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Stock Option Plan
I need a stock option plan outlining vesting over 4 years with a 1-year cliff, applicable to senior executives, including provisions for early exercise and double-trigger acceleration upon change of control.
What is a Stock Option Plan?
A Stock Option Plan lets companies give their employees the right to buy company shares at a set price within a specific timeframe. These plans serve as powerful tools for startups and established businesses to attract talent and create long-term incentives, all while following SEC regulations and IRS guidelines.
Under most plans, employees can exercise their options after a vesting period, typically 4 years with a one-year cliff. The purchase price (strike price) is usually set at the stock's fair market value when granted, giving employees the potential to profit if the company's value increases. For tax purposes, companies can offer either Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NSOs).
When should you use a Stock Option Plan?
Use a Stock Option Plan when your company needs to attract and retain top talent without spending large amounts of cash. This strategy works especially well for startups and growth-stage companies looking to compete with larger firms for skilled employees while preserving capital for operations and expansion.
The plan becomes particularly valuable during key growth phases: when scaling your team rapidly, preparing for fundraising rounds, or planning for an eventual IPO or acquisition. It helps align employee interests with company success, motivates long-term commitment, and creates a clear framework for equity compensation that satisfies both SEC requirements and IRS regulations around deferred compensation.
What are the different types of Stock Option Plan?
- Incentive Stock Options (ISOs): Offer special tax advantages for employees, available only to C-corporation employees, with gains typically taxed at long-term capital gains rates
- Non-Qualified Stock Options (NSOs): More flexible options available to employees, contractors, and directors, with regular income tax treatment
- Early Exercise Plans: Allow option holders to exercise before vesting, useful for tax planning and startups
- Performance-Based Plans: Link option vesting to specific company or individual performance metrics
- Time-Based Plans: Standard vesting schedules, typically four years with a one-year cliff
Who should typically use a Stock Option Plan?
- Company Board of Directors: Approves and oversees the Stock Option Plan, sets overall share pool and key terms
- Corporate Attorneys: Draft plan documents, ensure SEC compliance, and structure vesting terms
- HR/People Operations: Administers the plan, manages grant documentation, and explains benefits to employees
- Employees/Option Recipients: Receive and exercise options according to vesting schedules and plan terms
- Company Accountants: Track option grants, handle expense reporting, and manage tax implications
- Plan Administrator: Maintains records, processes exercises, and ensures compliance with plan terms
How do you write a Stock Option Plan?
- Total Option Pool Size: Determine number of shares to reserve, usually 10-20% of total equity for startups
- Vesting Structure: Define schedule, typically 4 years with 1-year cliff, and any acceleration triggers
- Strike Price: Get 409A valuation to establish fair market value for option pricing
- Eligibility Rules: Specify who can receive options (employees, contractors, advisors)
- Exercise Terms: Set exercise windows, early exercise rights, and post-termination periods
- Board Approval: Prepare board resolution and stockholder consent documents
- Documentation System: Set up tracking for grants, exercises, and compliance requirements
What should be included in a Stock Option Plan?
- Plan Purpose: Clear statement of objectives and intended participants
- Share Reserve: Total number of shares authorized for issuance under the plan
- Administration: Powers and duties of the plan administrator, typically the board or committee
- Eligibility Criteria: Detailed qualifications for option recipients
- Option Terms: Exercise price, vesting schedule, expiration dates, and exercise procedures
- Adjustment Provisions: Rules for stock splits, mergers, or other corporate changes
- Amendment Terms: Procedures for modifying the plan
- Termination Rights: Conditions affecting options upon employment end
What's the difference between a Stock Option Plan and an Equity Incentive Plan?
A Stock Option Plan differs significantly from an Equity Incentive Plan in several key ways. While both are tools for employee compensation, they serve different purposes and offer distinct benefits.
- Scope of Benefits: Stock Option Plans focus specifically on the right to purchase company stock at a preset price, while Equity Incentive Plans can include multiple types of awards like restricted stock, performance shares, and stock appreciation rights
- Flexibility: Equity Incentive Plans offer more flexibility in structuring rewards and can adapt to changing company needs without creating new plans
- Tax Treatment: Stock Option Plans typically involve either ISOs or NSOs with specific tax implications, while Equity Incentive Plans can incorporate various tax-advantaged compensation structures
- Administrative Complexity: Stock Option Plans are generally simpler to manage, focusing on option grants and exercises, whereas Equity Incentive Plans require more complex tracking of multiple award types
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