Settlement agreement for an employee with shares or options

An employee with shares or options has two relationships with the company, and a settlement that ends the employment without dealing with the equity leaves the employee holding shares with voting and dividend rights or options whose fate depends on documents nobody has read. The agreement has to apply the option scheme and the shareholders' agreement (or record a departure from them), fix the leaver category and the price, handle the tax, release the shareholder claims separately, and sequence the termination, the exercise and the transfer so that each happens when the documents say it must. I draft the agreement and the note on the conversation for the employer, £795 fixed, three working days; adding the negotiation with the employee's adviser makes it £995.

Who this is for

Companies in England and Wales parting with an employee who holds shares, growth shares or options under an EMI or other scheme, and employees' employers who want the equity dealt with in the same document as the exit.

What matters in a settlement with shares or options

The documents that govern the equity and what the settlement can and cannot change

The option agreement and the scheme rules govern the options, the shareholders' agreement and the articles govern the shares, and the settlement agreement can apply them (fixing the leaver category and the dates the documents leave to the board), can record a departure from them where the board and, for the shares, the other shareholders agree (a good leaver treatment for an employee the documents would class as bad, an extended exercise window), but cannot override the articles, which bind every shareholder under section 33 of the Companies Act 2006, or change the scheme rules in a way that would disqualify the options; the agreement should identify each document and say what it does with it, and the company should check the scheme rules before promising anything.

Options, exercise windows and the lapse on leaving

Under most schemes unvested options lapse on leaving and vested options lapse unless exercised within a window (often ninety days for an Enterprise Management Incentives option to keep its tax treatment, under Schedule 5 to the Income Tax (Earnings and Pensions) Act 2003), with good leavers allowed to exercise and bad leavers not; the agreement should state the number of options vested and unvested at the termination date, the leaver category the board has determined, the exercise window and the price, the shares that result and what then happens to them (held, or sold back under the articles), and the position where the employee does not exercise, because an employee who is told in the settlement that they may exercise and finds the window has closed has a claim the settlement did not waive.

Shares, the leaver category and the price

Where the employee holds shares, the articles and the shareholders' agreement usually require a leaver to offer them (unvested shares at nominal value, vested shares at fair value for a good leaver and the lower of cost and fair value for a bad leaver), and the settlement should fix the category, the valuation (an accountant's determination, a formula, or an agreed figure), the buyer (the company by buy-back approved under section 694 of the Companies Act 2006, an employee benefit trust, or the other shareholders) and the payment terms, with the transfer executed as a condition of the settlement payment; growth shares that have not reached their hurdle may be worth nothing, and the agreement should say so rather than leave the employee to discover it.

The tax on the equity and the elections

The exercise of options and the sale of shares have their own tax: income tax and national insurance on exercise of unapproved options or on EMI options exercised at a discount or after a disqualifying event, capital gains tax on the sale of shares with business asset disposal relief where EMI shares qualify, and the restricted securities rules in Chapter 2 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003 where no election under section 431 was made; the agreement should say that the employer will operate PAYE on what it must, that the employee is responsible for the rest, and that the employee should take their own tax advice on the equity separately from the settlement, with the tax indemnity covering both; the accountants advise the company and the employee's adviser advises the employee.

The shareholder claims and the separate release

An employee who is a shareholder has rights as a shareholder (under the shareholders' agreement, the articles and the Companies Act 2006, including a petition under section 994) that the statutory settlement mechanism under section 203 of the Employment Rights Act 1996 does not touch, and the agreement should contain a separate contractual release of all claims in the capacity of shareholder and option holder, against the company, the other shareholders and the directors, with the employee's confirmation that after the transfer they hold no shares, options or other interests; the release is given once the transfer is complete and the price paid, because a release given before the transfer releases the claim that would compel it.

The sequence: termination, exercise, transfer and payment

The agreement should set the sequence so that each step happens when the documents require: the termination date (which starts the exercise window and triggers the leaver provisions), the board's leaver determination (minuted), the exercise of vested options within the window with the exercise price paid, the issue or transfer of the shares, the transfer of all shares back under the articles with the stock transfer forms and the register updated, the payment of the share price and of the settlement sums (with the compensation using the thirty thousand pound exemption in section 403 of the Income Tax (Earnings and Pensions) Act 2003 and notice pay taxed as earnings under section 402B, the adviser's fees under section 413A), and the release; a settlement that pays everything on signing and leaves the transfer to follow has paid for a promise.

What it costs

Settlement agreement, £795. Drafted for your situation, with a note on how to have the conversation. Three working days.

Settlement agreement including reasonable negotiation with the employee's adviser, £995. The agreement in three working days. The negotiation then runs until the agreement is signed or it becomes clear it will not settle. Reasonable negotiation means what, in my experience, amounts to the standard back and forth on a settlement agreement. If the employee or their adviser is being unreasonable, for example by conducting themselves unprofessionally or requiring a substantial rewrite that needs material further legal advice to you, I will flag it and we will discuss how best to proceed, which may involve further fixed-fee work. That would be unusual.

Buying online forms the engagement on payment. The scope is what the settlement agreements for employers page describes, you accept the Terms of Service at checkout, and I email you within four working hours to get started. If you would rather ask something first, email me.

What you get

• A bespoke settlement agreement drafted for the exit you are dealing with
• Proper waiver of the relevant statutory claims, so the agreement does what you are paying for
• Advice on the tax treatment, including the £30,000 exemption and what falls outside it
• Confidentiality, non-derogatory statements and an agreed reference
• Reaffirmation or replacement of restrictive covenants, which is often the real value
• A short note on how to open the conversation and keep it without prejudice or protected
• One round of amendments after the employee's adviser responds

What is not included

• Advising the employee, which their own adviser must do independently for the agreement to be valid
• Tribunal representation if the matter does not settle
• Payroll processing of the settlement sums
• Handling the settlement payment, since I do not hold client money

Questions I am often asked

Our employee has vested EMI options. What happens to them when they leave?

What the option agreement and scheme rules say: usually a window to exercise vested options as a good leaver and lapse for a bad leaver, with the tax treatment depending on timing. The settlement states the numbers, the category, the window and the price.

Can we treat a departing employee as a good leaver even though the documents say bad?

If the board (and for the shares, the other shareholders as the documents require) agrees, the settlement can record it, provided the scheme rules are not breached. The company should check before promising.

Does the settlement agreement waive the employee's claims as a shareholder?

Not through the statutory mechanism, which covers employment claims. The agreement contains a separate release of shareholder and option holder claims, given once the transfer is complete and the price paid.

Related guidance and services

• Settlement agreements for employers, £795, the service this page describes
• Employment contracts and handbooks, £595
• Shareholders agreement, £995
• Settlement agreement for a founder leaving with shares
• Shareholders agreement with employee shareholders

This page is general guidance for businesses in England and Wales, not advice on your own circumstances. Last reviewed: October 2026. Email geoffrey@caesar.co.uk.