Employee shares and stock options
What is an employee stock option?
Stock options are a right, but not an obligation, to purchase existing stock in a company at a later date at a predetermined price. As an employee, you are free to decide whether you want to exercise the option and purchase stock at a later date. If you have stock options, you will normally only have to pay when you convert the options into shares in accordance with the terms of the stock option agreement. A warrant is roughly the same as a stock option, but unlike a stock option, it gives you the right to acquire a newly issued share.
Employee shares
Employee shares are usually shares that the employer either gives to employees or sells to employees at a favourable price, i.e. a price lower than the actual value.
If you have been given employee shares, you do not normally run any financial risk with this form of compensation. However, if the company is not listed on the stock exchange, you will normally be required to sign a shareholder agreement, which may entail certain obligations. In this case, we recommend that you send the shareholder agreement to us for review before signing it. You should also be aware that you will be taxed according to the relevant tax rules depending on the content of the scheme.
If you have purchased employee shares at a preferential price, you run the risk that the market value at the time of sale will be lower than the price you paid. The difference between the price you paid for the employee shares and the sale price you can obtain will then be a loss for you.
Convertible bonds
Convertible bonds are loans that employees give to the company they work for. The loan comes with the right to convert it into shares in the company at an agreed price on one or more predetermined dates in the future.
If price developments have made conversion unattractive, you can instead demand that the loan be repaid at maturity.
Impact on your rights as an employee
Generally speaking, you will own such a small share of the company that it will not affect your rights as an employee in any way compared to if you did not have a stock option scheme.
However, co-ownership of a larger share of the company's shares may well change your rights as an employee.
If you are unsure whether this is the case, send your agreement to IDA for review.
Agreements made before 1 January 2019
Rights if you resign
If the employee resigns, breaches the terms of employment or is dismissed for just cause, all unexercised share options will lapse unless otherwise agreed.
The same applies to the right to be granted options after termination of employment.
Of course, you can still agree on a more favourable solution with the company if they are interested in doing so.
Rights upon dismissal
If you are dismissed or resign due to gross misconduct on the part of your employer, you retain the right to any stock options, etc. that have been granted to you.
In addition, you retain the right to a proportionate share of the allocations for the financial year that you would have received if you had remained employed.
If the scheme states that this share of allocations lapses upon termination of employment, there is a good chance that the scheme is in English and has been drawn up in accordance with American law.
This does not change the fact that the Danish Stock Option Act applies and trumps American law.
Stock option schemes established on or after 1 January 2019
For agreements entered into on or after 1 January 2019, there are no longer any rules governing what happens to your options when you leave the company, so your rights depend on what is stated in the agreement. As there is no legal protection of your option rights upon termination, it is important that you ensure, as far as possible, that your rights upon termination are reasonable. It is important to note that it is potentially possible to agree that the scheme should mirror the previous rules as they stood before 1 January 2019, including the option to retain the right to exercise share options in the event of termination of employment by the employer.
We recommend that you send the agreement to IDA for review before signing it.
If you have already exercised your share options under an agreement under the new rules, your employer is not entitled to acquire the shares at a price below the market price at the time of repurchase.
Employer's duty to provide information
If you have a stock option scheme, warrant scheme or similar, your employer must provide you with a range of information about your scheme in writing in Danish. This is stated in the Stock Option Act. The following information must be provided in a separate document, typically referred to as an employer's statement:
- The date of allocation
- Criteria for allocation
- The date of exercise
- The exercise price
- Legal status upon termination of employment
- The financial aspects of the scheme