Overview of Employee Stock Option Plan

 

What is this document?

The purpose of an Employee Stock Option Plan (ESOP) is to enable the corporation to grant stock options to its directors, officers, employees and consultants (the “participants”). By becoming shareholders in the corporation with the chance to benefit from an increase in the value of the shares/stock, the participants have an incentive to work for the success of the corporation.

 

When would I use this document?

An ESOP can be used as a non-monetary way to compensate personnel.  By granting these participants the option to purchase shares in the corporation at a fixed price within a set period of time, the corporation can retain key personnel at a lower salary while rewarding them for their continued work and loyalty to the corporation as the corporation grows and share values increase. ESOP’s are used by corporations of all sizes and stages of growth.

 

Who Signs this Agreement?

The corporation’s authorized representative and the eligible employees (called participants) will sign the agreement.

 

More details about this document

The ESOP is established using a document that sets out the structure of the plan, the conditions under which a participant can receive options, conditions for termination of the employee’s participation in the plan, triggers that permit the corporation to buy back the shares, rules for exercising an option to purchase shares etc. The plan often gives the board of directors complete discretion as to whether a particular employee will be granted options under the plan.

If an employee is granted options, the grant will be set out in an Option Commitment Certificate. This document will set out the number of options to be granted over a set period of time (the vesting schedule), and the date on which the options will expire. It will specify the class, and number of shares the participant is eligible to buy on the exercise of each option. This document will also specify the price at which the participant can buy the shares.

Participants can choose whether to exercise their options to purchase shares. If the options are not exercised, they will expire on a stated date. Some ESOP’s will accelerate the vesting of options in certain circumstances eg. a take-over bid, to allow the participant the chance to use all the options to buy shares to sell into the take-over bid, even if without the take-over bid the options would not have vested until later.
Employee Stock Option Plans vary in length, but must be authorized by appropriate resolutions. If a participant decides to exercise an option to buy shares, they must complete an approved Notice of Exercise of Option, as well as a Subscription Agreement to purchase the shares.

 

What are the core elements of this document?

The core elements of an Employee Stock Option Plan include: Definitions, Option Commitment Certificate, Grant of Options, Conditions of Options, Vesting, and Exercise of Option,  Termination of Participation, Payment.

An Employee Stock Option Plan can include a number of other supporting clauses, including , Drag-along rights, Acceleration, Designated Representative, Termination, Transferability, Taxes and Protective Provisions. Some ESOP’s provide for a cashless exercise option.

 

Related Documents

Employment Agreement – an agreement that sets out the terms of an employment relationship

Shareholders’ Agreement – agreement between shareholders that governs relationships between shareholders, including shareholder ‘exits’ from the corporation

Nondisclosure/Confidentiality Agreement – an agreement that protects confidential information

Share Buyback Agreement – an agreement between a shareholder and the corporation giving the right to the corporation to ‘buy back’ the shareholder’s shares under certain conditions eg. the shareholder is no longer an employee

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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