Share Option Agreement Template

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.

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. 

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:

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

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

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. 

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. 

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. 

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:

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.

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:

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.

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

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. 

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.

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.

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.

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

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: