Jump to Section
Need help with an Option Grant?
Post Your Project (It's Free)
Get Bids to Compare
Hire Your Lawyer
An option grant is a type of compensation offered by companies in the United States to their employees or directors. It gives the recipient the right but obligated, to purchase a specified number of shares of the company's stock at a predetermined price (called the " strike price ") within a set period. Option grants are typically used as an incentive for employees or directors to align their interests with those of the company's shareholders.
How Does an Option Grant Work?
When an employee receives an option grant, they can purchase a certain number of shares of the company's stock at the strike price. The strike price is set at the stock's current market price at the time of the grant. The employee can purchase these shares at any time during the option period, typically 10 years.
Once the option period has expired, the employee can no longer purchase the shares. If the stock's market price has risen above the strike price, the employee can purchase the shares and sell them immediately for a profit. This is known as exercising the option. If the stock's market price is lower than the strike price, the employee may choose not to exercise the option and let it expire.
What are the Benefits of Option Grants for Employers?
Attracting and Retaining Top Talent
Option grants are a powerful tool for retaining top talent in a competitive job market. By providing employees with a stake in the company's success, employers can incentivize them to work harder and stay with the company for longer.
Option grants are a cost-effective way for companies to compensate employees compared to traditional salary increases or bonuses.
The employee must purchase the stock, the cost to the company is limited to the administrative expenses associated with the grant.
Option grants align with the incentives of employees and shareholders, as employees benefit from the company's success and stock price.
What are the Benefits of Option Grants for Employees?
Potential for Wealth Creation
The most significant benefit of option grants for employees is the potential for wealth creation. If the company's stock price increases, employees who have exercised their options can sell their shares for a profit.
Option grants can give employees a sense of ownership in the company and motivate them to work harder and contribute to its success.
Option grants allow employees to diversify their investment portfolio and potentially reduce their risk.
What are the Drawbacks of Option Grants?
- Risk : The biggest drawback of option grants is the risk associated with stock ownership. The value of the stock may decrease, and employees could lose money.
- Complexity : Option grants can be complex and difficult to understand, particularly for employees unfamiliar with the stock market.
- Tax implications : The tax implications of option grants can be complex and may result in significant tax liability for employees who exercise their options.
What are the Essentials of an Option Grant?
- Grantee: The person or entity receiving the option.
- Grantor: The company or organization granting the option.
- Exercise Price : The price at which the grantee may purchase the underlying security (e.g. stock).
- Vesting Period: The period during which the grantee must meet certain conditions before they can exercise the option.
- Expiration Date: The date after which the option can no longer be exercised.
- Option Type: The type of option, either a non-qualified stock option (NSO) or an incentive stock option (ISO).
- Strike Price: The price at which the grantee may purchase the underlying security.
- Number of Shares: The number of shares subject to the option.
- Plan Document: A written document outlining the terms and conditions of the option grant.
- Strike Price : The price at which the holder can buy or sell the underlying stock.
- Exercise Date : The date on which the holder can exercise the option.
- Expiration Date : The date after which the option can no longer be exercised.
- Vesting : The process by which an employee gradually acquires the right to exercise their stock options.
- Option Type : Options can be either American-style or European-style. American-style options can be exercised before the expiration date, and European-style options can only be exercised on the expiration date.
Option grants are a type of employee compensation that allows employees to purchase company stock at a discounted price. While option grants have many benefits for employers and employees, they also come with risks and tax implications that should be carefully considered.
As with any compensation, it's important for both employers and employees to fully understand the terms and conditions of an option grant before deciding whether it's the right choice for them. ContractsCounsel will help you go through each section of options.
Meet some of our Option Grant Lawyers
October 14, 2020
I work with early stage startups (in Georgia and internationally) with their formation, contract, patent and investment needs.
October 30, 2020
October 26, 2020
Seasoned negotiator, mediator, and attorney providing premier legal advice, services, and representation with backgrounds in the following but not limited to law areas: business/commercial (restaurant & manufacturing), contracts, education, employment, family and matrimonial, healthcare, real estate, and probate & wills/trusts
October 26, 2020
Experienced Attorney focused on transactional law, payments processing, banking and finance law, and working with fintech companies with a demonstrated history of driving successful negotiations in technology sourcing and transactions and strong understanding of government contracts and the procurement process
October 27, 2020
I am an experienced technology contracts counsel that has worked with companies that are one-person startups, publicly-traded international corporations, and every size in between. I believe legal counsel should act as a seatbelt and an airbag, not a brake pedal!
November 10, 2020
John Daniel "J.D." Hawke is an experienced attorney with a law practice in Mobile, Alabama. He was born in Fairhope, Alabama and after earning his undergraduate degree at Auburn University, he received a law degree from Thomas Goode Jones School of Law in 2010. After law school, he formed the Law Office of J.D. Hawke LLC and over the last decade he has fought incredibly hard for each and everyone of his clients. His practice focuses on representing people facing criminal charges and clients dealing with family law matters. In addition to criminal defense and domestic relations cases, he also regularly handles contract disputes, personal injury cases, small business issues, landlord/tenant disputes, document drafting, and estate planning. He is licensed to practice law in the State of Alabama and the United States District Court for the Southern District of Alabama.
October 30, 2020
Thomas Codevilla is Partner at SK&S Law Group where he focuses on Data Privacy, Security, Commercial Contracts, Corporate Finance, and Intellectual Property. Read more at Skandslegal.com Thomas’s clients range from startups to large enterprises. He specializes in working with businesses to build risk-based data privacy and security systems from the ground up. He has deep experience in GDPR, CCPA, COPPA, FERPA, CALOPPA, and other state privacy laws. He holds the CIPP/US and CIPP/E designations from the International Association of Privacy Professionals. Alongside his privacy practice he brings a decade of public and private transactional experience, including formations, financings, M&A, corporate governance, securities, intellectual property licensing, manufacturing, regulatory compliance, international distribution, China contracts, and software-as-a-service agreements.