Glossary for share schemes

  • Exercise price: the price that an employee pays per share, normally an agreed value set at the outset of the option agreement.
  • Exercise of option: the conversion of an option into shares by an employee. When an employee exercises their option they must pay the exercise price. They then become a shareholder of the company.
  • Grant of option: an option is granted when the option agreement is signed, normally by an official deed.
  • Market value: the valuation of a company (or a share in the company). This is often agreed with HMRC, but is sometimes set by a third party or investor. The market value of a company will change constantly over time and will often require some judgments and assumptions. It is fairly common for different stakeholders to value a company at different amounts, depending on their objectives and viewpoints.
  • Vesting: the period over which the options accrue. For example, options may vest over a four year period, meaning that each year an option holder will have the right to one quarter of the total options agreed. 
  • Four years vesting with a one year cliff: a commonly used vesting schedule, meaning that an option does not begin to accrue until the end of the first year after granted, then builds up to the full value over the following three years. 
  • Share option: an option to buy a share in the company at a set price. Note that a share option is not the same as a share in the company!

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