Stock Option Agreement

How To Use

This to-do list is provided to inform you about the document in question and assist you in its preparation.

Stock option agreements are a tricky business for a number of reasons:

  • Many states regard these agreements as falling under employment agreements and/or covenants which opens them up to examination by various labor boards in addition to the Attorney General’s office for fraudulent enticement and other matters. The argument is that Stock Options can be offered employees as “bait” to avoid receiving higher salaries. Therefore, this is an infringement of various rights, in the eyes of these states, their laws and statutes, and their enforcement officials.
  • Many employees view stock option offers in a similar manner and are not motivated by receiving them, and, to some extent are demotivated by the offer, especially after their families make derogatory comments about the “worth” of these options. In fact, I have had several employees resign when offered options because of personal upset caused by both the potential upside and more likely worthlessness of these options (a common result, of course; however, having said that, if the company works, the options can mean big bucks).
  • In addition, if the Corporation grants these options to any of its employees they then change their role, in part, to being an owner. This is an entirely different relationship than being an employee and often serves to confuse employer and employee alike, when employee turns the table on management and starts cross examining management (their absolute right as shareholders) and offering different suggestions than those of their immediate supervisor (another absolute right of a shareholder to offer suggestions, but in the appropriate forum of course, which is not in the course of their daily employment; but, these distinctions often get muddled among option holders).
  • The safest course is not to offer these at all. This is the unintended consequence of the events and facts enumerated above. However, it is not our role to advocate changing what is, but in suggesting how to deal with things as they are, until they are modified to become friendlier to the option-issuing corporation.
  • I have found the no option approach works best in our company and the last few we have set up. In fact, in classified ads seeking employees, my response level has always been higher and with a more qualified group when I offer regular employment versus when I offer regular employment plus an option or stock opportunity. People have become suspicious of these offers, rightfully or wrongfully. If you want to secure an employee’s commitment to the company, consider an outright issuance of stock so they have what they have and that is that. On the whole, though, you may find it wiser to not issue stock at all to employees. Pay them more instead. It will be simpler and probably cheaper in the long run. The above is business advice only.
  • Legally, you are issuing securities in this agreement and should have the agreement reviewed by an appropriately knowledgeable attorney in securities law. Have both parties sign the Agreement in duplicate, have these Agreements ratified by your Board and inserted into your minute book, and keep an extra copy in the employee’s or other person’s file in your company.