Employee share or option programs - What, how, and why

The recipe for putting together a kick-ass team: well-designed share and option programs (ESOPs) for employees. They can be remarkably powerful, and at the same time meaningfully cost-saving.
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In this post, you'll learn more about employee share and option programs (ESOPs):

One of the most important jobs any CEO has is to recruit and keep great people. With the current talent war in a healthy job market, that's harder than ever. This is where an ESOP can have a real impact.
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Let's start by defining what we mean by share and option programs. We're talking about giving employees ownership incentives in the company they work for, so they get to share in the value they're helping to create. That has many positive effects, which we'll come back to. It's a cornerstone of the playbook in Silicon Valley, where the term "Employee Stock Ownership Plans", or ESOP, was coined.

Investopedia defines ESOP as:

That covers any kind of employee incentive structure tied to shares in some way, including options. In Norway, we don't yet have a settled umbrella term. Some call it an incentive program, others options, share program, ownership, equity compensation, and so on. It's a matter of definition, and to be strictly accurate, it's hard to settle on one term. We've chosen "share and option program" for now, but for simplicity, we'll refer to it as ESOP throughout this post.
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Implementing an ESOP is likely one of the most effective decisions a company can make to lock in long-term motivation for its team. Many companies, especially early-stage ones, also use ESOPs actively as part of the compensation package to keep cash salary costs lower in a critical phase.
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For more on why you should consider this for your company, see this article.
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Owning a piece of the company has a strong motivational effect on most people. It can be powerful enough that, in many cases, it gives certain employees a sense of "purpose." They get the feeling that they're building something for themselves and for a shared community.
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Part-ownership also builds a solid team culture, an "us" culture. It makes employees more willing to push through hard work and the rough patches that many early-stage companies inevitably go through.

The data shows the same: it tends to make employees less opportunistic during tough times. Employees without ownership are often quicker to look elsewhere instead of helping the company through the hard moments.

In short, well-designed ESOPs help keep key people around longer, working toward shared goals.

Many companies also use ESOPs to attract stronger external board members.

Most companies that actively use ESOPs do so as part of the overall compensation package. That can have a strong impact on the finances, because salary is usually the highest single cost.
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It's often a must in early-stage companies, since most startups can't pay high salaries at the start. It can be thought of as an investment from the employees' side.

Early-stage investors find this favorable, and sometimes even expect it. Partly because it's good for the company's finances, and partly because the team has what they call "skin in the game," demonstrating commitment by trading guaranteed money for potential upside. Read more about how ESOPs can help reduce salary costs in this article.
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ESOPs come in many forms with different types of instruments (structures).

The most common are shares with restrictions, called Restricted Stock Awards (RSA), and stock options, often just referred to as shares and options. But there are others worth considering: Restricted Stock Units (RSU), and synthetic structures.

The main difference between shares and stock options is that shares are actual, present-day ownership in the company with the associated benefits, while stock options give the right to buy shares in the future at a pre-agreed price. Read our dedicated blog article for a closer look at the difference.

Picking the right equity and ESOP structure is a complex decision; there's a lot to weigh: cost, tax implications, motivational impact, legal considerations, practical considerations, and more.

In our view, the best-structured programs maximize motivation and retention, while keeping cost and tax burden on the employees as low as possible.

The stage a company is in at the time the ESOP is set up is often the dominant factor in choosing which type of program to use. The reason: the cost of participating in the program and the corresponding tax consequences. In other words, the short- and long-term financial impact on the employees.

From a tax perspective, any financial benefit tied to employment should be taxed as income. So the default rule is that gains from options are taxed as income. By contrast, a gain on an actual investment (made at market price) is taxed as capital income. That matters because tax on income is typically higher than tax on capital income. Investing through a holding company can also bring the exemption method (fritaksmetoden) into play.

Several countries, including Norway, have dedicated schemes for early-stage companies to stimulate value creation and growth. In recent years, there have been changes to make options more tax-efficient. But strict criteria apply to the option, the company, and the employee to qualify. See the dedicated article on this.

ESOP structures like Stock Options, Restricted Stock Units (RSU), and Phantom Shares all fall under the income tax category by default, because the employee receives a benefit through their employment. The exception is the special tax reliefs mentioned above, which mostly apply to stock options. Note: shares sold below market price are also treated as an employee benefit and are taxed immediately as income.

Companies should aim to minimize the tax impact on employees wherever they can. In cases where a company can't use a special tax exemption, the best move is usually to structure the plan so that any financial reward is treated as capital gains, if that's achievable.

That generally points toward direct ownership through the purchase of shares. There are different ways to do this. The most common is what we call Restricted Stock Awards (RSA). In short, that means granting shares with certain restrictions, which we'll describe more in the terms and conditions section.

Now that we've covered options and RSA, here are two scenarios to illustrate why timing matters when choosing a structure. Say you want to offer employees an ESOP in each of these cases:

Employees would need to either:

This is often before the company has raised any external funding. The company then has much more room to maneuver on ESOP design. Employees can buy shares at a very low price. An RSA plan is often the best option in this case. It's affordable and tax-favorable, since any gain is taxed as capital gains, or may fall under the exemption method.

Note: There are ways to make the RSA structure workable even after taking outside investment. We'll cover this in more detail in a separate post. One alternative worth considering is a loan-financed share purchase model (often called the Kruse Smith model). Read more in this article.

Another thing that makes structuring an ESOP complex is the many tricky legal terms that show up in the agreements, often kept in English because there are no fitting Norwegian equivalents.

These terms are mostly in place either to deliver the intended motivational effect for the employee or to protect the company from unwanted outcomes. They help companies avoid ending up with what's often called a "broken" or unfinanceable cap table, where a lot of the ownership has ended up with people who no longer work in or contribute to the company.

One of the most common terms is vesting. This determines how employees earn the right to keep shares, exercise options, or settle RSUs.

Vesting can be:

Other things an ESOP often includes: post-termination clauses for various scenarios, plan expiry dates, lockup periods, right of first refusal, and so on. Some of these can also be covered in a shareholders' agreement (SHA), especially for working shareholders.

Another thing to be aware of is share classes. A company can have specific share classes on its issued shares, which can affect voting rights, dividends, and payout preferences.

In short, ESOPs carry an element of risk for both the employee and the company. A well-designed ESOP structure and agreement reduces that risk for both sides. We'll cover this and the terms in more detail in a dedicated post later.

As with everything in business, communication matters, but it's often not taken seriously enough. When designing an ESOP, many stakeholders can be involved: founders, leadership, different types of investors, the board, existing employees, new hires, and more.

Strong communication from the start and throughout the process matters. It helps you land on a fair plan, motivating, and works for many people; a plan that has a higher chance of getting approved or accepted, and one that reduces friction and disappointment down the line.

We've seen many managers make empty promises about ESOPs to employees, then fail to deliver on the implementation. It's a complex domain with many important factors to weigh, which often leads managers to put off the decision. By the time they get to it, the desired or most optimal program type may no longer be feasible, for various reasons. That often leads to frustration on the team, and sometimes to employees leaving.

Communication throughout the life of the plan is also useful for keeping employees motivated and making them feel included.

We also recommend that the team, especially key people, always have an active plan. That means a new ESOP structure should be offered to them before the existing one expires. It's good practice for retaining talent and continuing to motivate the team over the long run.

A common question we get is: how much of the company's equity should be allocated to the ESOP program (the "pool" or "pot")? There's no exact science to this. It depends on the company's ambitions, how many employees you need, what kinds of employees, and the timeline. But somewhere between 10–20% is generally considered normal. This comes in addition to the founding team, who typically hold all or most of the shares before any outside investment.

It's also very common for the ESOP pool to be topped up at each investment round, which often comes with hiring needs. That's usually when the question of different ESOP structures becomes relevant.

If a company is on a venture journey and raises capital across multiple rounds, this has a self-regulating effect. As the company raises more capital, more shares are issued, so you can allocate more shares to the ESOP pool to maintain the same percentage of shares available for the program.

How much each individual person should get is also worth thinking through carefully. You're trying to look into the future of the business, predict your employee needs, and design a plan that works long-term. It should also be fair. Get the allocation wrong, and you can end up with unhappy employees. It's fine for employees who join early to get a bigger pot than those who join later. And it's fine for people in more senior roles to get a bigger pot than more junior ones. But the guiding principle should be fairness. Treat it as part of the compensation package. It often depends on seniority or the role. Another consideration: if someone takes a bigger salary cut than someone else, you can compensate the difference with ESOP.

While the "E" in ESOP stands for "Employee," it isn't limited to employees. It's not unusual to compensate board members or advisors with equity as well. This is especially useful in the early days of a company, when cash is scarce, you have little to show, you have a small team, and the need for strong contributors is high. Be aware that other terms and tax rules may apply to these, especially when it comes to options.

Having external contributors (other than employees) compensated with equity is often called "sweat equity." It's good practice for getting help in the early days. But be careful with how much equity you give away at this stage; you still need to think long-term and protect your ownership. Giving away too much equity early can haunt you later when you try to raise new capital. We'll cover this in more detail in a separate post.

There are several other factors we haven't covered in this post that we'll get into in others. These include, but aren't limited to:

The source of the shares (newly issued shares, "treasury" shares owned by the company, secondary shares); investor expectations and frequent requirements; setting up a new option pool pre- or post-money during a capital raise and the related dilution effects; accelerated vesting; employees using a holding company; accounting and reporting requirements; tax requirements; and more.

This domain is complex, and it requires admin both when you implement a program and throughout its life. Software for managing all of this saves companies meaningful time and money. It also gives the company full control and compliance, while keeping employees informed and motivated.

Lawyers we work with have said that our software, which handles the process around options and gives a fully diluted ownership view, can save up to 10% of a CEO or CFO's time at a growth-stage company.

Our software helps you implement plans, walks you through the process with wizards, and sends ESOP plans out for e-signature. The documents are stored in a dedicated document center, which gives you full traceability, easy access, full control, and keeps the cap table and transactions aligned. That isn't just helpful for company leaders who want full control of ownership; it's a must when raising capital.

The software is structured to let you reduce the admin burden when issuing new plans and exercising options. That means less need to convene a full general meeting every time you want to issue new plans. This is handled through a pre-approved pool structure, and you can set up plan templates that are easy to roll out for new hires.

The company leader (admin user) gets a clear overview of every ESOP in the company and can manage them from one place, adding new ones, editing old ones, updating stakeholders, exercising options, and so on.

Likewise, employees get their own dashboard with everything they need: plan details, progress, vesting schedules, and so on. It's designed to keep employees informed and motivated as they watch the value of their stake grow over time.

You also get a full cap table view, not just actual shares but also share rights. You can see and simulate how convertible loans, options, and other instruments might affect the ownership split under different scenarios.

The notification center keeps everyone up to date, flagging changes, nudging people to take action when needed, and sending reminders. This reduces both risk and the admin burden around following these plans up.

For example, when an employee wants to exercise options, they submit a request. The manager approves it, the employee transfers the money, and the manager then issues the shares. The whole flow runs through the software and cuts the admin load significantly.

The other side of this is the accounting and reporting requirements. Stock options need to be expensed, and there are tax obligations for employees and, in some cases, the company. Having a system that can report and forecast the necessary numbers saves time and helps leaders stay in control.

When you're building a team and a culture for high performance, there are few things with as much leverage as implementing an ESOP. The bonus: it can also help reduce costs. Both of these matter a lot in the early stage and the growth stage of a company.

That said, ESOPs are a complex domain, from a legal, tax, cost, and practical perspective. There's a lot to think about. Getting things right from the start matters. There are best practices, and there are common pitfalls to be aware of.

Trying to figure it all out yourself takes a lot of time, and there's a real risk of making mistakes that turn out to be costly later. Often, you don't know until it's too late. Using accountants and lawyers can feel like the only way out. That route is also expensive. They can give you legal advice, but they aren't always the best from a practical, business, or company-building perspective.

We specialise in helping companies analyse their stage and needs, and design the right plan at the right time, from a cost, tax, risk, and motivation perspective. That changes as the company evolves, so it's also important to plan for the long term.

Both implementation and administration can be demanding and time-consuming.

There are real advantages to consulting with experts in the field during implementation and using software that saves you valuable time and cost while keeping you in full control.

You're warmly welcome to book a free call with one of our experts to learn more.