Warrant Guide for Swedish Startups

This is a guide on how to set up an incentive scheme for employees using market level warrants (Swedish: teckningsoptioner) in Swedish limited companies (aktiebolag).

First, a summary will give you an overview of the whole process and highlight some common mistakes. Next, we’ll discuss how Swedish warrants work and how to set up an option pool. Finally, you will be walked through a step-by-step process: how to implement an option scheme.

Note: Since January 2018 there are new and more beneficial tax regulations for early-stage Swedish startups issuing qualified employee stock options (”QESO”, Swedish: kvalificerade personaloptioner) to employees. If that’s what you’re looking for, or if you want an overview of different incentive program models in Sweden, please read The Ultimate Guide to Stock Options in Swedish Startups instead.

If you know that you need market level warrants, then, by all means, continue reading.

Disclaimer: This web site and the documents that can be downloaded from here contain general information, which is not advice, and should not be treated as such. The information is provided ”as is” without any representations or warranties, expressed or implied.


The best way to set up an equity-based incentive scheme in Swedish startups who can’t use qualified stock options is typically by using warrants, which are a kind of stock options. Basically, the company issues new warrants to employees, who buy the warrants at market value (for tax reasons, see below). The warrants give each employee a right, but not an obligation, to buy shares at a fixed price (the “strike price”) at a later date, so if the company is doing well, the warrants can become quite valuable.

The premium paid by employees when purchasing warrants depends on many things, e.g. current company valuation, strike price and time to maturity, i.e. how much time needs to pass before the warrants can be converted into shares. The premium is typically 5-20% of the current share price. In other words: The employees pay a small fee today and get the right to buy shares at a, hopefully, favorable price in a few years. However, unless the company performs well, the warrants become worthless.

If an employee quits earlier than expected, the company can usually require him/her to sell part of the warrants back to the company. This is accomplished through a so-called vesting scheme whereby the employee gradually earns the right to retain more and more warrants.

When setting up a warrant scheme you need to draft a warrant agreement between the company and each employee, general terms and conditions for the warrants, and some other formal documents. If everything is set up correctly, the employee only has to pay taxes if and when selling the warrants (or the corresponding shares) with a profit in the future.

Please keep in mind that it is quite tricky to set up a warrant scheme without any tax risks. Tax implications can be massive if not done correctly. One pitfall is if you don’t use market terms and valuations. Even if you do a lot of the work yourself with setting up your warrant scheme, always consult legal, tax and financial advice before implementing the scheme. The difference in taxation can be from 25% capital gains tax for the employees if done correctly and if the shares don’t fall under the rules for qualified close companies (Swedish: kvalificerade aktier i fåmansbolag), compared to 57%+31% (income tax for the employees plus social security contributions for the company) in case of mistakes.

How Warrants Work

A company can issue (i.e. create and sell) a warrant to a third party, e.g. an employee. The warrant typically gives the holder the right, but not the obligation, to purchase one newly issued share in the company at a fixed price (“strike price”) at a fixed date some years into the future (“expiration date”).

When the warrant is sold to the employee, the employee must pay market price for the warrant (the “premium”) to avoid tax issues. If the price paid by the employee is lower than the market value, both the company and the employee must pay taxes (social contributions and income tax, respectively) based on the difference between price paid and market value.

The market price is calculated using the Black-Scholes model (explained below). The value of a warrant will fluctuate over time, and it can typically be sold at any time to another third party, possibly subject to transfer restrictions such as right of first refusal. This means that if the company is doing really well, the employee can, theoretically, after some years make money by selling the warrants, rather than exercising them, with the benefit of never having to actually purchase the corresponding shares.

The employee needs to pay the premium to the company in cash. This can be costly, depending on the company valuation and warrant terms. You can help the employee by paying an extra salary, but then you have to pay social security contributions and income taxes. Either way, if the company doesn’t grow as planned the warrant can become worthless and the employee will lose the initial investment! Tax-wise, there is no problem selling the warrant at a higher price than the value calculated using the Black-Scholes model, but since employees usually don’t have very deep pockets, you want to keep the price as low as possible.

At the expiration date, the warrant holder can decide to exercise the warrant. The company will then issue a new share and sell it to the warrant holder at the strike price. If the strike price is higher than the market value at the expiration date, the warrant is worthless (it is “underwater”). On the contrary, if the strike price is lower than the market price, the option is said to be “in the money”.

The terms of the warrant can include certain limitations, e.g. a right of first refusal which gives existing shareholders the right to purchase the warrant if the warrant holder wants to sell it to a third party. Terms can also include so-called vesting, implemented in such a way that if the employee quits soon after purchasing the warrants, some of the warrants (the “unvested” warrants) have to be sold back to the company for a very low price. The number of warrants that have to be offered to the company for purchase is declining over time. After some years, all warrants are vested.

Caution! Please note that the information in this guide applies to Swedish limited companies issuing warrants to a Swedish tax subjects, i.e. a person paying income tax in Sweden. The regulations can be different if you are, for example, issuing warrants to an American board member.

Option Pool

Perhaps you’re planning to issue warrants to future employees, not only existing ones. Maybe you’ve heard of option pools. Unfortunately, Swedish companies cannot easily create a pool of warrants to sell to employees later on. Ask yourself why you need a pool. If it’s because you don’t want to redo all the paperwork in six months, it’s understandable but unfortunately, there is no simple way around this.

On the other hand, if you’re discussing with potential investors and want to include an option pool in the financing round, there is a solution. When communicating the cap table, simply include a virtual option pool as if they were already converted into shares. This is not a real pool, it’s just a way of communicating the intention. When doing the investment paperwork, remember to distribute the pooled shares on all other shareholders.

Example: Assume that you’re raising SEK 1.5M from investors and that you’re aiming for a post-investment cap table (including the hypothetical option pool) where founders own 60%, warrant pool 20% and investors 20%. Then, when executing this deal, split the option pool 20% pro rata to the other shareholders, i.e. founders will have 75% and investors will have 25%. This way, assuming you issue the warrants some time later, founders will be diluted down to 60% and investors to 20%.

Also note that the valuation is different depending on if you include the option pool or not. In the example, the investors will initially get 25% for SEK 1.5M (pre-money valuation of SEK 4.5M) but after dilution of warrants they will own 20% for SEK 1.5M (pre-money SEK 6M). When communicating the valuation, be sure to specify if you are including the option pool (“fully-diluted valuation”, i.e. assuming all warrants are issued and converted) or not. If planning an option pool, always include this in the discussions.

Option Pool Through Subsidiary

As stated earlier in this text, there is ”no simple way” to make option pools. However, this doesn’t mean it’s a dead end. In short, you set up a new subsidiary (daughter company) and issue warrants to it. You have then issued real warrants and have created an option pool. When you at a later point want to transfer a warrant from this pool to an employee, you let the employee buy a warrant from the subsidiary at market value (again, using Black-Scholes model, recalculated with new parameters).

This doesn’t solve the problem of the employee having to pay market price for the warrant, but it simplifies the process a little if you want many employees at different occasions to purchase warrants, since no new general meeting is necessary in the parent company. If considering implementing such an option pool, always consult both legal, tax and financial advice.

Implementing a Warrant Scheme for Employees

This section will guide you through the steps to set up an incentive program using warrants.

Step one – Prepare Documents

  1. Define terms. Remember: always use market terms and valuations!
    1. Current share value. You want to keep the value low in order to reduce the premium. The post-money valuation in the latest financing round can be used as a guide but don’t blindly use that value. For example, if you are about to raise more money soon (e.g. within 6 months) at a higher valuation, the tax agency could argue that the share value should be higher than in the latest financing round. Either way, it is crucial to have a good documentation regarding how you came up with the valuation and the volatility (discussed below). This documentation should be prepared (or at least approved) by a financial advisor with experience from this kind of warrant schemes, perhaps your auditor or a consultant from a renowned firm.
    2. Expiration date. When shall the warrant holder have the possibility to exercise the warrant? This is up to you to decide. A long lifetime makes it more likely for the warrant to be “in the money” (valuable), but it also increases the premium. For an early startup, most warrants have a lifetime of several years but it depends a lot on the situation of the company. The employee cannot exercise the warrants before this date. However, if the company makes an exit, the warrants can be exercised beforehand.
    3. Strike price. This is the share price that the warrant holder has to pay if exercising the warrant, i.e. buying a new share. This is also completely up to you, no legal or tax help is needed. You want to keep it low to increase the chances of the warrant being in the money, but a lower strike price increases the premium, so be careful. Make sure not to set a too optimistic strike price since it creates a high risk of the warrants being worthless.

      Caution! Note the difference between share price and company valuation. Example: Assume that the valuation today is SEK 6M today for 1,000,000 shares (SEK 6/share) and you raise a round and dilute yourself by issuing 500,000 shares for SEK 3M, reaching a post-money valuation of SEK 9M, then growing the company to a SEK 12M valuation. In this case, the company valuation has doubled but the share price is only up by 33% to SEK 8 (12M/1,500,000=8).

    4. Volatility of the share price. This is a mathematical component when calculating the premium, representing how quickly the value share price can fluctuate. The lower the volatility is, the lower premium will be. Typically volatility can be 25-35%, but always consult your financial advisor.
    5. Risk-free interest. This is also a parameter that affects the premium. This is typically the same as the interest rate of a government bond (see riksbank.se) with the same expiration date as the warrant. When consulting your financial advisor, ask for this number.
    6. Vesting schedule. This doesn’t affect the premium but defines what happens if the employee quits earlier than expected. A typical setup makes the employee sell some warrants back to the company when leaving (the “unvested” warrants), the earlier the more warrants must be sold back. After some time (e.g. 4 years), all warrants can be kept (i.e. are “vested”) even if the employee quits. The vesting could for example make 1/48th of the warrants vest every month, with a 1-year cliff, meaning that the first 12 months no warrants are vested but after 12 months 25% are vested.Example: If the employee leaves after 11 months, all warrants must be returned. If leaving after 12 months, 12/48 = 25% can be kept. After 3.5 years, 42/48 = 87.5% can be kept. Finally, after 4 years all warrants are vested; 48/48 = 100%.

      One critical question is how much the company must pay to re-purchase the non-vested shares. Remember the basic rule? All valuations must be at market price. In this case, however, tax praxis allows this kind of re-purchase to be made at the lowest of market price and cost (i.e. the premium once paid by the employee).

  1. Calculate the premium. Use Black-Scholes to calculate the premium. See the Google Spreadsheet version or use the Excel file Black-Scholes.
  2. Prepare Warrant Agreement and Warrant Terms. Given that everything has went well so far, this step will be fairly simple. Just grab the Warrant Agreement and the Warrant Terms documents and read them carefully before updating all the parameters. Make sure you understand what you are doing. If in doubt, talk to your legal advisor.
  3. Update SHA. Down the road, when it’s time for the employee to (hopefully) exercise the warrants and buy shares, the employee must adhere to the existing shareholders’ agreement (SHA). This is agreed upon in the warrant agreement. Also, the parties to the existing SHA must allow the warrant holder to enter into the SHA. This is solved by a clause in the SHA, forcing the parties to accept warrant holders to enter into the agreement. Make sure this is done right by asking a legal advisor for help, or use the Shareholders’ Agreement template.
  4. Update AoA. Check your articles of association (“AoA”, Swedish bolagsordning) to verify that you have enough unused share capital to cover new warrants. In the AoA, the allowed number of shares and share capital are defined. Make sure that issuing new warrants doesn’t exceed the maximum number of shares or share capital. If it does, update the AoA (at an extraordinary general meeting) and register it with the Swedish Companies Registration Office (Bolagsverket).

Step Two – Talk to the Employee(s)

It might seem obvious but it’s essential to involve the employee early in this process. After reading this guide you may understand how warrants work, but it’s not that simple! Make sure that the employee understands why you want to have an incentive scheme program using warrants and how it works. Make sure to include:

  • Why have a long-term incentive scheme program? What are the pros and cons?
  • Why use warrants instead of just handing out equity?
  • How does it work, from the perspective of the employee?
  • Why does the employee have to pay for the warrants?
  • What happens if the company doesn’t grow as planned? Employee can lose money!
  • Warrants are not shares! No dividends and no voting rights.
  • The employee may have to start a company later on to avoid unnecessarily high taxes.

While it’s important to communicate with the employee, it’s as important not to promise anything too early. Unless you’re really planning to implement the scheme very soon, don’t promise anything and don’t talk about the valuation (since it might go up before implementation, increasing the premium for the employee).

Step Three – Execute

  1. Hold a board meeting. First, the board must make a suggestion to the shareholders to approve a warrant scheme, see Board Meeting Minutes (Proposal to GM) and Board Meeting Minutes (Proposal to GM) Appendix 1. Appendix 2 is a description of major events in the company since last general meeting. Ask your auditor for help. Appendix 1 also refers to the Warrant Terms. All the mentioned documents can be downloaded below.
  2. Hold the GM. Next, a general meeting (annual or extraordinary) has to approve the warrant scheme, see General Meeting Minutes. Please note that it refers to the board proposal in Appendix 1 so make sure to attach it.

    Either the GM makes all the necessary decisions or the GM gives the board the mandate to implement the scheme. In the StartupTools templates, the GM gives a mandate to the board. The mandate has to be registered with Bolagsverket, see latest registration document version at Bolagsverket (document no. 824). Don’t forget to pay the registration fee.

  3. Issue warrants. Now that the board has the authority to issue warrants to employees, it’s time to implement the scheme. Use Board Meeting Minutes (Execution) when offering warrants to employees. Make sure to attach all three appendices. Appendix 1 is the Warrant Terms. Appendix 2 is the Black-Scholes calculation, including the document motivating the company valuation, volatility and risk-free interest. Appendix 3 is the same as in step 1 above.

    This step can be done repetitively, as long as you are not exceeding the total amount of warrants approved by the general meeting. Also, if any of the parameters in the Black-Scholes model has changed (beware of valuation), you have to start over.

  4. Sign subscription list. When the board has offered warrants to the employee, the employee has to subscribe to the warrants (i.e. confirm the purchase of the warrants) by signing the subscription list Warrant Subscription List. If more than one employee are subscribing, they can sign the same subscription list or separate lists.

    Nowadays, subscriptions list are not required but are included in the StartupTools templates since it might make the process more straightforward.

  1. Pay for warrants. After subscription, the employee has to pay the premium, according to instructions from the company.
  2. Confirm subscription. The board has to confirm the subscriptions. Use Board Meeting Minutes (Confirmation).
  3. Hand out certificate. When the transaction is confirmed, the chairman of the board signs a Warrant Certificate, which is given to the employee.
  4. Notify Bolagsverket. You must inform Bolagsverket of the issue, see Bolagsverket’s web site for a template, and pay the registration fee. They need to know that you have issued warrants but they don’t care to whom.

Don’t forget to keep the warrant holders up-to-date with the status of the company. For example, if you after two years realize that the warrants will be underwater, perhaps you should have a chat with the employee and discuss whether it makes sense to create a new warrant scheme based on new conditions.

That’s pretty much it! This guide will not cover how to exercise the warrants and issue new shares. There is pretty much written about it already, e.g. at Bolagsverket. Also, when considering exercising or transferring a warrant, Swedish tax law can be dubious. Always discuss the situation with a financial advisor well in time.

Good luck!

/Erik Byrenius

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