Stock options for startups in Norway

In this blog post, you'll find everything you need to know about stock options for startups in Norway:

• The background to the scheme
• Benefits of the scheme and comparison with the standard option scheme
• Requirements as a company and as a recipient

This blog post specifically covers the Norwegian option scheme for "small" startup companies, hereafter referred to as startups.

We have a separate blog post about stock options in general, which you can find here. But let's start with a simple explanation of what a stock option is:

A stock option is a right (and not an obligation) to buy a certain number of shares in the company in the future at a predetermined price.

Stock options are one of the most common equity compensation schemes to incentivize employees

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Background on the stock option scheme for startups 📖

The government understands the importance of the economy promoting innovation and entrepreneurship. Therefore, incentive schemes must be in place to motivate this desired behavior. Because of this, the government has introduced its own more favorable schemes for startups.

Until 2018, Norway lacked a good incentive structure for equity compensation in startups and growth companies. The tax regime was not conducive to the use of equity compensation schemes, such as stock options. Neither for companies nor employees.

This has had a negative effect on the startup and entrepreneurial ecosystem as people are not motivated to take extra risks. Whereas good schemes motivate a behavior that increases the ecosystem over time. This was first seen in Silicon Valley and later in countries like the UK and in Sweden etc.

After much pressure from the startup community in Norway to come up with a solution that allows startups to compete for talent, politicians finally decided to implement a "small startup company" scheme in 2018. The scheme was still not very favorable and was not very well received by the startup community. In recent years, the scheme has been gradually updated and a new version of the scheme was made applicable from 01.01.2022 and this will be for both startups and growth companies. This is much better and a scheme that can be effective in attracting, motivating and retaining talent.

If your company used the scheme before 2022, transitional rules apply. This means that the stock options granted under the old scheme will be taxed according to the new rules.

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Benefits of the new stock option scheme for startups 🌟

According to normal practice and requirements for share option tax, any gain on the exercise of the share option is considered a benefit received as a result of the employment relationship. All such benefits are taxable as income, which often has a higher tax rate than tax on capital income. The time when the tax is payable is at the time of exercise. In most cases, this can be problematic in startups as it is not easy (and in some cases not legally possible) to sell shares to cover tax costs.

In short, the benefit of this new stock option scheme for startups is lower tax liability for both the employee and the company and the timing of when the tax is payable (see comparison below).

We will try to show a comparison of this below for the regular share option scheme and the start-up share option scheme to give a better overview:

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Stock options (normal practice)

• Tax is paid when share options are exercised.
• The gain on the option benefit (fair market price - exercise price - share option purchase price) is taxed as income tax.
• Gains after exercise are taxed as capital income
• The company must pay employer's national insurance contributions (AGA) on the share option benefit.

Stock options for startups (and growth companies)

• Tax is NOT payable when share options are exercised.
• The tax is only paid after the shares have been sold
• Gains on share options are taxed as capital income (not income tax).
• The company shall NOT pay employer's national insurance contributions (AGA) on the share option benefit.

Requirements to be eligible for the scheme 📑

In order to be eligible for the Startup Option Scheme, there are certain requirements that must be fulfilled. Most of these requirements are related to the company, but there are also some requirements for the option recipient and the option itself. However, as long as the company complies with the requirements, there are often some benefits that can be utilized.

We have listed these requirements below in the three different categories.

You can also check if your company qualifies for the scheme with this questionnaire.

Requirements for the company 🏢

Note that the requirements below apply to the group as a whole if a company is part of a group.

• The scheme applies to share options that give the right to acquire shares in limited liability companies/corporations domiciled in Norway. In addition, the scheme applies to corresponding companies domiciled in another EEA country that have limited tax liability to Norway according to the Norwegian tax legislation. The scheme also applies to a corresponding company domiciled in a country outside the EEA when the company is liable to tax in Norway. These companies cannot be listed on a public stock exchange.
• The company's total operating revenues and balance sheet total may not exceed NOK 80 million for the company to be covered by the scheme. This condition must be met in the closest preceding income year prior to the allocation of the share option.
• The company's average number of man-years in the last income year before the option was granted must be 50 or fewer. Both full-time employees, part-time employees and temporary employees registered in the Employee Register are included. The average number of full-time equivalents can be calculated based on the number of employees at the beginning and end of the year.
• The company may not be older than ten years at the time of granting the option, including the year of incorporation and registration. And including all years if the company was established by demerger/merger or tax-free conversion.
• Public bodies must hold less than 25% of the company AND voting shares. Public bodies are defined as bodies that conduct public activities on behalf of the state or municipality. Ownership through state and municipal companies is also covered.
• The company's operations may not engage in coal or steel operations.
• A maximum of 30 percent of the company's total payroll costs related to one or more of the following activities:a) long-term rental of premises and housing,
• b) Legal advice, auditing or accounting,
• c) Turnover of property or raw materials
• d) Activities covered by main business area K "Financing and insurance activities"?
• The company shall primarily engage in activities other than passive asset management. The activity related to passive asset management shall not exceed 10% of the company's total activity.
• The company cannot have debts in the form of claims for repayment of illegal state aid.
• The company cannot be in financial difficulties at the time of the award. According to the guidelines, a company is considered to be in financial difficulties if at least one of the following conditions exist (abbreviated version):
• a) When more than half of the company's subscribed capital has disappeared as a result of accumulated losses. This is the case when deducting accumulated losses from the reserves (and all other items included in the company's equity) results in a negative accumulated amount that exceeds half of the subscribed capital.
• b) When the business is in bankruptcy proceedings or meets the criteria for bankruptcy proceedings at the request of its creditors.
• c) When the business is not an SME (see below), and in the last two years has had
• a debt ratio, i.e. a ratio of book debt to equity, of more than 7.5 and
• an EBITDA interest coverage ratio of less than 1.0."EBITDA" means earnings before interest, tax, depreciation and amortization.
• A company is considered an SME when it has less than 250 employees, an annual turnover not exceeding EUR 50 million or an annual balance sheet total of less than EUR 43 million.

Requirements for stock option recipients 🧍

• The employee must work at least 25 hours for the company per week from grant to exercise of the Share Option in order to be covered by the scheme.
• The rules do not apply to employees who, either alone or together with a relative, own or control more than 5% of the shares or votes in the start-up company or the group as a whole. These conditions must be met in the immediately preceding income year before the option is granted.

This means that the option must be held privately and not via a holding company‍

Requirements for the option

• The rules apply to share options granted after 01.01.2022
• The total market value of the underlying shares related to the Share Options under the scheme may not exceed NOK 3 million for each employee at the time of grant. The amount limit also includes previously granted options, including options acquired under the previous start-up share option scheme.
• The individual company may not grant share options with associated shares that in total exceed NOK 60 million based on the market value of the underlying shares at the respective grant dates. If the company is part of a group, the limit applies collectively at group level. Once the limit of NOK 60 million has been reached, the company cannot grant new options under the scheme, even if the employee has exercised the option, waived the option or the option has lapsed for other reasons.
• The scheme only applies to options that are exercised for shares in the start-up company no earlier than three years and no later than ten years after the grant date.
• The agreed redemption price may not be lower than the market value of the shares at the time of allocation.
• The option must be granted to the employee personally and be non-transferable throughout the option period. This means, for example, that the option cannot be transferred to a company owned by the employee or transferred to others by inheritance or gift.

Reporting

Start-up companies have a reporting obligation for options granted and exercised under this scheme, see section 7-10 letter h of the Tax Administration Act

1. Information must be provided upon allocation:
2. Company name and organization number
3. The employee's name and birth or D number
4. Number of options granted
5. Date of award
6. Exercise price and market value of the underlying shares at the time of grant.
7. Upon redemption, information shall be provided on
8. Company name and organization number
9. The employee's name and birth or D number
10. Number of options exercised
11. Date of grant and date of exercise of the options

The deadline for submission of ordinary returns is 1 February after the income year.

The scheme can be effective, but unfortunately it's not easy to navigate due to the complex list of requirements. You can use our simple questionnaire to find out if your company is eligible to use this scheme.

Was this helpful and do you want more? 🤔

We hope you found this useful🦸 We'd love your feedback on this. Send feedback or questions to us at hello@unlisted.ai

If you would like to learn how we can help you implement and manage stock option plans or other equity compensation schemes in your company, feel free to book a non-binding call with us

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