How to exercise share options

📘 Overview

Exercising share options is the process by which an option holder converts their options into actual shares in the company.

This guide explains the key steps for both option holders and companies, covering EMI and unapproved schemes, as well as the tax and reporting implications of exercise.

🪜 Step-by-Step Process

Step 1 – Option Holder: Check Exercise Conditions

Before exercising, the option holder should review the terms of their option agreement to confirm eligibility.

Typical conditions include:

• A vesting schedule (e.g. four years with a one-year cliff)
• Performance targets (e.g. hitting revenue goals)
• A trigger event, such as a company sale or IPO (“exit-only” exercise)

💡 If you’re unsure whether your options have vested or can be exercised, contact the company or your scheme administrator before proceeding.

Step 2 – Company: Review Pre-Emption Rights

Pre-emption rights protect existing shareholders by giving them the first opportunity to buy new shares before they are issued to others.

If these rights apply:

• The company may need to offer the shares to existing shareholders first, or
• Obtain written consent from shareholders to waive these rights.

📎 Check your company’s Articles of Association and any shareholders’ agreements before issuing new shares. Shareholder consent may be required.

Step 3 – Option Holder: Notify the Company

Option holders must formally notify the company of their intention to exercise their options.

This is typically done by submitting a written exercise notice, as outlined in the option agreement.

Step 4 – Company: Check Exercise Timeframe

EMI Options

• Must be exercised within 10 years of the original grant to retain tax benefits.
• If an employee leaves, they typically have 90 days to exercise before losing EMI tax advantages.

Unapproved Options

• No statutory limit, but the company’s scheme rules apply.
• Leavers often have 30–90 days to exercise before options lapse.
• Some unapproved schemes only allow exercise on an exit event (e.g. sale or IPO).

💡 Once the 90-day window expires (for EMI options), tax relief is lost, even if the option is still technically exercisable.

Step 5 – Company: Obtain Board Approval

Check whether board or shareholder approval is required before issuing shares.

• Review the company’s Articles of Association and shareholder agreement.
• If required, record the approval in board minutes before completing the exercise.

Step 6 – Option Holder: Pay the Exercise Price

The option holder must pay the exercise price set out in their option agreement.

The company should:

• Confirm receipt of payment, and
• Update its accounting and share records accordingly.

Step 7 – Option Holder: Sign the Shareholder Agreement

Upon exercising options, the holder becomes a shareholder and must agree to the company’s shareholder terms.

This is usually done by signing a Deed of Adherence, which binds them to the existing shareholder agreement.

💡 The company should provide the Deed of Adherence and ensure it’s signed before shares are issued.

Step 8 – Company: Issue and Register Shares

Once the exercise price is paid and approvals are complete:

1. The company issues shares to the option holder.
2. The register of members is updated.
3. A share certificate is issued (optional but recommended).

Check whether the shares being issued form part of an existing class, or if a new share class must be created under the Articles of Association.

Step 9 – Option Holder: Understand Tax Implications

🟩 EMI Options

Option holders may wish to make a Section 431 election to manage future tax exposure (see below).

🟥 Unapproved Options

Step 10 – Optional: Section 431 Election

A Section 431 (s431) election allows the option holder and company to agree to ignore any share restrictions for tax purposes.

Benefits:

• Prevents future “dry tax” charges if restrictions lift and share value increases.
• Ensures future gains are taxed as Capital Gains Tax (CGT), not income.

Key Facts:

• Must be signed by both parties.
• Must be submitted within 14 days of acquiring the shares.

💡 We strongly recommend all EMI and unapproved option holders complete an s431 election on exercise.

Step 11 – Company: Report to HMRC

The company must report EMI option exercises via the Employment Related Securities (ERS) online service.

• Deadline: by 6 July following the end of the tax year in which the options were exercised.
• Report includes details of each option exercised and the resulting share issue.

📎 HMRC: ERS Online Service – Reporting EMI Options

⚖️ Summary