Also known as
Key Employee Stock Option Plan (KESOP), share option plan, or simply "options".
Suitable for
Stock Options are best suited to owners who want to incentivize a specific group of key people, senior leaders, high performers, and/or critical technical staff, without opening up the share register to a broader employee group. They're particularly effective as a retention tool: vesting periods of three to five years mean employees need to stay to see the benefit. They're also useful when an owner isn't yet ready to sell equity outright but wants to align key people's interests with the company's growth.
What's in it for employees
The appeal is straightforward: no cash required upfront, no risk of loss, and meaningful upside if the company performs. Employees who hold options long enough, and eventually exercise them and hold the resulting shares for two years, can also access the LCGE. Because of the initial vesting period, the timeline for being eligible for the LCGE is longer than with a direct Share Purchase.
Challenges
Options don't create the same ownership mindset as actually owning shares. An employee with options is watching the scoreboard; an employee with shares is already an owner. If cultural transformation or broad-based engagement is the goal, options alone aren't likely to get you there. There's also the valuation requirement: GAAP accounting rules require options to be expensed annually. And options provide no cash to the owner, which matters if liquidity is part of the objective.