Options or actual shares for your first hires?
At some point a founder wants to give an early, brilliant hire a real stake in the company, and the instinct is generosity: give them shares. Actual shares, right now, so they own a piece of the thing they are helping build. It is a lovely impulse and usually the wrong instrument. For most early hires, options are the better tool, and understanding why saves you a mess later.
What actual shares do
Give someone real shares and they own them immediately. That has consequences the generous instinct skips over. There can be a tax charge at the point they receive the shares, because they have been given something of value. They become a shareholder with the rights that carry. And, most awkwardly, if they leave in a year, they walk away still owning their shares, sitting on your cap table, contributing nothing further, for as long as the company exists. The generous gesture becomes permanent dead equity.
What options do instead
An option is a right to buy shares later, at a price set now, usually only if the person is still around when the option vests. That difference solves most of the problems above. The reward is tied to staying and contributing, not to having been there on one particular Tuesday. For most unapproved options, tax is usually charged when the option is exercised rather than when it is granted. Qualifying EMI options can be tax-advantaged, provided the statutory conditions are met.
Growth shares: the useful middle option
There is a third instrument that sits between the two, and it is worth knowing because it solves a specific problem. Growth shares are actual shares, but they only carry value above a threshold set at the point they are issued, usually a little above the company's current worth. The holder gets nothing for the value already built, and shares in the upside from here on.
That structure does two useful things. It lets you give someone genuine equity, with the ownership feel that options lack, without handing over a slice of the value you have already created. And because the shares are worth little or nothing at the moment they are issued, the upfront tax charge that makes ordinary shares awkward is typically much smaller. Growth shares are common for senior hires who want real shares rather than options, or for people who do not qualify for EMI. They are more fiddly to set up than an EMI option, so they earn their place when the situation calls for them rather than as a default.
When actual ordinary shares still make sense
For a genuine co-founder-level hire, someone joining early enough and centrally enough to be a founder in all but name, actual shares with proper vesting can be right. The test is whether this person is a builder of the company or an employee of it, however talented. Builders can make sense for shares. Employees, almost always, are better served by options.
The short version: generosity says shares, sense usually says options, and growth shares are the middle path when someone genuinely needs equity without the tax sting. If you are about to give away your first slice of equity, it is worth ten minutes to pick the right instrument before you hand it over, because it is far harder to unwind than to set up. We are glad to help you get it right the first time.
How Kyra Law can help
Kyra Law can advise on employee shares, EMI options and growth shares, then prepare or review the documents needed to implement the right structure. For a lawyer review and fast turnaround, contact enquiries@kyralaw.co.uk.