Thousands of employees at Monzo, the digital bank famous for its coral-coloured bank cards, could soon benefit.
Two big investors in the fast-growing fintech are set to expand their holdings by buying shares from Monzo employees who were given share options as part of their overall pay package.
The bank is not listed on the stock market (yet), but the price investors pay is estimated to create around 15 Monzo millionaires based on the number of share options some employees have.
Monzo employees will have to decide whether they want to participate by the end of next week and can sell up to 40 per cent of their holdings. Since options typically vest each year, longer-serving staff members could reap a pre-tax windfall equal to multiples of their current salary.
Stock options are commonly used in the startup world to incentivize staff with the prospect of future riches rather than a high salary. They might prove useless (never forget that many early-stage companies crash and burn), but Monzo staff aren’t the only ones who have been hurt recently.
This summer, staff at the new Revolut bank cashed in options It’s worth a cool $500 million. in a secondary sale to investors. And this week, staff at Moneybox, the savings and investment platform, were told they could sell up to 10 per cent of their holdings in a £70m sale to new investors. Kerching!
Twenty years ago, options were a benefit typically offered to senior management and the board, says Matthew Emms, tax partner at BDO, the advisory firm. It is now common for staff to be offered some form of ownership stake, as companies recognize the power of incentivizing the workforce to increase the value of a business.
However, it is worth understanding how the options work and the questions you should ask in job interviews if they are part of your overall package.
Basically, you’re trading your talent and hard work for a piece of the as-yet-unknown future value of the company you work for. The company will grant you the option to purchase a certain number of shares at a mutually agreed upon price at some point in the future when, if all goes as planned, they will hopefully be worth substantially more.
Acquiring part of the capital of a company that is not listed on the stock market is one thing; In fact, being able to collect your chips and sell them is another matter entirely. The first thing to understand is: what is the exit plan? What needs to happen for you to obtain this future reward?
Your overall chances of success depend on where the company is in the life cycle from a startup (higher risk) to a more mature company (lower risk) and what type of corporate event will be necessary for you to exit. This could be a stock market listing, a trade sale, or employees selling stakes to larger investors.
Estimating the likely value of your options at that moment is more art than science, but what is the likely time scale? If you work all hours earning a below-market wage, can you realistically last that long? The wise point out that this is why you need to understand the business you’re investing your career potential in before you commit, adding that you’ll really need to love the job and the company culture.
Options are used as a retention tool: companies spread out rewards to prevent staff from taking a big payout and then leaving. You need to know the vesting schedule and the “cliff,” the minimum period you would need to stay to get some shares.
For example, a two-year cliff at 50 percent would mean that on the second anniversary of your employment, half of your vesting would vest, meaning you can exercise your option and purchase these shares. Depending on the structure your company uses, you may have to fund this from your own resources or you may be able to deduct the exercise price of your option from the potential proceeds from the sale.
Emms notes that, like bonuses, options are often granted subject to the satisfaction of certain performance conditions (yours, the company’s, or both). But if you stop being an employee of the company, what happens then? This will depend on whether you are a good quitter or a bad quitter (an example of the latter could be going to work for a competitor). Please note that different employers will have different definitions of these terms. Please also note that in recent secondary sales, existing staff have been given priority over staff who have left the company.
If you make it to the exit and are able to sell some of your shares, the next question is how much tax will you have to pay?
This will depend on the type of stock options you have been granted. Many smaller businesses prefer EMI (Enterprise Management Incentives) schemes. Barring changes to the budget, these allow qualified staff to pay a reduced rate of capital gains tax (CGT) on their profits when they sell.
Non-approved share option schemes (i.e. those not offered through a specific tax-advantaged scheme) will normally be subject to income tax, national insurance and student loan repayments.
More mature listed companies can offer staff Share incentive plans either Save while you earn (SAYE) schemes that work on similar principles. After three to five years, you can buy shares for free or at a discounted price, and avoid CGT if you transfer the shares directly into your pension or Isa.
If you’re weighing two job offers against each other, it’s worth knowing the difference. And just as salaries can be negotiated, one could also argue for a more generous allocation of options.
“Go into any interview with your eyes open, because once you’ve signed a contract, you lose the opportunity to negotiate,” says Emms.
Finally, while options are a great way to build wealth, they also carry a concentration risk: Much of your fortune could be tied to the success of your employer.
In the past, I acquired shares in Pearson, then owner of the Financial Times, through a SAYE scheme. When my options consolidated I was able to buy shares for around £5 when they were trading above £10. Fortunately, I cashed out and diversified into a tracker fund before a series of profit warnings sent its stock tumbling.
If the company you work for hits a bump in the road, the drop in value of your stock options could be the least of your worries if your job is at risk.
Claer Barrett is the FT’s consumer editor and author of ‘What they don’t teach you about money‘. claer.barrett@ft.com instagram @claerb