How To Grant, Vest, And Exercise Stock Options

AdobeStock_414456803-300x118Both employees and employers need to understand how stock options work. Employers who issue stock options without understanding them can lose significant value or control of their businesses. Employees who do not understand their stock options could miss out on a significant part of the compensation they are owed for their employment. The experienced California stock option lawyers at Structure Law Group help employers and employees understand their legal rights and obligations regarding stock options.

A Timeline Of the Stock Option Life Cycle

Like other financial assets, stock options have a life cycle. Understanding this life cycle can help you understand the true value of the asset. There are three general phases in the life cycle of stock options:

  • The Grant Of Stock Options: Stock options are usually granted at the time of an employment offer. In some cases, they may be offered after a probationary term or a certain length of employment, but the offer of stock options is usually made in an offer letter. This offer is not the same as a legal grant of stock options. The grant occurs when the stock options are legally issued. In order to make a legal grant of stock options, the Board must approve the grant in accordance with a written stock plan. The grant will then occur with written documentation (usually a Notice of Grant Of Stock Options and a Stock Option Agreement). This process protects the company from unauthorized grants of stock options.
  • When Stock Options Vest: In order to encourage long-term employment and reduce turnover, stock options are usually issued with a vesting requirement. This means that the employee will not have full ownership of the stock options until the required length of employment has passed. Sometimes vesting occurs on a schedule: the employee might have a ten percent ownership in the stock options after one year of employment, twenty percent at two years of employment, and so on until the employee is fully vested at one hundred percent ownership after some term of stated employment, for this example – ten years. In other cases, vesting occurs at a single point in time: in the example above, the employee might have no ownership interest in the stock until ten years of employment, at which point he or she has a full hundred percent interest. Consult with a business lawyer about the vesting schedule that is best suited to your employment needs.
  • Exercising Stock Options: An employee exercises stock options when he or she purchases the stock at the set “exercise” price made in the initial grant. At that point, the employee is free to sell these shares or hold on to them to realize any future gains in the value of company stock.

Call Us Today to Speak with a California Business Attorney

The experienced California stock option lawyers at Structure Law Group are here to answer all your questions about stock option agreements. Our skilled attorneys have helped employers and employees structure stock option agreements that are best suited to their particular needs. Call (408) 441-7500 to schedule a consultation.