Your startup’s option scheme: the paperwork sequence that actually works

Why the paperwork order matters

When you decide to give your early team a stake in the business through share options, the legal documents aren’t just a formality. Getting the sequence right helps you avoid accidentally creating tax liabilities, diluting founders in ways you didn’t intend, or leaving an employee with an award that’s worth less than you both thought. This isn’t legal advice, but it maps out where each document fits and what it does in a typical EMI or unapproved option scheme.

If your scheme involves more than a handful of people or complex vesting triggers, talk to a solicitor who specialises in employee share incentives. For the standard path, though, knowing the components will help you have a more useful conversation with your lawyers and keep your own records straight.

The three core documents you will create

Most option schemes for UK startups involve a set of interlocking documents. Treating them as a single pack that gets updated together saves confusion later.

1. The option plan rules

This is the master document that sets out how the whole scheme operates. It covers things like who is eligible, what happens to options when someone leaves, how vesting works, any performance conditions, exercise mechanics and what happens on a sale of the company. EMI schemes have specific statutory requirements that the rules must reflect, including limits on the total value of options that can be held by any individual and restrictions on the types of companies that qualify.

An unapproved scheme has more flexibility but also fewer tax advantages, so it is worth understanding which route you are taking before the rules are drafted. Once the board adopts these, they are hard to change without formal board approval and sometimes HMRC notification, so get the commercial terms right before that point.

2. The board minutes or written resolution

Before any options can be granted, the directors need to formally adopt the scheme rules and authorise specific grants. This step often gets rushed, but without a properly recorded board decision, the grants themselves may be invalid. The minutes should at least record:

• which scheme the board is adopting (by reference to the rules document)
• that the directors have considered the company’s authority to grant options under its articles and any existing shareholder approvals
• the specific grants being made, including option holder name, number of shares under option, exercise price, vesting schedule and whether it is an EMI option or unapproved
• confirmation that the grant is within any scheme limits

For an EMI scheme, you also need a separate board resolution declaring that the options qualify as EMI options, and you will later need to send a notification to HMRC.

3. Individual option grant letters or agreements

Each person receiving options gets their own document from the company. This works alongside the scheme rules rather than replacing them. It sets out the personalised terms: the grant date, number of options, exercise price, vesting schedule and any leaver provisions that are specific to them. The grant letter should be explicit that the options are subject to the scheme rules, and it is good practice to attach a copy of those rules or make them easily available.

Send these out promptly after the board decision and keep signed copies. A missing or unsigned grant letter can create ambiguity years later when someone exercises, especially if memories have faded.

The pre-grant groundwork you shouldn’t skip

Before you even draft the scheme rules, there are a few pieces of company plumbing to check.

Articles of association. Many model articles don’t include pre-emption rights exceptions for employee share schemes, or they may restrict the board’s ability to issue shares for options. You may need to amend them or put a specific shareholder resolution in place before grants happen.

Valuation for EMI. If you are using an EMI scheme, you need to agree the market value of your shares with HMRC before you grant the options. This valuation affects the exercise price and has tax consequences for the option holder, so get it done early. Late valuations can cause problems and extra costs.

Data room thinking. Option grants create personal data obligations. You will hold option holders’ personal information, so your privacy notice should cover this. Keep the governance side simple: store signed grant letters, board minutes and valuations in one clearly labelled folder so you can find them during due diligence or an HMRC enquiry.

What happens after the grant

The paper trail does not stop once the grant letters go out.

If you are offering EMI options, you must notify HMRC within 92 days of the date of grant using the employment-related securities return. Missing that deadline can mean the options lose their tax-advantaged status, which can be an expensive mistake for your team members.

When someone exercises their options, you will need a notice of exercise, a board resolution to allot the shares, and then share certificates and Companies House filings. Keep the records clean from the start so you aren’t unpicking a mess during a fundraise or exit.

Keeping the scheme alive over time

As your startup grows, you may need to refresh the scheme: add more option pools, adjust vesting schedules for new hires, or handle leavers who are exiting before their options vest. Each event typically needs a board minute and possibly an updated grant letter. If you make a material change to an EMI scheme, check whether it needs a fresh HMRC notification or even a new valuation. A habit of quarterly paperwork reviews, similar to a compliance check, means these documents don’t stagnate in a drawer.

Getting the sequence right on your option paperwork is less about legal complexity and more about building a clear, defensible record of who got what and why. That clarity protects both your team and your cap table.