Employee Stock Options Discussion, Redux
In my earlier blog about employee stock options, I focused on the tax treatment of employees who are granted stock options under an employee stock option plan (“ESOP”). I wish to expand my discussion in this and follow on blogs by addressing other ESOP topics of interest.
Option vs. Options
An option grant is sometimes referred to a grant of options, in the plural. Which is it, a grant of an option or a grant of options? Technically, a grant under an ESOP is a grant of an option, in the singular. While nothing turns on describing an option grant as a grant of an option, in the singular or options, in the plural, the correct way to describe a grant under an ESOP is a grant of an option, in the singular. From an legal point of view, the person enjoying a grant under an ESOP holds an option to purchase up to a certain number of shares of the company at a certain exercise or purchase price, all as set out in the option paperwork.
Who is Entitled to Receive an Option Under an ESOP?
Persons other than employees may be entitled to receive an option under an ESOP. It depends on the ESOP in question. The ESOP should contain language describing who is entitled to receive an option under the ESOP, like the following language:
““Eligible Person” means a director, officer, employee or consultant of the Company or a person otherwise approved by the Board.”
Under the above definition, even a person not expressly included in the definition of Eligible Person might be entitled to receive an option under the ESOP in question. For instance, the board in its wisdom, as recommended by management, might decide to grant an option to an advisor, even though “advisor” is not included in the list of eligible persons.
Promise vs. Grant
The right to receive an option under an ESOP typically arises in the written agreement between the company and the service provider, under the company’s promise to grant an option as part of the service provider’s compensation package. The promise should come with enough information about the option to allow the employee to revisit the promise if the company fails to grant the option. Here is some typical language:
“As additional compensation, the Company will grant the Employee an option to purchase Shares, on the following terms and conditions:
(a) Number of Shares subject to option: 50,000;
(b) Exercise price: $0.65;
(c) Grant Date: January 1, 2016;
(d) Vesting schedule: three-year vesting period, with the option to purchase 25% of the Shares under the option vesting on the day following the first anniversary of the grant date and the option to purchase the balance of the Shares under the option vesting over the following two years, in equal quarterly amounts; and
(e) the option is subject to Board approval and the stock option plan of the Company.”
As can be seen from the above, the Company’s (conditional) promise and the actual grant of the promised option are two different things.
Whether the board has an actual meeting or just signs what is referred to as a directors’ consent resolution to approve an option grant, this likely won’t happen right away. Most boards meet or sign directors’ consent resolution periodically only.
Option Grant Paperwork
Most ESOPs refer to a document (e.g. option certificate) evidencing the stock option grant. A person whose stock option grant has been approved by the board under an ESOP can call upon the company to provide this document once board or committee approval has been forthcoming.
A stock option grant is part of an employee’s compensation as an employee. The option certificate evidencing approval of the grant and setting out the terms of the grant should be treated by the employee as a serious matter. An employee would certainly follow up on a promised payment of cash. He or she should do the same with the paperwork designed to follow board approval of an option grant.