This article is for Irish startup founders who want to use share options to attract and retain talented employees without giving away equity too early or creating tax problems.
If you're wondering how employee share options actually work, whether you should use Ireland's KEEP scheme, and how to structure an option pool properly, this guide covers the mechanics of share options, KEEP's tax advantages and qualification requirements, and how to set up and manage an employee option scheme from scratch.
Key Takeaways
• KEEP allows employees to pay only 33% Capital Gains Tax on sale instead of 52% income tax at exercise, saving significant money.
• Reserve 10-20% of company shares for an option pool before raising investment to avoid diluting investors post-funding.
• You must notify Revenue within 30 days of granting KEEP options or lose the tax advantages for that grant.
• Standard vesting is 4 years with a 1-year cliff, meaning employees get nothing if they leave before 12 months.
• KEEP eligibility requires companies to be under 7 years old, have under €50M assets, and fewer than 250 employees.
What's the difference between share options and actual shares?
Options give employees the right to buy shares at a predetermined price in the future, but they're not shares themselves. Until exercised, options provide no voting rights, no dividends, and no actual ownership—employees must pay the exercise price to convert options into real shares.
Does my Irish startup qualify for KEEP tax relief on employee options?
Your company likely qualifies if you're incorporated in Ireland, trading for less than 7 years, have under €50 million in assets, fewer than 250 employees, and aren't listed on a stock exchange. Most Irish startups meet these requirements, though you can outgrow eligibility as you scale.
How much tax will my employees save with KEEP compared to regular options?
KEEP saves significant tax by eliminating income tax at exercise. Without KEEP, employees face approximately 52% income tax on gains at exercise plus 33% CGT on later gains—totaling around €7.98 per share in the example provided. With KEEP, they only pay 33% CGT on the total gain when they sell, totaling €6.27 per share.
How much of my company should I reserve for employee options?
Most startups reserve 10-20% of total shares for an employee option pool. Don't grant too generously early—your second employee shouldn't get 5% of the company, as you need the pool to last for many future hires. Plan for option pool refreshes during investment rounds.
What happens to employee options if someone leaves the company?
It depends on whether they're a "good leaver" or "bad leaver." Good leavers (voluntary departure, redundancy, death, or disability) typically keep vested options and can exercise for 90 days after leaving. Bad leavers (terminated for cause, breach of terms, joining competitors) typically lose all options, even vested ones.
When should employees actually exercise their options and buy shares?
Most employees wait until an exit event (acquisition or IPO) to exercise because they need cash to pay the exercise price and may owe tax on exercise. Exercising early creates a cash flow problem—employees owe tax before they've sold shares and received cash. Standard option terms allow exercise anytime during the 10-year option period.
What does a 4-year vesting schedule with a 1-year cliff mean?
No options vest during the first year (the "cliff"), then 25% vest after year one. The remaining 75% vests monthly over the next three years (1/48th per month). If an employee leaves before the cliff, they get nothing; if they leave after two years, they keep 50% of their options.
How much does it cost to set up an employee share option scheme properly?
Standard legal documentation for an option scheme costs €1,500-3,000 to prepare properly, including the option plan rules, individual agreements, board resolutions, and Revenue notifications for KEEP. You'll also need a professional valuation to establish market value for KEEP compliance, though this might be nominal (€0.001 per share) for early-stage startups.
What's the maximum value of options I can grant per employee under KEEP?
The maximum is €300,000 per employee based on market value at grant. If you want to grant options worth more than this, or if your company doesn't qualify for KEEP, you'll need to use a standard ESOP instead, though the tax treatment will be less favorable for employees.
What happens if I forget to notify Revenue about KEEP option grants?
You must notify Revenue within 30 days of granting options to qualify for KEEP tax advantages. If you miss this deadline, you lose the tax benefits for that specific grant, meaning employees will face income tax at exercise instead of the favorable CGT-only treatment.
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