Equity is one of the most powerful tools a startup has – for raising capital, rewarding early employees and incentivising the right investors. But it’s also one of the most misunderstood. The difference between shares and options, between nominal value and market value, and between HMRC-approved schemes and unapproved grants can have significant financial consequences for everyone involved.

This guide cuts through the complexity to give you the practical grounding you need.

Shares vs Options: What’s the Difference?

Shares represent direct ownership in the company. If a company has one million shares and you own 100,000, you own 10% of the business. With that comes a claim on a proportionate share of the company’s assets, earnings and voting rights. Shares issued to investors during funding rounds, and shares allocated to founders at incorporation, are typically in this category.

Options are not ownership – they’re a right to buy ownership at a later date. An option gives the holder the right to purchase a set number of shares at a fixed price, called the strike price, at a specified point in the future (often an exit event or vesting milestone). Because they’re not shares yet, they don’t dilute existing shareholders until they’re exercised.

The practical implication for UK startups is straightforward: shares are the right tool for raising capital and rewarding founders. Options are the standard mechanism for incentivising employees – they let you offer future upside without affecting your cap table today.

Nominal Value vs Market Value

Before you can issue shares or options, you need to understand how they’re priced – and there are two distinct figures at play.

Nominal value (sometimes called par value) is the baseline value assigned to each share at the time your company is incorporated. In the UK, this is typically set at £0.001 or £1 – a deliberately low figure. It’s a legal rather than economic concept: nominal value represents the minimum price at which shares can be issued. It forms the basis of your share capital – for example, 1,000 shares at £1 nominal value gives you share capital of £1,000.

Market value is what a share is actually worth, based on investor appetite, company performance and comparable businesses. Early in a startup’s life, nominal value and market value are often the same or very close. As your company grows and attracts investment, market value rises while nominal value stays fixed. The difference between the two is the share premium.

Understanding this gap matters because both overpricing and underpricing shares at issuance can create real problems.

Getting the Price Right

The risk of overpricing is a down round – where your next raise prices shares lower than the previous one. This isn’t just a bruise to the ego; it triggers anti-dilution provisions, destroys investor confidence and can unravel your cap table in ways that are difficult to reverse.

The risk of underpricing – particularly when issuing shares to employees below market rates – is that HMRC can classify the discount as a benefit in kind. That turns what was meant to be a reward into an immediate income tax and National Insurance charge on the employee, based on the difference between what they paid and what the shares were actually worth on the day of issue.

This is exactly why HMRC-approved schemes exist.

HMRC-Approved Schemes: EMI, CSOP and Growth Shares

In the UK, several tax-advantaged equity schemes allow you to grant options (or shares) without triggering an immediate income tax charge.

EMI (Enterprise Management Incentive) is the most widely used scheme for UK startups. It allows eligible companies to grant options with a strike price agreed in advance with HMRC through a formal valuation. As long as options are granted at or above this agreed value, there’s no income tax or National Insurance at grant or exercise. Employees pay capital gains tax on any growth when they sell – and may benefit from Business Asset Disposal Relief (BADR), reducing the CGT rate to 10%.

CSOP (Company Share Option Plan) is available to both public and private companies and allows employees to be granted options worth up to £60,000. Options must be granted at market value, and there’s no income tax on exercise.

Growth shares are a different structure entirely – these are ordinary shares issued at a low current value (reflecting only the upside above an agreed hurdle rate), meaning you can give employees real equity rather than options. They require an HMRC-agreed valuation and careful structuring to make the hurdle rate defensible.

For options issued outside an approved scheme, any discount to market value at exercise is typically subject to income tax and National Insurance – significantly reducing the benefit to the employee and creating an unexpected tax bill for your company.

Capital Gains, SEIS/EIS and S431 Elections

For shares (as opposed to options), capital gains tax applies to the difference between what someone paid for their shares and what they eventually sell them for. The earlier shares are acquired in a startup’s journey, the greater that potential gain – which is why founder shares, issued at nominal value at inception, carry such significant long-term value.

For shareholders who have invested under SEIS or EIS, additional CGT reliefs may apply. SEIS qualifying shares held for at least three years are entirely exempt from CGT on disposal, while EIS investors benefit from CGT deferral relief.

One other UK-specific consideration: if shares are issued to employees (as opposed to options), they may be classified as restricted securities under ITEPA 2003. In many cases, making a s431 election is worth considering – this limits the income tax exposure on the shares to their current value, rather than leaving the employee exposed to a larger charge later if the restrictions are lifted and the value has risen.

Equity structuring gets complicated quickly. The right choice between shares and options, the right scheme, the right valuation – each of these decisions has real tax consequences that compound over time.