What is Employee Stock Options Agreement Drafting?
An employee stock options agreement is a legal contract that gives an employee the right to purchase a specific number of shares from the company at a fixed price, as long as certain vesting conditions are met.
Employee stock options are beneficial in various ways, such as by boosting employee loyalty and motivation.
If you need to draft an employee stock options agreement, you should read the rest of this article to explore what key terms should be included, how to draft it for clarity, and why it’s in your best interest to hire a lawyer for assistance.
What Key Terms are Usually Included in an Employee Stock Options Agreement?
Here’s a rundown of some of the common terms you’ll find in an employee stock options agreement:
- Grant date. The agreement must state the date when the stock options will be used.
- Exercise price. This is the defined fixed price per share the employee pays when they buy the company stock.
- Expiration date. The deadline from the grant date by when options must be exercised.
- Vesting schedule. The vesting schedule must be clearly defined. This refers to the waiting period before the right to buy shares is triggered.
- Option types. There are different stock options that must be defined.
- Termination. It’s important to clarify what will happen to employees’ vested and unvested stock options if they leave the company.
- Dispute resolution. If conflicts should arise, such as over vesting or termination, the agreement should help parties resolve it. This can include specifying what dispute-resolution method will be applied, such as arbitration.
What are Tips for Drafting an Employee Stock Options Agreement?
Since you want to clarify who will receive stock options and how they will be awarded, specificity is key to prevent confusion and disputes. Here are some things to include in your employee stock options agreement.
Explain the Vesting Schedule
Since most stock options can only be exercised and stocks bought after a specific period of time, the agreement must provide clarity about this timeline. Explain the vesting commencement date, which is the date when the vesting schedule begins.
You should also explain the total number of shares offered and if the vesting schedule is based on time (such as if it’s a three-year period) or depends on milestones (such as after the employee achieves a company goal).
Include Definitions
Since there can be technical words or phrases that appear in the agreement, and which can be challenging to understand, you should consider including a definitions list to make the agreement more accessible to both parties.
Define the Exercise Price
You want to specify the fixed exercise price. There are certain details to include in this section of the agreement, such as if the exercise price is fixed at the Fair Market Value (FMV), what the currency and cost per share is, and how it will be paid.
The employee stock options agreement should state if the exercise price can be adjusted, such as if during the restructuring of the company.
Explain Termination
Clarify if vested or unvested stock options will survive after agreement termination. You’ll want to differentiate between a good leaver and bad leaver of the company, and how their stock options are treated.
- A good leaver is someone who has left the company due to reasons such as death or retirement, or even mutual separation. These employees are usually allowed to maintain their vested options for a specific duration.
- By comparison, a bad leaver is an employee who is sent away due to fraud or misconduct. For these employees, it’s common for them to have to forfeit their vested options when they leave the company.
Understand the Tax Implications
Tax associated with employee stock options can be challenging to understand, so you want to clarify all the obligations and implications.
Examples of tax implications may include tax-withholding rights, in which the company can hold back unvested options. This has to be done properly to avoid paying penalties.
A lawyer can help you understand all the tax requirements and collaborate with your tax professional.
How Does a Lawyer Help You with Employee Stock Options Agreement Drafting?
A lawyer can assist you in various ways when drafting your employee stock options agreement. This includes:
- Customizing the agreement. A lawyer evaluates your business goals and long-term growth plans so that you can align the most suitable stock options with them.
- Complying with relevant laws. They’ll consider employment tax and securities legislation in your jurisdiction to prevent disputes and non-compliance.
- Defining commercial terms. They’ll consider details such as the number of stock options, exercise price, and vesting schedule so that everything is clearly outlined.
- Protecting your business interests. A lawyer will include provisions to safeguard your information, intellectual property (IP), and more, depending on your specific requirements.
- Reviewing your document for clarity. If you’ve drafted an employee stock options agreement, a qualified lawyer can review it to ensure it’s clear, reasonable, and protects your interests.
Where to Find a Lawyer for Employee Stock Options Agreement Drafting
If you need to hire a lawyer, you might wonder where to locate the best one with experience and skill. On online legal platforms, you can access a network of qualified lawyers who are experienced to help you with contract drafting and review.
ContractsCounsel is one of the largest online legal marketplaces that gives you access to a network of vetted lawyers. You can hire a lawyer on the platform to draft your agreement for a flat fee, helping you to keep your legal costs down.
Here are the steps to follow to request that a qualified lawyer on the ContractsCounsel platform drafts your employee stock options agreement.
- Go to the ContractsCounsel marketplace.
- Post your project for free. Include a few details to help you find the most suitable lawyer, such as the type of stock options your company is offering.
- Receive multiple bids from lawyers directly on the platform who have the experience to help you.
- Review the lawyers’ profiles. Take some time to go through the platform’s lawyer data, such as the lawyers’ location, client ratings for previous projects, expertise, and credentials.
- Connect with a lawyer you think is best suited to your requirements and hire them to draft your employee stock options agreement for a flat fee.
