A cash payment can look generous until you realise that leaving may also mean losing options that could be worth far more. Knowing how to value share options is therefore essential before agreeing the terms of a UK settlement agreement. The right figure is rarely printed neatly in the agreement. It depends on the share plan rules, your leaving status, the company’s prospects and the deadline for exercising any options that remain.
Share options are often one of the most valuable and least understood parts of an exit package. They need to be reviewed alongside notice pay, bonus, holiday, compensation, tax treatment, restrictive covenants and your reference – not treated as an afterthought.
How to value share options before signing
Start by identifying exactly what you hold. “Share options” is a broad description. Your rights may sit under an Enterprise Management Incentive (EMI) scheme, an unapproved option plan, a Company Share Option Plan (CSOP), or a bespoke executive arrangement. The scheme type can affect both tax and what happens when employment ends.
Ask for the option agreement, the relevant share plan rules, all grant notices and any correspondence about vesting or exercise. These documents should confirm the number of options, the exercise price, the class of shares, vesting dates and the circumstances in which options lapse.
The basic starting calculation is:
Potential value = current share value less exercise price, multiplied by the number of exercisable options.
For example, if you can exercise 10,000 options at £1 per share and the shares are currently worth £4, the paper gain is £30,000. That is not necessarily the amount you could put in the bank. You may need to pay £10,000 to exercise, meet a tax bill, and then wait for a sale of the shares. If the company is private, there may be no immediate buyer at all.
This is why an option valuation is an evidence-based judgement rather than a simple multiplication exercise.
Establish what vests, survives and lapses
The first practical question is not “What are the shares worth?” It is “What rights will I still have after my employment ends?”
Options commonly vest over time. Unvested options may lapse on termination, although the employer or plan administrator may have discretion to allow some or all of them to vest early. Options already vested may also lapse unless exercised within a short post-termination period, sometimes 30, 90 or 180 days.
Your classification as a leaver matters. Plan rules may distinguish between a good leaver, bad leaver and other categories such as retirement, ill health, redundancy or dismissal. A negotiated departure under a settlement agreement is not automatically treated as a good-leaver event. The agreement should state the treatment of your options clearly, rather than leave this to an assumption or an informal assurance.
Check in particular whether the proposed terms provide for:
- accelerated vesting of some or all unvested options;
- retention of vested options for a defined exercise period;
- treatment on redundancy, a sale, flotation or other exit event; and
- cancellation, buy-back or cash payment for options that would otherwise lapse.
A small change to leaver status or the exercise window can materially change the value of the settlement.
Assessing the company’s share value
For a listed company, the market price gives a useful starting point, though restrictions, dealing windows and tax still need consideration. For a private company, valuation is more difficult because there is no daily market price and shares are often illiquid.
The employer may have a recent valuation from a funding round, a sale process, a company accounts-based valuation, or a valuation agreed with HMRC for tax purposes. Request the basis of any figure being used. The latest preferred-share funding valuation may not translate directly to the value of ordinary shares under your option scheme. Investors can have preferential rights on a sale, meaning ordinary shareholders receive less than the headline company valuation suggests.
A fair review should consider the company’s latest accounts, recent investment, current trading, debt, any planned transaction and the rights attached to your particular share class. A business with strong headlines but substantial debt, or several layers of investor preference, may produce a lower return for option holders than expected.
It is also sensible to distinguish between three figures: the value today, the likely value in a realistic sale scenario, and the amount the employer is prepared to pay now to resolve the issue. Those figures may be different, and that does not automatically make an offer unfair. It does mean the assumptions should be transparent.
Do not overlook exercise cost and tax
The exercise price is money you must pay to acquire the shares. If your options are underwater – meaning the exercise price is above the current share value – they may have little immediate financial value. They can still have future potential, but that potential is uncertain.
Tax can also change the calculation significantly. With qualifying EMI options, favourable tax treatment may be available if conditions are met. However, leaving employment can affect the relevant time limits and, depending on the circumstances, may affect the tax position. Non-tax-advantaged options can trigger income tax and National Insurance liabilities on exercise or another chargeable event.
A settlement agreement should not casually describe an option-related payment as tax-free. The £30,000 tax exemption that can apply to certain termination payments does not automatically apply to payments connected with employment-related securities or share options. The drafting should say who is responsible for tax, National Insurance and any interest or penalties if HMRC takes a different view.
Legal advice on the settlement agreement and specialist tax advice serve different purposes. Your solicitor can ensure the agreement properly records the parties’ obligations and protects your position; a tax adviser may be needed where the figures, scheme rules or potential tax exposure are complex.
Turning option value into a negotiation point
Once the likely value and risk are understood, there are several ways to deal with options in a settlement. The best route depends on your cash position, confidence in the business and the employer’s willingness to negotiate.
You may ask to be treated as a good leaver, retain vested options for longer, receive accelerated vesting, or receive a cash payment for options that would otherwise be cancelled. In a company sale or restructuring, it may be possible to agree that your options participate in the transaction on the same basis as if you had remained employed until completion.
A cash payment offers certainty, but it may be lower than the potential upside of keeping the options. Retaining options preserves that upside, but you take the risk that the company does not grow, does not sell, or that you cannot readily sell your shares. There is no universal right answer. The settlement should reflect an informed choice rather than pressure caused by a short deadline.
If cash compensation is proposed, ask how it was calculated. A reasonable negotiation is more likely when you can point to specific evidence: the number of options affected, the exercise price, the latest share valuation, a pending transaction, and the leaver provisions that the employer is being asked to vary.
Questions to raise during a settlement agreement review
Before signing, make sure you can answer the following questions clearly:
- How many options have vested, and how many will lapse?
- What leaver category will apply under the plan rules?
- Can you exercise after termination, and by what exact date?
- What is the exercise price and the expected tax cost?
- What evidence supports the stated share value?
- Are your shares ordinary shares, and do investor preferences reduce their value on an exit?
- Does the settlement agreement override, amend or preserve any rights under the share plan?
- Is there a tax indemnity, and is it drafted fairly?
The wording matters as much as the commercial promise. A settlement agreement may state that an employer will exercise discretion, but it should be clear what discretion has actually been exercised, when it takes effect and what happens if an intended transaction does not proceed.
Get clarity before rights are waived
A valid settlement agreement requires you to receive independent legal advice on its terms and effect. That advice should include the consequences of waiving employment claims, but it is also an opportunity to identify valuable contractual rights that might otherwise disappear on termination.
At Arcos Settlement Agreements, a review can help you identify whether the share-option provisions are clear, whether the agreement reflects the negotiated position, and which questions should be raised before you decide. Where valuation evidence or tax advice is needed, it is better to obtain it while there is still time to negotiate.
Your options may be worth nothing, a modest amount or a meaningful part of your overall package. The point is not to chase a speculative number. It is to leave with clear information, workable terms and no avoidable surprise after you have signed.