What employee share scheme means
An employee share scheme gives employees a stake in the company they work for.
The rationale is alignment. An employee who owns part of the business benefits when it succeeds, which is difficult to replicate through salary alone in a company that cannot pay market rates in cash.
Most schemes use options rather than shares. An option is a right to buy shares at a fixed price, the exercise price, at a future point once it has vested. The employee pays nothing now, and exercises later if the shares are worth more than the exercise price.
The alternative is issuing shares directly, which makes the employee a shareholder immediately with the rights and administrative consequences that involves.
Options are usually preferred because they cost the employee nothing up front, they do not put a shareholder on the register until exercise, and they can be forfeited if the employee leaves before vesting.
How it is used
A workable scheme addresses a defined set of questions.
The pool: what percentage of the company is set aside, commonly a single digit percentage in an early stage company.
The exercise price: what an employee pays per share on exercise.
Vesting: over what period the option is earned, typically several years, usually with a cliff before any of it vests so that a short lived hire receives nothing.
The exercise window: when an option can be exercised, and how long a leaver has to exercise vested options before they lapse.
Leaver provisions: what happens on resignation, dismissal for misconduct, redundancy, death or disability. Distinguishing a good leaver from a bad one is standard, and the definitions should be written rather than assumed.
What happens on a sale: whether unvested options accelerate, and whether the employee participates in the exit.
And the administrative machinery: who grants options, how they are recorded, and how exercise is processed.
A scheme with no written rules is not a scheme. It is a set of promises that will be argued about.
Key features
- Gives employees a stake, usually through options rather than shares
- An option is a right to buy at a fixed exercise price once vested
- Vesting over a period with a cliff is standard
- Leaver provisions distinguish good leavers from bad
- Acceleration on a sale should be addressed expressly
- Written scheme rules are essential
How this works in Nigeria
Three practical issues shape Nigerian employee share schemes.
The first is the register. Every employee who exercises becomes a shareholder, entered in the register of members with a certificate, and included in every subsequent corporate action. A company with forty small shareholders faces an administrative burden and a due diligence complication. Many Nigerian companies address this by holding scheme shares through a nominee or a trust structure, so that one entity appears on the register on behalf of the participants. That should be designed at the outset rather than retrofitted.
The second is tax. The treatment of share based remuneration in Nigeria depends on the structure and the timing, and the tax reform legislation passed in 2025 revised significant parts of the framework. Benefits arising from employment are within the personal income tax net, and gains on eventual disposal engage the capital gains regime. This is an area to take current advice on rather than assume, because the treatment affects what the scheme is actually worth to the employee.
The third is expectation management. Nigerian employees offered options frequently do not understand them: that they cost money to exercise, that they are worth nothing unless there is an exit or a buyer, and that leaving early forfeits most of them. A scheme communicated badly generates resentment rather than alignment.
Explaining the mechanics honestly, including that the shares may never be worth anything, is better than allowing an employee to accept a lower salary on a misunderstanding.
Share options vs direct shares vs phantom shares
Three ways to give employees economic participation, with different mechanics.
Share options give a right to buy at a fixed price once vested. The employee pays nothing now, is not a shareholder until exercise, and unvested options can be forfeited on departure. This is the standard structure.
Direct shares make the employee a shareholder immediately, with voting rights, entry in the register and inclusion in every corporate action. It is simpler conceptually and heavier administratively, and recovering shares from a departing employee requires a buyback mechanism agreed in advance.
Phantom shares or a cash bonus scheme track the value of shares without issuing any. On an exit the employee receives a cash payment reflecting what shares would have been worth. There is no dilution and no register entry, and the payment is employment income.
For a Nigerian company that wants alignment without forty shareholders on its register, phantom arrangements or a nominee structure are worth considering alongside conventional options.
Limits and risks
Options are worth nothing without a liquidity event. In a company that never sells and never pays dividends, an employee holds a right to buy shares they cannot sell.
The exercise price is also a real cost. An employee leaving with vested options may have to fund the exercise within a short window to keep them, and many cannot.
Administration is heavier than founders expect, and a scheme that is never documented or updated becomes a source of dispute.
Dilution is real too. A pool set aside for employees dilutes founders and investors, and it is negotiated in funding rounds for exactly that reason.
And tax treatment can reduce the value materially, which is why it should be understood before the scheme is designed rather than at exercise.
Worth knowing
Explain honestly that options cost money to exercise and may never be worth anything. Nigerian employees accept lower salaries for equity they do not understand, and the resentment when they discover the mechanics does more damage than never offering it would have.
Questions people ask
What is an employee share scheme?
An arrangement giving employees a stake in the company, usually through options: a right to buy shares at a fixed price once the option has vested.
Why options rather than shares?
Because they cost the employee nothing up front, do not put a shareholder on the register until exercise, and can be forfeited if the employee leaves before vesting.
What is vesting and a cliff?
Vesting is the period over which the option is earned, typically several years. A cliff is an initial period during which nothing vests, so an employee who leaves early receives nothing.
What happens if an employee leaves?
It depends on the leaver provisions. Unvested options are usually forfeited, and vested options must typically be exercised within a short window or they lapse. Good leaver and bad leaver definitions should be written down.
How do Nigerian companies avoid forty shareholders on the register?
By holding scheme shares through a nominee or trust structure so one entity appears on the register on behalf of participants. It should be designed at the outset rather than retrofitted.
How are employee shares taxed in Nigeria?
Treatment depends on the structure and timing, benefits from employment fall within personal income tax, and gains on disposal engage the capital gains regime. The 2025 tax reform revised parts of the framework, so take current advice.