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Equity Grant Agreement Review

September 21, 2023
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What is an Equity Grant Agreement?

An equity grant agreement is a legally binding contract between a company and an individual, usually an employee, that outlines the terms and conditions under which equity or ownership interest in the company is granted.

Equity grants are a common form of compensation and are used to align the interests of employees with the company's success. A few common types of equity grants include:

  1. Stock options. Grants that provide the recipient with the option to purchase company stock at a predetermined price within a specified time frame.
  2. Restricted stock units. Restricted stock units are a promise to deliver company shares to the recipient at a future date after specific vesting conditions are met.
  3. Restricted stock awards. Company shares that are immediately issued, but the recipient may not have full ownership until certain conditions are met.
  4. Performance shares. Performance-based grants are contingent on achieving specific performance targets like revenue goals.
  5. Employee stock purchase plans. Plans that allow employees to purchase company stock at a discount through payroll deductions.

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How Do I Review an Equity Grant Agreement?

It is important to review an equity grant agreement to ensure you understand all of the financial implications of the contract. When reviewing an equity grant agreement, follow these steps:

  1. Read the entire contract. Carefully read the entire agreement including all of the fine print. Be sure to check that the provisions in the document accurately represent what you have agreed upon.
  2. Makes notes. Make notes about key terms, obligations, vesting schedules, and any other important provisions that stand out. You may want to come back to these terms to revise language or renegotiate.
  3. Look for ambiguities. When a contract is unclear or ambiguous, it can create legal issues and disputes. Any terms that could have differing interpretations should be clearly explained to ensure that both parties understand what the term represents.
  4. Be prepared to negotiate. If there are any clauses that concern you, be prepared to renegotiate these terms to ensure a fair and mutually beneficial agreement.
  5. Seek legal advice. Before entering into a legally binding agreement, you should always consult with an attorney. An attorney can review the contract to make sure that it is in your best interest.

Reviewing an equity grant agreement is important because gaining ownership interest in a company can have many financial implications. By reviewing the agreement, you can ensure that the terms you have agreed upon are accurately reflected in the contract and each party understands their rights and responsibilities.

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What Should I Look for in a Grant Agreement?

An equity grant agreement should include the following key elements:

  • Type of grant. Designate the type of equity grant being offered and understand how the grant functions.
  • Number of shares. The number of shares or units being granted to you.
  • Vesting schedule. The schedule that determines when you will gain ownership of the granted equity and whether there are any additional vesting milestones.
  • Expiration date. Some equity grants, like stock options, have an expiration date by which you must exercise the options to avoid losing them.
  • Transferability. Whether the equity grant is transferable or if there are restrictions on selling or transferring the shares.
  • Performance conditions. Some grants are tied to performance goals. In this case, review the conditions and targets that must be met.
  • Termination and forfeiture. Terms related to the impact of employment termination on your equity grant.
  • Change of control provisions : Provisions that detail what happens to an equity grant if the company changes control like through a merger or acquisition.
  • Clawback provisions. Provisions that may require you to return granted equity under certain circumstances.
  • Governing law and jurisdiction. The jurisdiction and governing law that will control the contract in case of a dispute.

The contents of an equity grant agreement will vary based on the parties and the type of equity granted to the employee. It is always a good idea to consult with a lawyer if you have questions or concerns about the information in your equity grant agreement.

What Does it Mean When a Grant is Vested?

When an equity grant is vested, it means that you have acquired ownership of the equity. Vesting is typically subject to certain conditions which will be outlined in the equity grant agreement.

When reviewing provisions that involve vesting schedules, look for the following terms:

  1. Vesting period. You will need to meet specific conditions within a certain period of time to gain ownership of the equity grant. It's common for vesting to occur over several years.
  2. Vesting schedule. An outline of the timing and milestones for vesting. Common vesting schedules include cliff vesting, graded vesting, and performance vesting.
  3. Forfeiture. If you leave the company or fail to meet the vesting conditions before the equity grant vests, you may forfeit some or all of the unvested shares or options.
  4. Ownership. Once shares or options have vested, you have ownership rights in the equity. This means you can exercise stock options, sell vested shares, or receive dividends.

It's important to carefully review the vesting terms in your equity grant agreement to understand when and how you will gain ownership of the equity. Vesting schedules can be negotiated so if you are unsure if your agreement contains fair terms that serve your best interests, always have a lawyer review your equity grant agreement before signing.

Should I Hire a Lawyer to Review an Equity Grant Agreement?

Yes. It is highly recommended to hire a lawyer to review an equity grant agreement, especially if you are unfamiliar with these types of contracts.

A lawyer hired for document review will provide the client with the following benefits:

  1. Legal expertise. Equity grant agreements can involve complex legal and tax considerations. If you are not well-versed in these areas, a lawyer who specializes in employee compensation and equity grants can provide valuable insights and help you avoid potential issues.
  2. Customization. If the equity grant agreement needs to be customized to accommodate your interests, your lawyer can ensure that the agreement aligns with your goals.
  3. Negotiation. If you wish to negotiate certain terms of the grant agreement, like different vesting conditions or acceleration provisions, a lawyer can advocate for your interests and represent you in negotiations.
  4. Legal protections. A lawyer can help ensure that the grant agreement provides appropriate legal protections for your rights as an equity grant holder.
  5. Dispute resolution. If a dispute or disagreement arises, having a lawyer who is familiar with the agreement can be invaluable in resolving the issue or representing you in dispute resolution proceedings.

Hiring a lawyer to review an equity grant agreement is always advisable. A lawyer can help you fully understand the terms, assess any risks, and ensure that the agreement aligns with your financial and career goals.

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