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An employee option plan—the right to purchase shares in the company at a predetermined price—motivates employees and binds them to the enterprise. It can be a smart move, but it stands or falls with a good option agreement that regulates the terms, vesting, and consequences upon departure.
What is an option plan?
With an option plan, you give employees the right (the option) to purchase shares in the company in the future at a predetermined price. If the value of the company increases, the employees benefit. In this way, the staff shares in the success they help make possible — good for motivation and engagement.
Why is it motivating?
Employees with options have a direct interest in the company growing and increasing in value. This connects them to the enterprise and stimulates engagement and loyalty, especially among key figures. Moreover, for start-ups and scale-ups, it is a way to attract and retain talent without immediately paying high salaries.
The option agreement
The core is a good option agreement. In it, you specify: the number of options, the exercise price, the term, and the vesting conditions (when and at what rate the options are 'earned'). Also important is what happens if an employee leaves — does he retain his (vested) options, and under what conditions?
Pay attention to the tax and legal aspects
Options have tax implications for both employee and employer, particularly at the time of exercise or realization. Discuss the tax implications with your advisor. From a legal perspective, it is important that the option plan aligns with the articles of association and any shareholders' agreement. Therefore, have the plan and the agreement drafted by a specialist.
Frequently Asked Questions
What is an employee option?
The right to purchase shares in the company in the future at a predetermined price. Employees benefit from the increase in value.
What do I arrange in an option agreement?
The number of options, the exercise price, the term, the vesting, and what happens upon the employee's departure.
Are there any tax implications?
Yes, including when exercising or cashing in. Discuss the tax implications with your advisor.
Setting up an option plan properly?
Our legal experts draft an option agreement that aligns with your shareholders' agreement. View our corporate lawteam or schedule a free consultation.
