What ‘Monzo millionaires’ can teach us about share options

Thousands of staff members at Monzo, the digital bank famed for its coral-coloured bank cards, could soon be in the pink.

Two big investors in the fast-growing fintech are set to expand their stakes by buying stock from Monzo employees who were awarded share options as part of their overall pay package.

The bank isn’t listed on the stock market (yet) but the price the investors are paying is estimated to create around 15 Monzo millionaires based on the number of share options some staff are holding.

Monzo employees must decide if they want to take part by the end of next week, and can sell up to 40 per cent of their stakes. As options are typically awarded every year, long-serving staff members could reap a windfall before tax equivalent to multiples of their current salary.

Share options are commonly used in the start-up world to incentivise staff with the prospect of future riches in lieu of a chunky salary. They could turn out to be worthless — never forget that many early stage companies crash and burn — but Monzo staff are not the only ones to hit paydirt recently.

This summer, staff at newly minted bank Revolut cashed out options worth a cool $500mn 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 £70mn sale to new investors. Kerching!

It pays to understand how options work and the questions you should ask in job interviews if they form part of your overall package

Twenty years ago, options were a perk that tended to be offered to the C-suite and board of directors, says Matthew Emms, tax partner at BDO, the advisory firm. It is now common for staff to be offered some kind of ownership stake, as companies recognise the power of incentivising the workforce to increase the value of a business.

However, it pays to understand how options work and the questions you should ask in job interviews if they form part of your overall package.

Essentially, you are trading your talent and hard work for a share in the future, as yet unknown, value of the company you work for. The business will grant you the option to acquire a certain number of shares at a mutually agreed price at some future point when — if all goes to plan — they will hopefully be worth substantially more.

Acquiring some equity in an unlisted company is one thing; actually being able to cash in your chips and sell is entirely another. The number one thing to understand is: what’s the exit plan? What needs to happen for you to realise this future reward?

Your overall chances of success depend on where the company sits in the lifecycle from a start-up (higher risk) to a more mature business (lower risk) and what kind of corporate event will be needed for you to exit. This could be a stock market listing, trade sale or employees selling down stakes to larger investors.

Estimating the likely value of your options by that point is more of an art than a science, but what’s the timescale likely to be? If you’re working all hours earning a salary below the market rate, can you realistically stick it out for that long? Sages point out this is why you need to understand the business you are investing your career potential in before you commit, adding you will really need to love the work and the company culture.

Options are used as a retention tool — businesses spread out the rewards to avoid staff getting one big payout and then leaving. You need to know the vesting schedule and “the cliff” — the minimum period you’d need to stick around to get some shares.

For example, a two-year cliff at 50 per cent would mean on the second anniversary of your employment, half of your entitlement would vest, meaning you can exercise your option and acquire these shares. Depending on the structure your firm uses, you might have to fund this from your own resources, or you may be able to deduct your option exercise price from the eventual sale proceeds.

Emms points out that just like bonuses, options are often awarded subject to meeting certain performance conditions (your own, or the company’s, or both). But if you cease to be employed by the company, what happens then? This will depend on whether you are a good leaver or a bad leaver (an example of the latter could be leaving to work for a competitor). Be aware that different employers will have different definitions of these terms. Note also that in recent secondary sales, existing staff have been prioritised ahead of staff who have left the business.

If you make it to the exit and can sell some of your shares, the next question is how much tax will you need to pay?

This will depend on the type of share options you have been awarded. Many smaller companies favour EMI schemes (Enterprise Management Incentives). Barring any changes in the Budget, these enable qualifying staff to pay a reduced rate of capital gains tax (CGT) on their profits when they sell out.

Unapproved share option plans (that is, those not offered via a specific tax-advantaged scheme) will normally be subject to income tax, national insurance and student loan repayments.

More mature listed companies may offer staff Share Incentive Plans or Save As You Earn (SAYE) schemes which work on similar principles. After three to five years, you can acquire shares for free or at a discounted price, and avoid CGT if you transfer the shares directly to your pension or Isa.

If you are weighing up two job offers against one another, it pays to know the difference. And just as salaries can be negotiated, you could also argue for a more generous allocation of options.

“Go into any interviews with your eyes open, as once you’ve signed a contract your opportunity to negotiate will be lost,” says Emms.

Finally, while options are a great way of building wealth, they also carry concentration risk — too much of your fortune could be tied to your employer’s success.

In the past, I acquired shares in Pearson, then owner of the Financial Times, via a SAYE scheme. When my options vested, I was able to buy shares for around £5 when they were trading above £10. Thankfully, I cashed out and diversified into a tracker fund before a string of profit warnings caused its shares to slump.

If the business you work for hits a bump in the road, the plunging value of your share options could be the least of your worries if your job is at risk.

Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. [email protected] Instagram @Claerb