Stock option for startups in Norway

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This blog post specifically covers to the Norwegian stock option scheme for small startups. But note that some other countries have similar arrangements with local adaption and different criterion.

We have a separate blog post covering stock options in general which you can find here. But lets start with a simple explanation of what a Stock Option is:

A stock option is a right (and no obligation) to purchase a set number of shares in the company in the future for a pre-determined price.

Stock Options are one of the most common Employee Stock Ownership Plans to incentivise employees.

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Background for the Stock Options for startups scheme

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Governments understand the importance for the economy to foster innovation and entrepreneurship. Hence go incentive schemes needs to be in place to motivate for this desired behaviour. Because of this, certain countries have their own stock option scheme for startups.

Up until 2018, Norway lacked a good incentive structure for equity compensation in Startups and growth companies. The tax regime were not favourable for using equity compensation, such as stock options. Neither for companies nor employees.

This has a negative effect on the startup and entrepreneurial ecosystem as people are not incentivised for taking extra risk. While good schemes motivate to a behaviour which boost the ecosystem over time. This was first seen in Silicon Valley and later in countries like UK and in Sweden etc.

After a lot of pressure from the startup community in Norway to come up with a solution which allows the startups to compete for talent, politicians eventually decided to implement a Norwegian Stock Options for Startups Scheme in 2018. The scheme was still not very favourable and was not very well received by the community. In later years, the scheme has been gradually updated and a new version of the scheme was made effective from 01.01.2022. This is much better and an arrangement which can be effective to attract, motivate and retain talent.

If your company used the scheme prior to 2022, transitional rules applies. This means that the stock options granted during the old scheme will be taxed according to the new rules.

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Benefits with the Stock Option for startups scheme

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According to the normal practice and Stock Option tax requirements, any gains of the stock option, prior to exercising is considered a benefit received as a result of the employment. All such benefits are taxable as income tax, which is typically a lot higher than capital gain tax. The timing of when the tax is payable is at the time of exercise, which in some cases can be problematic. Especially in startups where the stock might not be easily sellable.

In short, the benefit with this new Stock Options for startups scheme is lower tax requirement for both the employee and the company and the timing of when the tax is payable (see comparison below).

We will try to show a comparison of this below for the normal Stock Option Scheme and Stock Option for startups scheme to provide a better overview:

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Stock Options (Normal)

• Tax is payable when stock options are exercised.

• The Gains on the stock option benefit (Fair market price - exercise price - stock option purchase price) is taxed as income tax.

• Gains after exercise is taxed as capital gain.

• The company has to pay employer´s tax (Arbeidsgiveravgift / AGA) on the Stock Option benefit.

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Stock Options for startups

• Tax is NOT payable when stock options are exercised.

• The tax is first payable after the shares are sold

• Gains on Stock Options are taxed as capital gain (not income tax).

• The company do NOT have to pay employer´s tax (Arbeidsgiveravgift / AGA) on the Stock Option benefit.

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Requirements to be eligible for the scheme

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In order to be eligible for the Stock Option for Startups Scheme, there are certain requirements that have to be met. Most of these requirements are related to the company, but there are also some requirement for the Stock Option receiver and the Stock Option itself. However, as long as the company comply with the requirements, there are often some benefits that can be taken advantage of.

We have listed these requirements below in the three different categories.

You can already know if you comply with these requirements by filled out this questionnaire. Unlisted will then help you to know if your company is eligible to use this scheme.

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Requirement for the company

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Note that the below requirements related for the group as a whole if a company is part of a concern.

• The scheme applies to Stock Options that give the right to acquire shares in limited liability companies (aksjeselskap / AS) resident in Norway. In addition, the scheme applies to similar companies domiciled in another EEA country that have limited tax liability to Norway according. The scheme also applies to a corresponding company domiciled in a country outside the EEA when the company is liable to tax in Norway. The company cannot be listed on a public stock exchange.

• The company's total operating income and balance sheet total cannot exceed NOK 80 million for the company to be covered by the scheme. This condition must be met in the closest previous income year before the grant of the Stock Option.

• The company's average number of man-years in the most recent income year before the grant of the option must be 50 or fewer. Both full-time employees, part-time employees and temporary employees who are registered in the Employee Register are included. As a starting point, the average number of man-years can be calculated on the basis of the number of employees at the beginning and end of the year.

• The company cannot be older than ten years at the time of the grant of the option, including the year of foundation and registration. And including all years if the company was founded by demerger/merger or tax-free transformation.

• Public bodies need to have less than 25% of the capital AND voting shares. Public bodies means bodies that run public activities on the behalf of the state or municipality. Ownership through state and municipal companies is also covered.

• The company activity can not be operating coal or steel operations.

• A maximum of 30 per cent of the company's total wage costs linked to one or more of the following activities:

a) long-term rental of premises and housing,

b) Legal advice, auditing or accounting,

c) Turnover of property or raw materials

d) Activities covered by main business area K "Financing and insurance activities"?

• The company must mainly carry out activities other than passive asset management. The activity linked to passive asset management must not exceed 10% of the total activity in the company.

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

• The company cannot be in financial difficulties at the time of award. According to the guidelines, a company is considered to be in financial difficulties if at least one of the following circumstances exists (abbreviated version):

a) When more than half of the company's subscribed capital has disappeared as a result of accumulated losses. This is the case when, by deducting the accumulated losses from the reserves (and all other items, which form part of the company's equity), a negative accumulated amount appears, which exceeds half of the subscribed capital.

b) When the business is undergoing bankruptcy proceedings or meets the criteria for bankruptcy proceedings at the request of its creditors.

c) When the business is not an SME (see below), and in the past two years has had:

• a debt ratio, i.e. a ratio between book debt and equity, of over 7.5 and
• an EBITDA interest coverage ratio of less than 1.0.

"EBITDA" means earnings before interest, tax, depreciation and write-downs.

A company is considered a SME when it has less than 250 employees, has an annual turnover that does not exceed 50 million Euro or an annual balance sheet of less than 43 million Euro.

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Requirement for the Stock Option receiver

• The employee must work at least 25 hours for the company per week from the award to the exercise of the Stock Option in order to be covered by the scheme.

• The rules only apply to employees who either alone or together with a relative owns or control more than 5% of the shares or votes in the start-up company or the group as a whole. These conditions must be met in the closest previous income year before the grant of the option.

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Requirement for the option

• The rules applies for Stock Options granted after 01.01.2022

• The total market value of the underlying shares that are linked to the Stock Options under the scheme, at the time of award, cannot exceed NOK 3 million for the individual employee. The amount limit also includes previously granted options, including options acquired under the previous Stock Option for startups scheme.

• The individual company cannot grant Stock Options with associated shares that in total exceed NOK 60 million based on the market value of the underlying shares at the respective grant times. If the company is part of a group, the limit applies collectively at group level. When the limit of NOK 60 million has been reached, the company cannot grant new options under the scheme, even if the employee has redeemed the option, renounced the option or the option has lapsed for other reasons.

The scheme can be effective, but unfortunately it is not easy to navigate through this due to the complex list of requirements. You can use our simple questionnaire to find our if your company is eligible to use this scheme.

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Was this helpful and do you want more?

We hope you found this helpful🦸 We would love to get your feedback on this. Please send any feedback or questions to us at hello@unlisted.ai

And if you do want to learn how we can help you implement and administrate Employee Stock Ownership Plans (ESOP) in your teams, feel free to book a free call with us

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