Introduction

Managing employee equity in Sweden presents unique challenges because of the widespread use of reverse vesting, particularly in relation to warrants (Sw. teckningsoptioner). While this approach addresses certain tax considerations, it raises practical questions about how to handle unvested warrants when an employee departs. For boards, compensation committees, and advisors, understanding the available mechanisms for repurchasing or extinguishing options is essential to designing programs that are both compliant and sustainable.

Vesting and reverse vesting

In Sweden, employee equity programs often rely on “reverse vesting” for tax reasons. Under traditional vesting, employees earn their options gradually over time. By contrast, reverse vesting grants all options upfront, but requires the holder to sell back the unvested portion if they leave the company.

This structure creates a practical question: what happens to unvested options when employment ends? Someone must repurchase them, typically at cost, without being allowed to exercise them, to avoid an unfair shift in ownership.

The company as purchaser

Unlike shares, there is no restriction on a company holding its own warrants. In theory, the company can repurchase the options and simply let them lapse unexercised. This is usually the cleanest solution. However, repurchases are only permitted if the company has distributable equity, which excludes many companies from using this approach.

Subsidiary as purchaser

If the parent company cannot buy back the options, the most practical alternative is for a subsidiary to purchase them and then allow them to lapse. Even if the funding comes from the parent, the subsidiary’s purchase is not treated as a dividend but as a standard financial investment. When the options expire, the subsidiary books a loss, which can be covered if needed through an unconditional shareholder contribution from the parent.

The drawback is maintaining a subsidiary for this sole purpose. Still, for companies with more than a single option plan, this tends to be the most efficient structure.

Re-using options

A recurring question is whether purchased options can be recycled, for example resold to new hires, or transferred directly from a departing employee to a new one. In practice, this is rarely advisable. Options age: their remaining term is often shorter than the intended vesting horizon, and if the company’s valuation has risen significantly, the strike price required to avoid benefit taxation becomes prohibitively high.

Shareholders as purchasers

Another, less common, solution is for one or more shareholders to buy the unvested options and agree contractually not to exercise them. This can work if a small group of large shareholders is willing to absorb the cost, but becomes unwieldy if many shareholders are involved.

Conclusion

In practice, there is no one-size-fits-all method. Direct company repurchases are the simplest, but often blocked by capital requirements. Subsidiary structures are efficient for ongoing programs, though administratively heavier. Recycling options may seem attractive but rarely works in practice, while shareholder-funded buyouts remain niche. Ultimately, boards should evaluate their equity architecture early, considering both tax and governance implications, to ensure that option plans remain a value-creating tool rather than a source of friction.

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