The option pricing rules will change as from 2021, as confirmed by new legislation passed recently by the Finnish Parliament. Under the new rules, it will be possible to issue options to personnel using a very low, or even nominal, strike price.
Under the current rules and practice, the strike price of options needs to be at least 50% of the fair value of the share at the time of grant in order to avoid the price difference being subject to pension contributions. This has led to difficult valuation problems and limited the use of options as incentives especially after financing rounds by equity investors.
According to the new rules, the difference between the fair value of the share at grant and the strike price is subject to pension contributions only if both of the following are fulfilled: the strike price is significantly lower than the fair value of the share at grant and the exercise takes place within a year following the grant. Therefore, if the exercise window of the option begins after more than one year following the grant, the whole option benefit should be out of scope of pension contributions. The Finnish Centre for Pensions has, as the competent authority, not yet issued any detailed guidance on the matter.
The new legislation will enter into force on 1 January 2021 and will only apply to stock options granted thereafter. In respect of stock options to be granted before 1 January 2021, the existing rules still need to be taken into account.
The new legislation fits well with the option structures customarily utilized by early-stage companies; many companies already utilize a twelve-month (or longer) cliff period before options start vesting. For companies interested in taking advantage of the new rules immediately in January 2021, it is recommended to make the requisite revisions to existing option programs in good time before the rules take effect.
For more information, please contact Sebastian Kellas and Topi Siniketo.