Shareholders can make share option agreements with third parties for future sales and purchases of company stock. They are beneficial in terms of company finances and act as a great incentive for employees as part of a share option reward scheme. However, for the document to legally stand, it needs to be written correctly. On this page, we have a selection of share option agreement templates to help. Plus, we offer more generalized advice on these agreements and how they work.
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. It is important to note that the Grantee is in no way obligated to purchase the shares, but they can exercise the agreement at a later date if they choose to do so.
Share option agreements work according to applicable law, requiring careful attention to details when they are set up and when they are exercised.
To set up a share option agreement with a third party or employee, the company must first gain approval from all shareholders. There will need to be discussions about who can be eligible to be a Grantee of shares before the record date, whether the share option agreement is lost under specific circumstances, and such period that the agreement shall stand for. Many share option agreements will also state an agreed price for the stocks, whereas others are to be calculated at the time of the sale using a pre-agreed formula.
In some cases, the share option agreement only stands if a “trigger event” occurs. In other words, a particular event must happen before the Grantee can purchase any shares. This is why using the appropriate share option agreement template is crucial. All the information must be accurately detailed in the document to ensure that it will stand. Once the document is agreed upon and signed by both parties, the Grantee can then purchase shares at a later date as per the share option agreement.
To exercise a share option agreement, the Grantee must notify the CEO of the company that they wish to exercise their options. This needs to be specified in a written notice addressed to the company or such other address as specified in the options agreement. A duly authorized transfer agent will manage and keep track of registered shareholders each time any agreements are exercised.
There are three main strategies for exercising stock options:
You can find all elements of the agreement in our share option agreement template. We highly recommend using this when drafting an options contract to ensure that all the necessary information is included. The precise elements also depend on the type of share option agreement in place. Nevertheless, the document needs to contain all information on the transactions contemplated by the company, including all of the following:
Typically, this information is spread over four documents—the stock option plan, the individual stock option agreement, the exercising agreement, and the notice of stock option grant. The latter is not always included with the other documents and mainly acts as a short summary.
A share option contract can be created for employees in general, for employee performance incentives, or for non-employee third parties.
A common example of a share option agreement is one between a company and its employees. Businesses often use option contracts as a rewards scheme to motivate their employees to reach certain targets. The options agreement can only be exercised if and when a certain personal or corporate target is achieved before the termination date. This is the exercising right for the contract, and these conditions are at the sole discretion of the company owners. It is important to note that the employee can be employed in any capacity. They may be a company officer or a general employee in the organization.
Businesses can also set up share option agreements with employees using a share valuation as the exercising right. Employees can only exercise these options contracts once the vesting period has passed. In these contracts, it is common that a predetermined stock valuation method is given in the agreement used to determine the value of shares. However, if a stock option is granted with an exercise price of less than fair market value on the grant date, the company will face tax liabilities and penalties as per the American Jobs Creation Act of 2004.
When the agreement is between a third party rather than an employee, a non-employee share option agreement template must be used. The third party could be anyone from an investor to a contractor or another company. These types of agreements are known as unapproved options agreements, and the third party won’t receive any tax relief on the shares. Thus, these are sometimes referred to as “non-tax-advantaged” share options. The idea is that putting a share option agreement in place will drive up the value of the business.
Share option agreements have many benefits to a business. They can help to drive up the value of their shares and can be a tax-efficient way to reward staff members. Yet, writing a share option agreement can be confusing. You can use our share option agreement templates to help you write an agreement out. If you do decide to hire a finance lawyer to help you with the process, ensure that you are paying reasonable attorneys fees for the service.
