This Wisdom of the Crowd, compiled from questions and responses posted on the Corporate & Securities eGroup,* addresses the Legal Requirements For a Valid Employee Stock Option Agreement at a Private Company. -- *(Permission was received from the ACC members quoted below prior to publishing their eGroup Comments in this Wisdom of the Crowd resource.)
-- Question:
Hi, I work for a small (less than 25 people) private company. I do not perform securities work for the company and I am not a securities attorney. The company offers employees, including me, stock options. Elsewhere that I have worked, that promise of stock options has come with a signed Stock Option Agreement. Here, for some reason, there appears no signed stock option agreement - not for me, not for any of the employees. I have even been "informed" (by accidental discovery of a table of grants) that I have been granted more options, but knew nothing about it prior to this discovery. I have no "paperwork" to document these facts for myself, and other employees also have no signed stock option agreements or have been told of further grants.
Do employees need a signed stock option agreement? Why or why not? Does the company need signed stock option agreements with the employees? What is the minimum the company must do - show approval of the grants in board meeting minutes - versus what is prudent and customary for the company to do?
We have a "director of finance" and this director of finance, who also does human resources for an accountant is not as "precise" as I have known other accountants to be. So, I don't know if the inertia in giving the employees signed stock option agreements comes from the desire to do less work and/or tracking things down or if this is legitimately an okay thing.
Any thoughts on this are greatly appreciated. Thank you.
Wisdom of the Crowd:
--Response #1: Looks like responder #1 is going to explain the requirements to you. For background, lookup IRS code 409a. Workaround might be a phantom equity plan.1--Response #2: Agree. I have done phantom/shadow equity for key employees and am happy to discuss.2--Response #3: Another thought is this: I wonder how valuable illiquid stock in a privately held corporation really is to your employees and how interested the non-employee owners (the "true" owners) really are in diluting their stakes; it makes no sense that they would want to give up control. In these situations I've seen company commitments to buy back the stock if the employee leaves or retires. That may create valuation issues down the road. These are terms that belong in the paperwork. You may be better off with a "phantom" option plan that awards value but not real equity.¨--Response #4: Yes, you need agreements that outline the terms of the award -- this protects the company and the employees. It will cover items like vesting, how to exercise options, tax withholding obligations, what happens to options if employee leaves employer or is fired. The board does need to approve and document its approval of grants (as well as obligations relating to valuation). There are tools out there to help and I work for one of them -- a company called Shoobx that helps DE C-Corps generate this paperwork and handle these processes (i.e., company and employee signs electronically on the web, board consent is generated for board members to sign which they do electronically as well, process and documentation for employee to exercise options), all the while keeping your company's capitalization table up to date. Happy to discuss further off line. Thanks.4
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1Robert Enayati, General Counsel and Corporate Secretary (October 23, 2016).
2Matthew Wojtkowiak, General Counsel, Alphaserve Technologies (October 24, 2016).
3Arnold Graber, Executive Vice President and General Counsel, Metalico, Inc. (October 24, 2016).
4Anita Ryan, Staff Attorney, Shoobx (October 23, 2016).
Region:
United States
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