Dear Pomelo, what does it mean to exercise my options and how do I do it?

If you are reading this article, chances are you have received options and the time has come for you to be able to exercise them. If you are sitting here reading this thinking “yes this is me” then congratulations, take a second to give yourself a pat on the back!  If that is not you, maybe you have received options and are curious to understand more? If neither of these situations are you, maybe you just want to brush up on your understanding of options so that you can have banter with your brother or impress the girl sitting opposite you in your shared workspace at the coffee machine, absolutely no judgment either way. If you're not actually sure what options are then maybe check out this article first and then loop on back to us here. We will be waiting.

After speaking with serial entrepreneurs, investors and even people with finance degrees we realised no one fully understands all the jargon associated with options, equity agreements and everything in between. If the so called “experts” are confused we realised there was a gap in the market to educate people about equity and create a safe space where no question is a stupid one (as the saying goes the stupid question is the one not asked).

What are options again?

Options give you the right to buy shares (but not the obligation) at a fixed price. In an equity agreement you receive a fixed amount of options which vest over time. Think of it like receiving a token each month to go to a different destination for your birthday. When the time comes to pick your destination you have 12 options of where you could go but no obligation to go to any location. The best part is the price is fixed, so the latest fuel shortage doesn’t dampen your dream of going to the Dominican Republic.

What does exercising my options mean?

Exercising (or striking) options means the process of converting options into shares. No this is not a science experiment where you convert water into wine. To be able to “exercise” your options you need to have fulfilled all the conditions of your equity agreement which is discussed in more detail below.

How do I know when I can exercise my options?

There are a number of conditions which need to be met to be able to exercise your options:

1. Your options must have vested before you can exercise them. Options vest over a time period which is mentioned in your equity agreement. For example if you have 4000 options which vest every 6 months over 4 years, every 6 months 500 of those options have vested and you are technically entitled to exercise them.
   
2. You need to check which type of equity agreement you have. The two most common are time based and exit based. If you have a time based equity agreement and all your options are vested (provided you met all the conditions) you can exercise your options. If you equity scheme is a exit based one you need to wait for an exit event to happen.
   
3. Typically you still need to be employed with the start up.

The above list is not exhaustive, we have more resources here which discuss other conditions in more detail.

Do I have to pay to exercise my options?

Unfortunately nothing in life is free. Typically you have to pay to exercise your options. Check the exercise price in your equity agreement. If you got in early, exercise prices can be as low as £0.01 per option. Let’s be honest there is virtually nothing else you can buy for a penny these days.

Do I have to exercise my options now?

It fully depends. If you just can’t wait to become a shareholder and you have met all the conditions then yes, go for it. Remember, as long as you are still employed with the start up you don’t need to exercise your options today. If your start up is going through an exit event, then most likely, yes you should exercise your options.

I have a new job offer, what does this mean?

Congratulations! However, before you rush and sign a new contract there are a few things you should consider.

• Have all your options vested? If not, you are walking away from potential equity in your start up
• Does your equity agreement have a good leaver / bad leaver clause? If you leave will you be considered a good or bad leaver?
• Is your equity agreement an exit based agreement? If yes and no exit event has taken place, chances are you will not be able to exercise your options and therefore end up forfeiting them.
  

How do I exercise my options?

To exercise your options you need to notify the person who is in charge of managing your equity agreement (typically the founder, but chat to the team at Pomelo to help with this) that you want to exercise your options. They sort out all the paperwork and compliance with the HMRC. Finally, you need to pay (if any) the exercise price to the company. Once the transaction is settled, you will be a proud owner of the equity in your company.

What happens after I have exercised my options?

Your options have converted into shares and now you are a shareholder, this means you are an owner of part of your start-up. Apart from bragging rights, being a shareholder means you may receive dividends (if they are paid), you may have voting rights and will receive any proceeds in case of an exit event.

Are there any tax consequences?

Hopefully your equity scheme is a EMI Scheme. These schemes are the most tax favourable for employees. There should be no income tax liability when you exercise your options which is a big win for employees.

If you have got to the end of this and are still confused or your question has not been answered why don’t you drop us a message. Remember the only stupid question is the one not asked and we are waiting to chat all things options with you.