U.K. Share Schemes vs. U.S. Stock Option Plans

ASL’s Valuation Team recently prepared 409A valuations of VC funded biotech companies located in the U.K. We would like to share some insight into U.K. share schemes and compare them to U.S. stock option plans. To start with, in the U.S., they are called plans whereas in the U.K., they are called schemes.

There are two types of stock options in the U.S., Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs). The biggest difference between the two has to do with their treatment for tax purposes. ISOs are more tax efficient because tax is paid only when you sell the stock. With NSOs, tax is paid when you exercise options, i.e. when you buy the underlying stock, and again when you sell the stock, presuming your shares increased in value.

In the U.K., there are four types of approved share option schemes: Share Incentive Plan (SIP), Save as you Earn (SAYE), Company Share Option Plan (CSOP), and Enterprise Management Incentive (EMI).  EMI share schemes are the most popular. Like U.S. options, they are often used by early stage technology companies with the goal to provide an additional incentive to employees through participation in the company’s equity.  In addition, like U.S. options, these are granted, exercised and eventually sold.  And like U.S. ISOs, there is no tax upon receipt of the grant or upon exercise, only upon sale at capital gains.

The key difference between U.S. ISOs and U.K. EMIs is the grant price.  EMIs are often granted at nominal prices, i.e. £0.0001 while in the U.S., stock options must be granted at fair market value.  The fair market value of stock options can be determined through a formal valuation performed by an independent appraiser, whereas EMI’s are submitted and approved by the HMRC (the U.K. tax authority).  409A valuations expire one year after the valuation date, or sooner if there was a significant event such as a new funding round.  EMIs have to be reported to the HMRC within 92 days of the grant.

An important thing to note: U.K. companies looking to go public in the U.S. need to be 409A compliant when it comes to issuing options to their employees who are located in the U.S.

We will discuss SIPs, SAYEs and CSOPs, the other U.K. share schemes, in a future article.  In the meantime, if you would like to further discuss the complexities of share plans/schemes in the U.S. or the U.K., please contact Jeff Faust, CVA, Director of Valuation Services at jfaust@aslcpa.com or 408-377-8700 x232.