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Share Option Agreement

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Updated Oct 6, 2023
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A share option agreement is an agreement between the holder of shares and another party. This party might be an employee of the company or company directors or third-party investors. The share option agreement gives this third party (known as the Grantee) the right to purchase company stocks at a future date within a given time period. Fill out this adaptable template online and download a fully prepared legal document to your device in minutes. Access it anytime in your Lawrina account.

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Share option agreements are commonly utilized by startup companies in the US. They are legal agreements hinged on the purchase or sale of a company’s equity at an agreed date and price. For the agreement to be effective, it must be properly documented with every necessary element, such as the option price, vesting period, quantity, etc. Lawrina offers a detailed share option agreement template that can help streamline the process.

What Is a Share Option Agreement?

A share option agreement can be defined as a legal document recording the accord between two parties: a company and another party. The agreement grants the option holder the right (not obligation) to buy a defined amount of the company’s equity at a fixed date in the future at an agreed price. For example, if a person is granted 1,000 ordinary share options at the value of $1 per option, that person can only exercise the right to this option at the agreed date. If the person chooses to make the purchase, he or she will then own $1000 (1,000 x $1) worth of the company stocks. Additionally, by virtue of 26 CFR § 423, an option can be granted as part of a sample employee stock option agreement.

These agreements aren’t necessarily created just for employees. Other interested parties outside the company may be granted share options. If you’re planning to enter into an option agreement, keep in mind that you can set mandatory conditions in your share option agreement template. According to the Internal Revenue Service (IRS), conditions made toward granting an option, as opposed to exercising such an option, shall be given effect in alignment with the goal of the company. 

Parties of the Share Option Agreement

Although share option agreements are usually created as a stake in the company as part of an employee’s work contract, these agreements are not restricted only to employees. They can also be established with persons or entities outside the company. As such, the parties to a share option agreement are:

  • Grantee/Option holder: This is the party receiving the company’s equity. The grantee is often an employee of the company but can also be an investor, consultant, external collaborator, etc. 

  • Grantor: This is the party offering the share options to the grantee. The grantor could be a start-up, a private company, or a corporation.

Key Terms

Some key terms that are generally used in share option agreements include the following:

  • Option grant: The option grant is issued to the grantee as the right to purchase a specific number of options as a specific date and price.

  • Option type: The type of option is an essential term to be defined in the agreement. The option can be a sample employee stock option agreement or a share option agreement for a non-employee. 

  • Strike price: Also called option or exercise price, the strike price refers to the exact cost of the stock options. 

  • Vesting period: The vesting period is the period before the exercise date, the period of time which the grantee must wait before he or she can exercise the options. 

  • Exercise period: This is the period during which the grantee must exercise his or her stock options. If they are not exercised appropriately within the exercise period, the grantee may forfeit the rights granted by the share option agreement. 

  • Rights: The grantee’s rights to purchase the shares will be listed clearly in the share option agreement, including the extent of his or her rights after the options have been exercised. 

Why Do Companies Use Share Option Agreements?

There are various reasons why companies use share option agreements. The most common reasons are: 

  • Incentive programs: Notwithstanding the fact that share options are established as a reward scheme, they can be favorable to the employee. The options give employees the capacity/right to buy company shares at a fixed date and price. The employee who chooses to exercise his or her options can gain substantial interest and profit if the value of the share increases. 

  • Talent acquisition and retention: Stock options create an attractive compensation plan to piques the interest of skilled and talented workers who may be interested in being part of the company, especially one that looks promising. They also encourage existing employees (option holders) to remain in the company since the value of the option depends on the company’s performance. Key employees — executives, directors, etc. — can be effectively retained through this means of compensation. 

  • Fund management: Share option agreements allow companies to effectively manage their funds by allowing them to reward and motivate their employees without direct expense.

Having a proper share option agreement template to use is vital for proper fund management. An equity stake agreement template can help you manage your company’s affairs effectively. 

How Do Share Option Agreements Work?

As earlier defined, a share option agreement gives a person the option to purchase a company’s shares at a future date at a price that is typically below the fair market value. To determine the best price to purchase the stock, certain valuation methods must be used with respect to sections 422(b)(4), 422(c)(5), 422(c)(7), and 423(b)(6) of the Internal Revenue Code. For example, § 422(b)(4) states that the option price must not be less than the fair market value of the stock at the time the option was granted. 

Additionally, it is important to know the difference between vesting and exercising. Vesting merely gives the grantee the right to buy the staked shares at a fixed date and price. Exercising makes the grantee an option holder. Therefore, vested shares does not mean ownership. Before a person can make a claim of ownership, he or she must exercise the right to purchase the shares by paying the option price. According to the IRS, even when an employee or non-employee grantee promises to pay or makes payment to a stock purchase plan, he or she is not yet exercising the option. However, when an option holder does exercise the option and the shares have been issued, he or she becomes a shareholder. As a result, option holders will eventually get voting rights and other shareholders’ rights after acquiring the shares. 

Setting Up an Options Agreement

If a company wants to offer a share option agreement, the company’s shareholders will need to approve. They will hold a board meeting, with all essential members present, to discuss the vital parts of the stock option agreement, such as eligible members, the number of shares approved, the exercise period, conditions, etc. The option price for a share option agreement is usually predetermined, but there are occasions when it may be calculated at the time of the purchase using a fixed formula. 

It is important to note that some sample employee stock option agreements include conditions that must be met before an employee can exercise his or her purchasing right. The company can require the employee either to remain in his or her position for a stipulated period of time before the shares can be fully vested, or hit an agreed milestone. Respectively, this is called vesting by time and vesting by milestone.  

Depending on your goal, you can include any of these conditions in your share option agreement templates. Once both parties duly sign the document, the grantee can exercise his or her right after meeting all agreed conditions. 

Exercising a Share Option Agreement

A grantee can only exercise a share option agreement by purchasing the shares on the agreed date and at the fixed cost. This process usually includes the following:

  • The grantee must ensure that all required conditions have been fulfilled.

  • He or she should notify the executive authorities of the plan to exercise. In most cases, a written notice addressed to the company or another method specified in the share option agreement will be sufficient.

  • The grantee must pay the strike price for the shares.

  • After payment, the option would be duly granted to the option holder as the share owner.  

After exercising a stock option agreement, the grantee can choose to either hold or sell the shares. To avoid having issues when later exercising shares, an accurate share option agreement template that includes all the necessary details and language will help.

What Are the Elements of an Option Agreement?

A share option agreement template will include all the necessary elements to create a well-drafted and effective document. Although, what should be included in the agreement depends on the particular nature of the agreement. Regardless, a well-documented share option agreement usually includes the following elements:

  • Names of the parties: The agreement should clearly define the grantor and the grantee, including each party’s contact information, mailing address, etc. 

  • Grant details: The share option agreement should list the number of shares granted, type of equity, grant date, etc. 

  • Exercise/strike price: This is the agreed amount of money that the grantee will pay to exercise the share options.

  • Vesting period: The share option agreement must define the vesting timeframe and the conditions for when the agreement will become exercisable.

  • Date of termination: This is the date when the grantee can no longer exercise the share options.

  • Rights and liabilities: The agreement will list the rights that the option holder will have in the company after exercising the share options.

  • Governing law: The share option agreement document must define the jurisdiction that will govern the interpretation and enforcement of the agreement.

What Should I Put in the Agreement?

A share option agreement should typically include all the necessary elements, and should be tailored to meet the goals of the parties. To set up the agreement, the parties should discuss the terms. 

A well-drafted customizable share option agreement template can be tailored to meet every business entity’s needs. Lawrina’s equity stake agreement template can be swiftly edited online to download a prepared PDF within a few minutes.

Examples of Share Option Agreements

You can create a share option agreement for employees and for other parties, such as investors, traders, and others.

Performance-Based Employee Agreement

A performance-based employee agreement is a share option agreement between an employer and employee that strongly lays emphasis on achieving a certain goal that aligns with the organizational objectives. Such agreements usually come with a financial or non-financial incentive. The conditions under this type of agreement are at the company’s sole discretion and are clearly defined in the share option agreement template. 

Employee Share Valuation Options Agreement

As a share option agreement, an employee share-valuation options agreement involves the assessment and granting of shares to employees as part of a compensation plan. This type of share subscription agreement checklist includes the number of shares granted, the strike price, the vesting schedule, and several other important factors. However, the employee can only exercise his or her shares once the vesting period has elapsed. This type of share option agreement clearly defines the evaluation method that will be used to determine the value of the share in the market.

Non-Employee Share Option Agreement

A sample share option agreement for a non-employee can help when creating a legal arrangement between the company and another party who is granted the option to buy company shares, which is different from the traditional employer-employee arrangement. This is a strategy to enable individuals or entities outside the company to have an interest in the company’s growth. Agreements made outside the company should be properly cross-checked before appending your signature.

When To Use a Share Option Agreement

Share option agreements are a great mechanism to incentivize, retain, and attract key individuals or employees in the company. These share subscription agreement checklists involve several essential aspirations of the company. They can be used to align individual and organizational goals, promote a sense of ownership, and lay emphasis on the reward of hard work and commitment.

Common Use Cases

The most common reasons for companies to opt for share option agreements are to:

  • Incentivize their employees; 
  • Retain key talent and skilled workers;
  • Conserve funds;
  • Reward industrious employees; and
  • Foster the company’s growth.

When Not To Use a Share Option Agreement

Share option agreements can be quite valuable in some cases, but there are circumstances for which they might not be a suitable choice. The company must reconsider using a share option agreement when the company has:

  • Limited growth potential;
  • Critical lack of funds, in such a way that it would be impractical to manage the day-to-day operations needed to grant the equity;
  • Short-term objectives;
  • High-employee turnover;
  • Legal or regulatory barriers;
  • Lack of valuable equity; and 
  • Unstable work environment.

Legal Disclaimer

Please note that Lawrina does not provide any legal services. The information on Lawrina’s Site and its downloadable content, including legal articles and templates, shall not be considered legal advice and is not guaranteed to be correct, complete, and up-to-date. If you require legal advice on your issue, we recommend you contact a qualified attorney licensed in your state. You personally assume full responsibility for any consequences, damages, and costs associated with your use of any content of Lawrina Services available on Lawrina’s Site. 

By using Lawrina’s Site you agree with mentioned above and give your irrevocable consent to comply with and to be bound by the provisions of Lawrina Service terms.

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Frequently Asked Questions

What happens if I leave the company before my options fully vest?

Unvested shares are handled based on the company’s policy and the terms of the share option agreement. They are rarely exercisable. In some cases, the departure of an employee leads to forfeiture of his or her share options. However, there are a few companies that allow partial vesting of the share option agreement even after the employee’s departure.

When can I exercise my options?

You can exercise your options after the vesting date stipulated in the share option agreement has been attained.

Can I transfer my options to someone else?

Even though the transferability of equity options depends largely on the terms of the share option agreement, most companies explicitly disallow the transferability of the share options to a third party.