Do out of the money options deserve compensation?

October 7, 2025

As employee share arrangements become more common so do the instances that threaten to derail them

Is anyone else feeling that the Budget cannot come soon enough, so we can all get on with our lives?  I never like this phase when all you have is speculation and uncertainty.

Nonetheless, assets still need valuing and we are busily getting on with exercises around planning for the changes to BPR, serving the needs of companies that are fundraising and engaged in M&A, and setting up employee share arrangements.

We have seen a recent trend in employee share arrangements (ranging from EMI schemes through to growth shares and the rest) which undergo a corporate action that means the equity value of the company is denuded whilst share arrangements are still out of the money.

These actions may make it more difficult for a company to reach a hurdle condition and make it harder for the value an option holder can realise in the future.

We often get asked: “What, if any, compensation should we pay to the option holders and if there is compensation due, how should we award it?”

We also get asked about what HMRC might think…

Anyway, each case is unique, but it did make me wonder whether you, as lawyers, might have an opportunity here to pre-emptively solve the problem before it arises?

In certain circumstances, it might be a good idea to work into the share scheme arrangements a mechanism for how compensation could be paid. Previously, we have examined how shareholders might be compensated by granting additional options, adjusting the exercise price, or adjusting UMV/AMV.

I hope this gives you a reason to call your clients about the extant arrangements you have advised on and will also be useful when you are setting up new ones.