depends on how “for hire” vs. “founders” the team is

Some companies allocate the same amount to all employees, some reserve

the program for a few key employees

The most common is a balanced approach, where allocation depends on

1) Salary, 2) Position/Seniority) and 3) When you get hired

Normally, founders do not participate, they own shares

Some employees don’t appreciate options, they view them with skepticism…

Option pools in the usshare options //

We like everybody to have a stakealliance venture’s view//

We prefer employees owning shares

- Gives both upside and downside

- More tax efficient

If you keep company valuations low initially, it is easier for key hires to become

shareholders

Key benefits with options: Give stakeholders a free upside (no investment

needed at grant) while conserving company cash

We believe options could be a much more powerful tool in Norway if tax was

fixed (e.g. approved schemes)

We prefer a balanced approach in option programs

- Most options allocated to key employees, but everybody gets a small allocation

Governance & Practicalitiesshare options //

Allocating shares is an ownership issue

- New shares have to be approve by the General Meeting

- Allocating options potentially dilutes the other shareholders

Some authority is often delegated to Board of Directors

The BoD often delegate some authority to CEO

Use a standard option agreement

Try to use fixed dates, i.e. that options vest from a certain date, so that

employees do not have individual starting dates

Keep good overview of option grants together with your cap table/shareholder

registry

Give yourself flexibility to extend program (expiry date)

Thank you!

Johan Gjesdahl, Partnerjohan@allianceventure.com

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