Stock Option Agreement: Main Terms and What to Look For
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What is a Stock Option Agreement?
A stock option agreement refers to a contract between a company and an employee, independent contractor, or a consultant. Employers use it as a form of employee compensation. Both parties submit to operate within the terms, conditions, and restrictions stipulated in the agreement. The party receiving the stock options is a highly valued employee who will earn the right to exercise stock options. In addition, the employee will be given the right to purchase the stock options at a pre-determined price.
A stock option agreement outlines the employee's rights. The company is granted stock options, which often involves a vesting schedule and exercise price or strike price. Once the options vest, the employee can purchase the options at the strike price in hopes of making a profit if the company’s stock value has appreciated.
Main Terms of a Stock Option Agreement
The stock option agreement has specific terms you should know. The terms help determine the scope and extent of the contract. For example, most stock options often have the following terms.
Parties to the Agreement
The agreement first lays down parties to the contract. Often, the parties are the company issuing the stock options and the employee receiving the stock options. The contract may refer to the employee as the optionee and the company as the optionor.
Stock Option Shares
Another term is the amount of option shares. This refers to the shares in the company that the employee will have the right to buy in the future. In the agreement, the number of options the employee is being issued.
Exercise Price
Another term in the stock option agreement is the exercise price. This is often the price the optionee has the right to purchase the shares. The exercise price, or strike price, is the fair market value of the company’s stock at the time of issuance. The exercise price can also be set at a discount or a premium to the fair market value.
Total Exercise Price
A stock option agreement will also have a total exercise price outlined for the employee. If the employee were to buy all of the options, the employee would have to pay the total exercise price to the company.
Effective Date
Another common term in a stock option agreement is the effective date. This is often the period within which the option becomes effective. For example, the effective date may be that day when the optionee signs the stock option agreement.
Conditions to Exercise
The other important term is the condition to exercise. The clause clarifies the conditions that must be satisfied before the stock option can be effective. While the optionee's commercial objective often determines the conditions of exercise, they aren't necessary. For example, another condition can be the time in the form of a vesting schedule.
Expiry Date
The other critical term in a stock option agreement is the expiry date. This period is when the option holder may exercise. The stock option agreement often terminates on the expiry date.
When entering into a stock option agreement, the parties often discuss the expiry date. However, different circumstances may determine and affect the actualization of the expiry date.
Here's an article about the terms of the stock option agreement
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What Should I Look for in a Stock Option Agreement?
When signing a stock option agreement, it's important to consider certain issues. Here're some factors to consider in a stock option agreement.
- Number of Shares. You must have clarity about the number of shares you can purchase. Before signing a contract, you must consider what options will be on your table now and in the future. Most times, factors such as vesting often affect the number of shares one can purchase.
- Exercise Price. Another element an optionee should look out to in an agreement is the exercise price. The price is often on the offer letter and stock option agreement. Ensure that the employee stock option agreement clearly defines the exercise price.
- Vesting Schedule. The standard vesting period is around four years and a one-year cliff. If you depart before the cliff, it's important that you also understand the consequences. You must pay attention to the vesting schedule on the agreement before making that important decision.
- Early Exercise of Option. You must pay attention to the exercise option on the agreement. Check to ensure that the contract specifies the possibility of letting employees exercise vesting earlier. The tax benefits in such cases are beneficial to the employee.
Before signing the contract, these are some important things to consider in a stock option agreement.
Here's an article on what to look out for in a stock option agreement
Can I Negotiate my Stock Option Agreement ?
It's always advisable for employees to negotiate the stock options before signing the agreement. Most times, employees feel inadequate where negotiations about stocks and salary are concerned. However, you can arrange your stock option agreement before signing it.
When negotiating, consider a background review of all the dynamics around the offer. Conduct your research to ensure that you are knowledgeably informed about the key terms you can negotiate.
Here's an article about negotiating a stock option agreement
Examples of Stock Option Agreement
Different companies offer varying plans for stock options for their employees. Here are some of the well-known examples of stock option agreements.
Wordlogic Corporation, 2012 Equity Incentive Plan Stock Option Agreement
The agreement was more of an incentive plan for employees. Therefore, the contract had some of the essential terms discussed. They include the purpose of the plan, the definition, the grant date, the expiry date, and the participants.
The terms also include the qualifying performance criteria. Here, employees can read through and note areas that may disqualify them from the contract. The plan's administration and the options are the other critical elements stipulated in the agreement.
Here's an article about an example of the stock option agreement
How Do Employee Stock Option Plans Work?
The employee stock options refer to a plan that's offered to employees. The plan stipulates the options to buy shares of the company's stock at a certain price for a specified period. The program can act as a supplementary source of income for the employee.
Investing in ESPP is a great idea, given that it can help employees meet short-term financial objectives.
Incentive Stock Options vs. Non-Qualified Stock Options
There're notable differences between incentive stock options and non-qualified stock options. One significant difference is that incentive stock options are only eligible to employees. The recipient must also be a person, so it can't be issued to entities like contractors.
On the other hand, non-qualified stock options are open to both employees and independent contractors. These may also include non-employee directors.
Both options are not taxable when granted. But taxes apply when you sell your shares, based on the exercise price and the current value of the shares. This is an important note.
The options have varying treatments regarding taxation upon exercise for income. For example, in the case of ISOs, it's taxable for amount but not income or employment tax. On the other hand, NSOs are only taxable for tax purposes and never for AMT purposes.
For favorable tax treatment, there's an annual limit of stock for ISOs, which is $100,000 in stock options that can become exercisable in any one year for any individual employee. However, there is no limit for NSOs.
These are some of the most important elements that separate ISOs vs. NSOs.
Learn more about ISOs vs. NSOs.
Get Help with a Stock Option Agreement
When it's your first time handling the stock option agreement, it's important to have a legal mind in your corner. So take your time to understand all the terms and elements of the contract.
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Christopher R.
Corporate and transactional attorney in sixth year of practice. Focus areas include general corporate counsel, labor and employment law, business partnership matters, securities matters related to privately-held companies, and regulatory compliance in securities and finance matters.
"Christopher has been incredibly helpful with our ongoing project!"
Nicholas M.
Nicholas Matlach is a cybersecurity expert (CISSP) and an attorney who is dedicated to helping small businesses succeed. He is a client-focused professional who has a deep understanding of the challenges that small businesses face in the digital age. He also provides legal counsel to small businesses on a variety of issues, including formation, intellectual property, contracts, and employment law.
"Enjoyed his demeanor. Professional yet down to earth. The document created for me was very explicit and easy to read. I would recommend :)"
Daehoon P.
Daehoon P.
Corporate, M&A & Securities Lawyer | Managing Attorney, DP Counsel PLLC Practice Areas: Business Formation | Commercial Contracts | Contract Drafting & Review | Mergers & Acquisitions | Venture Capital | Securities Offerings | Franchise Law | Employment & Equity Compensation | Intellectual Property | Cross-Border Transactions About/Bio: I represent companies, investors, and fund sponsors in corporate transactions, commercial contracting, and private securities matters, from entity formation and early-stage financings to acquisitions, exits, and ongoing strategic counsel. As Managing Attorney of DP Counsel PLLC, I help clients structure transactions clearly, allocate risk thoughtfully, and move deals forward with documentation that is practical, enforceable, and aligned with business objectives. My practice includes both day-to-day commercial matters and more complex transactional work, including venture financings, private offerings, M&A deals, fund-related documents, and cross-border structuring. What I Do: Corporate & Commercial • Entity formation and structuring for corporations, LLCs, and limited partnerships • Operating agreements, shareholder agreements, and governance documents • Commercial contract drafting, review, and negotiation • Vendor, distribution, manufacturing, SaaS, and licensing agreements • Employment, consulting, confidentiality, and equity compensation agreements • Outside general counsel support for growing companies Securities & Private Capital • Private offerings under Regulation D and Regulation S • Private placement memoranda, subscription agreements, and investor documents • SAFE, convertible note, and priced equity financings • Venture capital and private fund formation matters • Fund governing documents and offering document packages • Securities law analysis for private capital raising transactions Mergers & Acquisitions • Letters of intent and term sheets • Stock purchase, asset purchase, and merger agreements • Due diligence coordination and transaction support • Disclosure schedules, closing documents, and post-closing matters • Earnouts, rollover equity, indemnity structures, and related deal terms • HSR, CFIUS, and related regulatory issue spotting for qualifying transactions Digital Assets & Emerging Technologies • Federal-law digital asset and token securities analysis • Entity structuring for blockchain and Web3 ventures • Digital asset fund and operating structures • AML/KYC documentation support and regulatory issue spotting Franchising • Franchise Disclosure Documents (FDDs) • Franchise agreements • Master franchise and area development agreements • Franchise structuring and registration coordination Real Estate Transactions • Commercial real estate acquisitions and dispositions • Real estate joint ventures and syndications • Commercial lease drafting and negotiation • Real estate investment structures and related offering documents Cross-Border & International • U.S. market entry and entity structuring for international clients • Delaware and multi-entity holding structures • Cross-border transaction planning and documentation • Coordination with foreign counsel and tax advisors on cross-border matters Why Clients Hire Me: • Big-law-level drafting with boutique responsiveness • Practical, business-focused advice grounded in execution reality • Clear scoping and transparent fee arrangements • Experience across financings, acquisitions, fund formations, and cross-border transactions Typical Projects: • Contract drafting and negotiation • Entity formation and governance packages • Private offering document suites • Venture financing documentation • M&A transactions from LOI through closing • Fractional or outside general counsel support Industries Technology | SaaS | FinTech | Digital Assets | E-commerce | Healthcare | Real Estate | Food & Beverage | Professional Services
"Daehoon provided excellent service reviewing the stock option grant and agreement. He was responsive, completed everything promptly, and even added additional points upon request. His attention to detail and ability to address revisions made the process very smooth. Highly recommend!"
Julian H.
I am a business attorney with years of experience advising individual entrepreneurs and small businesses on issues ranging from entity selection/formation to employment law compliance, to intellectual property protection and exploitation. I often act as General Counsel for my clients fulfilling the legal function as part of a team of managers. I look forward to learning more about your business and how I may be of assistance.
"Julian was stellar - speedy and informative. Will absolutely hire him for future projects."
Forest H.
Forest is a general practice lawyer. He provides legal advice regarding small business law, contracts, estates and trusts, administrative law, corporate governance and compliance. Forest practiced complex commercial litigation in Florida for eight years, representing clients such as Host Marriott, Kellogg School of Business, and Toyota. Since moving to Nashville in 2005, he has provided legal advice to clients forming new businesses, planning for the future, and seeking funding through the use of equity and/or debt in their businesses. This advice has included the selection of business type, assistance in drafting and editing their business plans and offering material, reviewing proposed term sheets, and conducting due diligence. Forest is a member of the Florida, Tennessee, and Texas Bars; in addition. Forest has held a Series 7, General Securities Representative Exam, Series 24, General Securities Principal, and Series 63, Uniform Securities Agent State Law.
"I had a great experience working with Forest Hamilton during the acquisition process. Forest was professional, responsive, and easy to work with throughout the APA drafting and review process. Communication was clear, revisions were handled quickly, and he helped keep the transaction moving smoothly from start to finish. I appreciated his professionalism and willingness to answer questions throughout the process. Would definitely recommend him to others needing support with business acquisition agreements and transaction-related legal work. Thanks again, Forest."
Anjali S.
Attorney licensed in California, New York, and Florida with over a decade of experience in technology transactions, data privacy, and intellectual property. I advise businesses on drafting, reviewing, and negotiating commercial agreements, including SaaS agreements, master services agreements (MSAs), vendor and procurement contracts, data processing agreements (DPAs), and intellectual property licensing arrangements. I hold the CIPP/US and CIPP/E privacy certifications and regularly support clients on matters involving data use, privacy considerations, and contract structuring in technology-driven business relationships. My approach is practical and business-focused, with an emphasis on clear guidance, efficient negotiation, and helping clients move forward with confidence.
"Anjali is beyond sharp, responsive, and--most importantly for my project--highly knowledgable in the entertainment and intellectual property spaces. I'd work with her again in a second."
July 15, 2020
David C.
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Corporate
Stock Option Agreement
Connecticut
How to amend a stock option agreement?
I recently accepted a job offer from a company that provided me with a Stock Option Agreement. After a few months in my role, I have realized that some of the terms of the agreement are not suitable for my current needs. I would like to know how I can go about amending the agreement to better suit my current needs.
Thomas L.
You need to propose your changes to your employer.
Securities
Stock Option Agreement
California
Stock option agreement and stock splits?
I am an employee of a company that is planning to offer stock options as part of my compensation package. I am trying to understand what would happen if my company does a stock split. Would my stock options be affected by the split, and if so, how? I want to make sure I understand the implications of a stock split before I accept the stock options as part of my compensation.
Thaddeus W.
Good question! Typically, a stock split will result in an appropriate adjustment to an option award so that, after the adjustment, the option holder (you, in this case) is "made whole" -- that is, you are effectively in the same place economically (as far as this option is concerned) after the split with the option as you were before. If you look at your company's Stock Plan (the plan under which your options were authorized and granted to you), you will probably find a section called "Changes in Capitalization." (Or, you can search to document for the word "split" and may be able to find the governing provision that way.) The provision might be included in your Stock Option Agreement, but typically it is covered in the Plan. Anyway, the provision (wherever it is located in your documents) would normally say something along the lines of the following: "In the event of a stock split (and other events), the following will occur: (i) the numbers and class of shares covered by your option award, (ii) the exercise price per share of each outstanding option, and (iii) any applicable repurchase price per share issued under any option award, will be automatically proportionately adjusted in the event of a stock split (or other event)." (Usually the language is even more "legalesey" but that's pretty much the jist of it.) Of course, its impossible to say for sure in your situation (or in any other specific situation) without seeing the relevant documents and knowing all other relevant details, but that would be the typical approach.
Employee Benefits
Stock Option Agreement
Texas
Can you explain the vesting schedule and exercise period in a Stock Option Agreement?
I recently received a job offer from a startup company that includes stock options as part of my compensation package. The company provided me with a Stock Option Agreement, but I am uncertain about the details regarding the vesting schedule and exercise period. I would like to understand how these provisions work, as well as any potential implications they may have on my ability to exercise the options in the future.
Darryl S.
These are KEY TERMS of such an agreement that dictate how and when you can access and use the stock options granted to you. Here's a detailed explanation of each: VESTING SCHDULE - The vesting schedule defines when you earn the right to exercise your stock options. You don't typically receive the full option rights immediately; instead, they vest (become exercisable) over a period of time or upon achieving specific milestones. This structure incentivizes employees or stakeholders to remain with the company or contribute to its growth. Options often vest over 3-4 years with a one year cliff (meaning you must staying employed at least 12 months to earn anything and after they vest monthly or quarterly). EXERCISE PERIOD - The exercise period (also sometimes called the "option exercise window") is the time frame during which you can actually purchase (or "exercise") the shares after they have vested. If you don't exercise within this window, the options may expire. Typically, you have up to 10 years from the grant date to exercise vested options, as long as you're still employed. If you leave the company, you usually have a shorter window (e.g., 90 days) to exercise vested options. - Options that are not exercised before the expiration date become void.
Employment
Stock Option Agreement
Connecticut
Stock option agreement confidentiality?
I recently signed a Stock Option Agreement with my employer. After signing the agreement, I was provided with a confidentiality clause. I am concerned about the terms of this clause, and what it means for my ability to discuss the agreement with others. I am seeking advice on the potential legal implications of this clause, and what I can and cannot do.
Thomas L.
Confidentiality clauses are becoming regulated by the various states. At a minimum, your clause (regardless of what it says) will not prevent you from talking to a lawyer or to government officials.
Employee Benefits
Stock Option Agreement
California
Stock option agreement and early exercise provisions?
I recently accepted a job offer from a company that includes stock options. I have been provided with a Stock Option Agreement, but I am unsure of the early exercise provisions and how they may affect my future rights as an employee. I am looking for guidance on the legal implications of early exercising my stock options.
Paul S.
It's very important to follow the process for exercising the options, to the letter. These are described in the stock option agreement. I've had someone reach out in the past, asking why their never got their stock options. When I asked how he exercised them, he said he sent a message over Slack, rather than following the proper process. If you aren't sure what to do, then you should have a lawyer go through the documents with you.
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