Creating an option pool in a Swedish company

A common question we get is how you issue an option pool in a Swedish company for future employees and other key people. The simple answer is “you don’t”. But all the same it is possible to create something that has the same effect. A second question is: “Do you need to?”. The simple answer is “most of the time not, unless your company is going public”. More details on the can be found at the end of this article.

The root of the problem is that in a Swedish company (as opposed to a US company for example), you cannot normally create shares or options that exist, but are not allocated to any one owner. In a Swedish company, a share is either issued to a shareholder (which is not the company itself), or it does not exist at all. We write “normally”, since there are special cases regarding public companies, that under some circumstances may own their own shares. But this is a special situation that does not solve the problem of creating an option pool in a private company.

Option pool in the shareholders’ agreement

What you do instead is that you agree with the investors that you reserve a certain amount of shares to be issued to future employees. You formalize this by putting that into your shareholders’ agreement. Let’s say for example that your company has 2.5 million shares to begin with (why so many – read our guide). You may want to allocate up to 20% of that, that is 500,000 shares, to future employees and other key persons. So when you talk to investors, you need to inform them that in addition to the 2.5 million shares that already exist, there may be up to 500,000 more shares issued to future employees.

If you do a seed round in your company of 250,000 shares, this will result in different valuations, depending on which shares you count.

Number of shares
Seed round investors250,000
Option pool500,000
Price per share10 krCorresponding valuation
Pre-money number of shares2,500,00025.0 million kr
Post-money number of shares2,750,00027.5 million kr
Fully diluted number of shares3,250,00032.5 million kr

What is important to keep in mind here is that the valuation of the company will differ a lot depending on how many shares you use when calculating the valuation. If you are doing a seed round at 10 kr per share, your pre-money valuation, that is using the number of shares in existence before the share issue happens, will be 2.5 million shares x 10 kr per share = 25 million kr. After the share issue has happened, you have a post-money valuation of 2.75 million shares x 10 kr per share = 27.5 million kr. But if you include the up to 500,000 shares that may result from the option pool, your fully diluted valuation will be 32.5 million kr.

For this reason, it is very important to be clear with investors what type of valuation you mean when you talk about “the valuation of the company”. And it may also be helpful to primarily communicate the price per share, which stays the same, regardless of the number of shares you count into the valuation.

Two types of options

To confuse matters more, Swedish companies can issue two types of options: Qualified Employee Stock Options (QESOs) and Warrants. In short QESOs are the most advantageous; for example they are free, but have some limitations with regards to who can receive them, whereas warrants need to be paid for. But warrants are on the other hand more flexible. Also, whereas warrants are financial instruments that need to be registered with Bolagsverket, a QESO is just an agreement between the company and the employee. You can read more about this in our article “The Ultimate Guide to Stock Options in Swedish Startups“.

Creating an authorization for the board

In addition to having the option pool in the shareholders’ agreement, you may also authorize the board to issue warrants. An authorization may only be issued one year at a time. In the case above, you would authorize the board to issue 500,000 warrants the first year, and if you issued 125,000 warrants, then you would authorize the board for 375,000 for year two, and so on.

But what about QESOs? Since QESOs are not financial instruments, there is nothing to register with Bolagsverket, and therefore also nothing to authorize (in a formal sense) the board to be able to do. That is, there is no need for the shareholders’ meeting to make any decisions about QESOs – they need only be in the shareholders’ agreement. So if you primarily use QESOs, you may not need to authorize the board to issue warrants.

Theoretical risk of shareholders voting against delivery of shares

When creating QESOs, the company in effect makes a promise to issue shares in the future. However, due to a bug in the law regulating QESOs, this cannot be done by issuing QESOs as warrants. So theoretically, the company risks a situation three years (or later, depending on the duration of QESO program) when it is going to issue shares for the mature QESOs that the shareholders do not approve the share issue. If, as suggested above, the option pool is in the shareholders agreement, then shareholders are bound to vote for it. But they still have the theoretical possibility to vote against it. If so, the company will be in breach of its QESO obligations, and will have to pay damages to the employees. The shareholders who created this problem by voting against the share issue will in turn be in breach of the shareholders agreement, and can be sued for damages by the other shareholders. This is usually considered enough to make sure that future shareholders vote the right way.

An option pool owned by the company itself

There is however one situation where this is not enough. This is when the company is going public. When a company goes public, it falls under the rules of chapter 16 of the Swedish Companies Act (“Aktiebolagslagen”), which among other things stipulates that share issues to employees need to be approved by a shareholders meeting, and with 90% majority. Since a public company cannot have a shareholders agreement (at least not for most shareholders), there is a real risk that a small minority blocks the delivery of QESO shares. So in case you are planning to go public, the company can issue warrants to itself, with a duration and strike price that matches the QESOs (“matching warrants”). When the time comes to deliver QESO shares, the company instead turns over the matching warrants to the QESO holders, who immediately use them to subscribe for shares. This way, the company avoids the risk of a shareholders meeting blocking the delivery of shares.

Does this sound confusing? Luckily there is a plattform to help you manage all of this. Book a demo and we will tell you more!

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