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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.
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.
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:
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.
Note that the below requirements related for the group as a whole if a company is part of a concern.
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"?
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:
"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.
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.
We hope you found this helpful🦸 We would love to get your feedback on this. Please send any feedback or questions to us at firstname.lastname@example.org
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