Share Options and Settlement Agreements

If you're a director, senior manager, or employee at a technology company, startup, or established business, there's a good chance you hold share options or unvested equity. When a settlement agreement is being negotiated, this asset becomes critically important. What happens to your shares? Can they be taken away? How are they taxed? These are the questions every departing employee with equity should ask.

Understanding Vested vs Unvested Shares

Share options typically operate under a vesting schedule. A common structure is a four-year vesting period with a one-year cliff. This means:

• Vested shares: You own these outright. They've been earned. Upon departure, they're typically yours to keep.
• Unvested shares: You haven't earned these yet. They vest over time, usually through continued employment.
• The cliff: Many schemes require you to complete a minimum period (often 12 months) before any shares vest. If you leave before the cliff, you lose everything.

What Happens to Your Shares in a Settlement Agreement

Your share position is a negotiating point. The employer will typically try to:

• Forfeit all unvested options
• Cancel or buy back vested shares at a discount
• Apply acceleration only to a small portion
• Require you to sell shares back to the company

You should never accept this passively. If you're entitled to unvested shares under your original contract or share scheme rules, that's an asset with real value. A settlement agreement should address:

• Whether any unvested shares will accelerate
• The valuation method for any shares being bought back
• Whether acceleration is partial or full
• Payment terms and timing
• Tax treatment of share-based payments

Negotiating Share Treatment

Share options have real value. If you've been told you're leaving under a settlement, the shares you lose represent genuine compensation. Here's how to approach negotiations:

Know your baseline. Review your original offer letter and any share scheme documents. What does the plan say happens if you're made redundant? Is there a change of control clause? Some schemes mandate acceleration in certain circumstances, which limits what the employer can do.

Quantify the loss. If you have 10,000 unvested options vesting over four years, and the strike price is £1.00 but the current fair market value is £5.00, that's £40,000 in lost value. That should be reflected in your settlement sum.

Push for acceleration. Even partial acceleration (accelerating 25-50% of unvested options) reduces your loss. This is more common if you're being made redundant or if there are underperformance issues.

Ensure fair valuation. If shares are being bought back, the valuation should reflect fair market value at departure, not an artificially depressed price set by the employer.

Tax Implications of Share-Based Payments

This is where professional advice becomes essential. Share options and accelerated equity can trigger significant tax liabilities:

Income tax on exercise. If you exercise unvested options as part of a settlement, you may trigger income tax on the gain between the strike price and fair market value. This is treated as employment income.

Capital gains tax. Any uplift in share value after you acquire the shares may trigger CGT when you sell. However, you get an annual exemption (£3,000 in 2026-27).

Employer National Insurance. The company may owe secondary National Insurance on the gain, which could be passed to you.

EMI relief. If you hold Enterprise Management Incentive (EMI) options, there are specific tax-advantaged treatments. These should be preserved in a settlement agreement where possible.

The settlement agreement should clarify: Who bears the tax cost? Are shares being acquired gross or net? How will the company assist with tax planning?

A Practical Example

Sarah joined a tech company three years ago and received 10,000 share options over four years (25% per year). The strike price was £1.00. Today, the shares are worth £8.00 each. She's been offered a settlement agreement.

Vested: 7,500 shares (three years completed). Current value: £60,000.

Unvested: 2,500 shares (one year remaining). Expected value: £20,000.

If the settlement agreement simply forfeits the 2,500 unvested shares, Sarah loses £20,000 in value. Her settlement package should either (a) accelerate the vesting, or (b) compensate her for this loss in cash, ideally as a tax-efficient payment.

What Your Solicitor Should Check

• The original share scheme rules and any change of control provisions
• Whether acceleration is mandatory or discretionary in your circumstances
• The valuation method (and whether it's fair market value)
• Tax treatment and who bears the cost
• Whether the settlement agreement properly discharges all claims relating to shares
• Lock-up periods or sale restrictions post-departure

Key Takeaways

Share options and equity compensation aren't a nice-to-have—they're part of your compensation package. When you're leaving under a settlement agreement:

• Don't accept forfeiture of all unvested shares without negotiation
• Quantify your share loss and factor it into settlement discussions
• Push for acceleration, especially if you're being made redundant
• Ensure valuations reflect fair market value, not employer-set prices
• Get specialist tax advice before exercising or acquiring shares
• Have a solicitor review the share provisions of any settlement agreement

At Nexa Law, we regularly negotiate share arrangements as part of settlement packages. We ensure you're not undervaluing this critical asset. If you'd like to discuss your specific position, we're here to help.