Before a company can start issuing options, the incentive plan will first need to be drafted in legal documents and approved by the board and/or shareholders. It might need to adhere to certain regulatory requirements.
Draft the legal documents or use ready-made templates
You can either go to lawyers who will help you draft the legal documents, or you can also find ready-made country-specific templates online. However, be aware that these templates have not been custom-made for your company, so time should be taken to consider whether the terms in the template work for your company and towards the goal you are trying to achieve with the plan.
E.g. if part of your objective is to motivate employees, pay special attention to the good and bad leaver terms in any grant agreement. If these terms are very restrictive towards the employee, the option plan can lose its desired effect as a tool of motivation and create frustration instead. If the terms of the agreement force the employees to exercise their options right after leaving the company, the terms will also create a lot of work for the person managing the option plan, as every time an employee leaves, there’s a possibility they have to deal with the process of exercise.
The documents that are needed for an incentive plan can vary a bit from country to country, however, the usual ones are:
[fs-toc-h2]The grant agreement
The grant agreement is the contract that is signed between the employee (or any other participant) and the company. The grant agreement can include the plan’s terms and conditions, but most importantly, it includes the terms specific to the employee, such as:
- the employee’s name and other details, such as their address
- the grant date
- the number of options
- the vesting start date
- the vesting schedule
- the exercise price
- the terms of exercise
- any performance conditions
[fs-toc-h2]The plan’s terms and conditions document
This is often called the Employee Stock Option Plan or similar and includes the overall terms and conditions of the plan, which are general to all employees. Some of the terms usually there are:
The granting of options. The procedure that needs to be followed in your company to legally issue the options
- The terms and conditions that have to be set at the point of the grant and are usually included in the grant agreement
- Who can be granted options, whether just employees or also other types of participants
- Any limitations the plan has e.g. due to country-specific tax reliefs
- How to set performance conditions within the plan
- How the vesting and exercise of options works
- How the plan is affected by takeovers and other corporate events
- When and how vested and not vested options lapse
- How the plan relates to the contract of employment
- Data protection
- Governing law, jurisdiction, and court for disputes
[fs-toc-h2]The articles of association may need to be updated
- In some cases, the articles of association may need to be updated to allow for the possibility of creating and using a share option plan. If a reserve of shares is created for the option pool, then the total amount of share capital needs to be updated.
Obtain corporate approvals to use the documents and the plan.
The type of approvals needed can vary from country to country and depend on your company’s Articles of Association e.g.:
- board or supervisory board approval
- shareholders’ resolution/decision:
Generally, shareholders are required to pass a resolution or decide on any employee share option plan that the company wants to use. Such a resolution or decision will include key details of the plan and authorise the company to manage the plan.
Check whether you should obtain and use a fair market valuation
In some countries, like the UK, the fair market valuation can be used to offer tax-advantaged grants at a reduced exercise price, namely at the fair market value.
The fair market value is usually slightly lower than the share price in the latest funding round.
Check whether you need to fulfil certain regulatory requirements
Depending on the local laws and regulations, some actions might be required to ensure compliance. This could be filing and reporting documents with the local tax office, obtaining any required approvals or exemptions, etc.