What is Stock Option Agreement Drafting?
A stock option agreement is a contract between a company and an employee, usually as a way to maintain high-performing talent in the organization. This legal contract specifies how the employee can purchase company shares at a fixed price.
To draft a stock option agreement, there are important key terms to include for clarity and to prevent disputes.
Read the rest of this article for information about core components to include in a stock option agreement, how to draft it, and how a qualified lawyer can help you with the drafting process.
What Key Terms Should You Include in a Stock Option Agreement?
A stock option agreement usually contains important information such as:
- Grant date. This is the specific day on which the company will give the stock options.
- Strike price (or exercise price). Specify the fixed price paid to buy shares at a later date.
- Vesting schedule. It’s important to explain the milestones that have to be met so that the employee can earn the stock options.
- Option pool. This includes the total number of options that will become shares which can be offered by the company.
- Expiry date. The employee’s right to buy shares will end on a specific date, after which they will be forfeited.
- Stock option type. The agreement should explain if there are incentive stock options (ISOs) or non-qualified stock options (NQSOs).
What are Tips for Drafting a Stock Option Agreement?
To increase clarity between parties, your stock option agreement must specify additional information. Here are some things to consider when drafting your agreement.
Set the Strike Price
When including the strike price, know that it’s usually set at the stock’s market value at the time the option is granted. If the value of the stock increases prior to the option being exercised, it’s possible for the holder to buy shares at a lower strike price and benefit from the difference between the exercise price and market value.
Explain Vesting Structures
Your agreement must specify when the stock options can be exercised. This can include cliff vesting, when the employee can access to vested options after a defined period, such as one year; or graded vesting, in which options vest slowly over time, such as monthly.
Choose an Expiration Date
Including an expiration date for the stock options must be included in the agreement. It’s usually 10 years from the grant date. By having this clearly stated in the agreement, you’ll prevent misunderstandings or disputes over option forfeiture.
Clarify Termination Provisions
What happens if the employee leaves the company? This is something that should be outlined in the stock option agreement to prevent disputes. You could state a specific period after employment termination by when stock options must be exercised, such as a few months.
Don’t Forget About Tax Implications
Explain the tax treatment of the stock options, which will vary depending on the type of stock. For example, for ISOs, holding the stock for a specific period of time can potentially lower long-term capital gains taxes. A professional tax consultant can help you with the stock option tax treatment so that you avoid unexpected expenses.
How Does a Lawyer Help with Stock Option Agreement Drafting?
When drafting a stock option agreement, it’s worth consulting a qualified lawyer for assistance with all the details required. While a lawyer will help you remain legally compliant with all corporate, securities, employment, and other laws to minimize your dispute risk, they can also help you in other ways.
A lawyer will:
- Customize the stock option agreement terms so that they cater to your business requirements and objectives.
- Protect your company interests, such as by including confidentiality and non-compete clauses.
- Clarifying all employee rights and duties so that everyone understands how the stock options work.
- Reducing your tax risks by addressing potential tax implications for both parties.
- Aligning the stock option agreement with other corporate documents, such as shareholder agreements.
- Providing legal guidance throughout the process. As your business grows, your lawyer will help you to update your stock option agreements so that they’re legal and protect your interests.
- Reviewing a stock option agreement you’ve already drafted to give you peace of mind that it’s valid and clear to minimize your risks.
Where to Find a Lawyer to Draft Your Stock Option Agreement
If you need to hire a lawyer to help you draft your stock option agreement, you might wonder where to find one. It’s not always easy to locate a reputable, experienced lawyer whose information is readily available for you to review prior to hiring them. On online legal platforms, you can access a network of qualified lawyers who are experienced to help you.
ContractsCounsel is one of the largest online legal marketplaces that enables you to connect with a curated network of vetted lawyers. All lawyers on the platform have years of experience in contract drafting and review. You can easily access their information on the platform before choosing one to work with.
To request that a lawyer on the ContractsCounsel platform drafts your stock option agreement, here are the steps to follow:
- Go to the ContractsCounsel marketplace.
- Post your project (or request for a lawyer to draft your agreement) for free.
- Include a few details to help you find the most suitable lawyer, such as the types of stock options your company is offering to employees and why.
- Wait for lawyer bids. You’ll receive multiple bids from lawyers directly on the platform. They have the credentials and experience to help you.
- Review the lawyers’ profiles. Go through the platform’s wealth of lawyer data, such as their 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 stock option agreement for a flat fee.