Navigating Option Expirations: Considerations for UK Employers

For high-growth companies, managing the lifecycle of employee share options is a critical aspect of both retention strategy and long-term equity planning. As options near expiration—particularly for long-tenured employees or alumni—founders and leadership teams of UK companies are often faced with key decisions, such as whether to extend, modify, or let these awards expire. In our experience, there are three core pillars to this decision-making process: retention strategy, equity philosophy, and legal execution.

Retention Strategy: Aligning Incentives with Status

A company’s approach to option expiry typically varies depending on whether the individual is still employed or has since left. Most of our clients at EquityPeople lean toward providing extensions for active employees, while the approach for alumni often hinges on the founders’ broader philosophy and the terms of the plan.

The terms of the original grant are also very important here. If the company has made genuine efforts to support early exercise, such as setting a low strike price, offering flexible exercise windows, and ensuring tax efficiency, then there may be less perceived obligation to extend expiry terms. In contrast, if the scheme was structured with a “cashless exercise at exit” model due to tax or liquidity constraints, extending option life becomes more common. Shorter post-termination exercise periods (e.g. 90 days) also tend to increase the likelihood that extensions will be considered.

Equity Philosophy: The Message Behind the Decision

Founders who place significant value on equity as a tool for long-term alignment often lean toward extending the option exercise window for both current and former employees. Failing to do so may be perceived, especially by early team members, as a signal that their past contributions are no longer valued. This, in turn, can have reputational and cultural implications for the company’s ability to retain and motivate current employees.

Conversely, if the founding team is less concerned about this perception, they may take a stricter stance: once the employee leaves, they must either exercise or forfeit.

Legal Considerations: What Can (and Should) Be Done?

Assuming a standard equity plan where options expire 90 days after departure (the typical “good leaver” structure), the legal focus is often on current  employees. Where alumni still hold options, a more tailored legal and tax analysis is typically required.

Where options are already exercisable but the employee is constrained by cost or tax exposure, companies sometimes consider solutions such as:

• A grossed-up bonus to cover the exercise cost and tax,
  

• An employee loan (subject to relevant regulatory and affordability concerns).

• Providing a liquidity opportunity for the employees. This could be in a secondary transaction (selling to an existing or new shareholder) or, for example, under the new legislation in the UK allowing trading of private company shares on an intermittent basis (known as a “PISCES” transaction).
  

Where options are not exercisable, the company may explore whether it has discretion, particularly under Enterprise Management Incentive (EMI) schemes, to trigger an early exercise right without undermining favourable tax treatment. Our partner Anna Humphrey of Goodwin explains that they have seen creative solutions here, including allowing employees to trigger a disqualifying event (e.g. a sabbatical).

If the plan does not permit early exercise, other alternatives  include:

• Amending the plan rules,
  

• Extending the option term (noting this may impact tax treatment),
  

• Letting the options expire  and issuing replacement options (potentially at a higher valuation).
  

Each of these comes with legal, tax, and accounting implications, and specific advice should be taken accordingly.

Finally, where a company chooses to allow options to expire, perhaps to free up space in the option pool, it should conduct a legal review to ensure no risk of future claims by impacted option holders. While such claims are rare, a proactive legal assessment can provide assurance.

Conclusion

The question of how to treat expiring options is rarely just administrative, it reflects a company’s values, legal posture, and strategic priorities. A well-rounded approach requires balancing fairness with commerciality and ensuring that legal structures support, rather than constrain, the desired outcome.

Important U.S. Disclosure:

The content of this article was developed with UK share plan frameworks in mind. US companies and practitioners should exercise caution when applying the strategies discussed. In particular, US laws—including Internal Revenue Code Section 409A, Section 422 (regarding Incentive Stock Options), and accounting standards such as ASC 718—impose strict rules around extending option exercise windows, modifying grant terms, and issuing replacement awards. Practices such as granting loans for option exercises, extending options for former employees beyond 90 days, or triggering early exercise via employment status changes (e.g., sabbatical) may create adverse tax consequences or legal exposure in the US context. Additionally, references to UK-specific structures (such as EMI schemes and PISCES transactions) do not have direct equivalents under U.S. law. 

Companies with option holders in the United States should consult with experienced legal, tax, and accounting advisors before implementing any equity plan modifications discussed herein.