Stock options for startups in Norway

In this post, you'll find everything you need to know about stock options for startups in Norway:

- The background of the scheme

- The benefits of the scheme, and how it compares with the standard option scheme

- The requirements for the company and the recipient

The information in this blog post concerns a specific scheme for startup and growth companies, hereafter referred to as startups, and therefore does not apply generally to all stock option schemes. You can find a separate blog post about stock options in general here.

Let us start with a simple explanation of what a stock option is:

A stock option is a right, but not an obligation, to buy a set number of shares in the company in the future at a pre-agreed price.

Stock options are one of the most common forms of equity compensation used to motivate employees.

It is well known that working in startups and growth companies involves risk, which can be demotivating and discouraging for employees. At the same time, compensating employees for the effort required in such companies can place a significant financial burden on the business. This is particularly true for startups with limited liquidity.

Because of limited liquidity, startups may find it particularly relevant to reward employees with ownership rather than cash. However, the previous tax rules limited how effectively companies could compensate employees through ownership.

Following considerable pressure from the startup community in Norway, a scheme for “small startup companies” was introduced in 2018. The scheme was considered too narrow and was therefore not particularly well received by the startup community. Since 2018, the scheme has been gradually updated, and a new version came into effect in 2022. To better achieve the purpose of the scheme, the 2022 version was significantly expanded compared with the previous rules.

The purpose of the scheme is to stimulate innovation and entrepreneurship by providing favorable tax conditions for employees in startups. These favorable tax conditions apply in situations where employees in startup and growth companies receive ownership as compensation for their work. When ownership in early-stage companies becomes more rewarding, it can also become a more effective way to attract and retain sought-after talent. At best, this encourages skilled employees to take on the risk associated with pursuing innovation and growth, while also motivating them to stay with the company for the long term.

If your company used the scheme before 2022, transitional rules apply. This means that stock options granted under the old scheme are taxed according to the new rules.

As a general rule, the tax regulations state that the value of benefits an employee receives compared with an ordinary buyer should be treated as employment income. Such benefits are taxable as employment income and are generally subject to a higher tax rate than capital income. The tax liability arises in the year the options are exercised to purchase shares. For most startups, this can be problematic because it may be difficult (if not impossible) to sell the shares in order to cover the tax liability.

In short, the tax scheme results in lower taxation and defers the tax liability until the employee has cash available to pay the tax bill (see comparison below).

Below, we compare the standard stock option scheme with the startup stock option scheme to give you a clearer overview of the differences.

- Tax is paid when stock options are exercised.

- The gain on the option benefit (fair market value − exercise price − cost of purchasing the option) is taxed as income.

- Any gain after exercise is taxed as capital income.

- The company has to pay the employer's social security contributions (arbeidsgiveravgift, AGA) on the option benefit.

- No tax is paid when stock options are exercised.

- Tax is only paid after the shares are sold.

- Gains on the options are taxed as capital income (not income tax).

- The company does NOT have to pay employer's social security contributions (AGA) on the option benefit.

To qualify for the startup option scheme, several requirements need to be met. Most of these relate to the company itself, but there are also requirements on the option recipient and on the option itself. As long as the company meets the criteria, there are often meaningful benefits to be had.

We've listed the requirements below in three categories.

You can also check whether your company qualifies using this short questionnaire.

Note: the requirements below apply at the group level if the company is part of a corporate group.

- The scheme applies to stock options that grant the right to acquire shares in a limited company (AS) based in Norway. It also applies to equivalent companies based in another EEA country that have limited tax liability to Norway, and to equivalent companies based in non-EEA countries when the company is liable to Norwegian tax. The company cannot be listed on a public stock exchange.

- The company's total balance sheet cannot exceed NOK 200 million. This must be the case in the most recent income year before the option is granted.

- The company's total operating revenue cannot exceed NOK 80 million. This must be the case in the most recent income year before the option is granted.

- The average number of full-time equivalents (FTEs) in the most recent income year before grant must be 150 or fewer. This includes full-time, part-time, and temporary employees registered in the Employer/Employee Register. As a starting point, the average can be calculated from the number of employees at the beginning and end of the year.

- The company cannot be older than 12 years at the time the option is granted, including the year of incorporation and registration, and including all years if the company was formed through a demerger/merger or tax-free conversion.

- Public bodies must hold less than 25% of the company AND of the voting shares. "Public bodies" means bodies carrying out public activity on behalf of the state or municipality. Ownership through state and municipal companies is also included.

- The company cannot operate in coal or steel.

- A maximum of 30% of the company's total wage costs can be tied to one or more of the following activities:

- Long-term rental of premises and dwellings

- Legal advice, audit, or accounting

- Trade in property or raw materials

- Activity covered by main activity area K, "Financial and insurance activities."

- The company's main activity cannot be passive asset management. Activity linked to passive asset management cannot exceed 10% of the company's total activity.

- The company cannot have debt in the form of a claim for repayment of unlawful state aid.

- The company cannot be in financial difficulty at the time of the grant. According to the guidelines, a company is considered to be in financial difficulty if at least one of the following applies (abbreviated):

- More than half of the company's subscribed capital has been lost as a result of accumulated losses. This is the case when subtracting accumulated losses from reserves (and all other items forming part of the company's equity) results in a negative accumulated amount exceeding half of the subscribed capital.

- The company is in bankruptcy proceedings or meets the criteria for bankruptcy proceedings at the request of its creditors.

- The company is not an SME (see below), and over the last two years has had a debt ratio (book debt to equity) above 7.5 and an EBITDA interest coverage ratio below 1.0. ("EBITDA" means earnings before interest, taxes, depreciation, and amortization.)

- A company qualifies as an SME if it has fewer than 250 employees, an annual turnover not exceeding EUR 50 million, or an annual balance sheet of less than EUR 43 million.

- The employee must work at least 25 hours per week for the company, from the grant to the exercise of the option, to be covered by the scheme.

- The rules do not apply to employees who, either alone or together with a relative, own or control more than 5% of the shares or votes in the startup or in the corporate group as a whole. These conditions must be met in the most recent income year before the grant.

- This means the option must be held privately, not through a holding company.

- The rules apply to stock options granted after 01.01.2022.

- The combined market value of the underlying shares tied to options under the scheme cannot exceed NOK 3 million per individual employee at the time of grant. This limit also includes previously granted options, including options acquired under the earlier startup option scheme.

- A single company cannot grant options with associated shares exceeding NOK 60 million in total, based on the market value of the underlying shares at the respective grant dates. If the company is part of a group, the limit applies at the group level. Once the NOK 60 million limit is reached, the company cannot grant new options under the scheme, even if an employee has exercised the option, waived it, or the option has lapsed for any other reason.

- The scheme only applies to options that are exercised into shares in the startup at least 3 years, and at most 10 years, after the grant date.

- The agreed exercise price cannot be lower than the market value of the shares at grant.

- The option must be granted to the employee personally and must be non-transferable for the entire option period. That means, for example, the option cannot be transferred to a company owned by the employee, or transferred to others by inheritance or gift.

Startup companies have a reporting obligation for options granted and exercised under this scheme, see Section 7-10(h) of the Norwegian Tax Administration Act (skatteforvaltningsloven).

1. At the time of grant, the following must be reported:

- Company name and organization number

- The employee's name and date-of-birth or D-number

- Number of options granted

- Grant date

- Exercise price and market value of the underlying shares at the grant date

2. At the time of exercise, the following must be reported:

- Company name and organization number

- The employee's name and date-of-birth or D-number

- Number of options exercised

- Grant date and exercise date

The submission deadline for ordinary returns is 1 February following the income year.

The scheme can be effective, but it isn't easy to navigate due to the complex list of requirements. You can use our simple questionnaire to check whether your company qualifies.

We hope so. 🦸 We'd love your feedback — send thoughts or questions to [email protected].

If you'd like to learn how we can help you set up and run option schemes or other equity compensation programs in your company, feel free to book a no-obligation call with us.