Employees who join startups in their beginning stages are often compensated with a salary, a signing bonus and a number of stock options, referred to as Incentive Stock Options (ISOs). Incentive Stock Options are an employee benefit that offers the employee a right to purchase the company’s stock at a discount. As the name implies, Incentive Stock Options are incentive for employees to help the company grow in value as the worth of the options will increase when there is an increase in the company’s share price.
Incentive Stock Options are typically granted to employees on a vesting schedule. Employees should be aware of the following aspects of their Incentive Stock Options:
Vesting Schedule: Stock vesting refers to the process in which individuals earn ownership rights to their shares in the company over a specific period of time. A vesting schedule outlines the timeline and conditions under which the shares will be fully owned by the employee. It is important to understand the vesting schedule and the milestones or requirements that need to be met to achieve full ownership. An experienced business lawyer in Denver, Colorado can assist in reviewing the stock option and grant documents to provide you with a better understanding of the vesting schedule.
Cliff period: The vesting schedule may include a cliff period, which is a specified duration at the beginning of the vesting schedule where no shares are vested. For example, a common cliff period is one year, meaning that no shares will be earned until the employee completes one year of employment with the company.
Accelerated Vesting: Certain events can trigger accelerated vesting. For example, in the case of a sale of the company – an acquisition, or merger of the company, there may be provisions in the stock option plan documents for accelerated vesting where all or a portion of the unvested shares become fully vested. It is important to understand the circumstances under which accelerated vesting can occur. A Denver corporate attorney can assist with reviewing the stock option grant documents to provide you with a better understanding of the accelerated vesting terms.
Termination or Forfeiture: The vesting schedule typically also addresses what happens to unvested shares in the event of termination or resignation of the employee or other circumstances under which the employee leaves the company. It is important to understand whether unvested shares will be forfeited or if there are any provisions in the stock option plan and grant documents for partial or full acceleration of vesting when an employee’s relationship with the company terminates. A Denver corporate attorney can assist in reviewing the stock option plan and grant documents to provide you with a better understanding of the forfeiture terms.
Tax Implications: Receiving vested shares may have tax implications. It is advisable to consult with a tax professional to understand the tax consequences associated with the receipt, vesting and subsequent sale of shares.
Shareholder Rights: As shares vest, the employee gains ownership rights and becomes a shareholder in the company. It is important to understand the rights and privileges associated with being a shareholder, such as voting rights, dividend entitlements, and any other benefits or obligations that come with share ownership. A Denver corporate attorney can assist in reviewing the incorporation documents of the company, shareholder agreement or buy-sell agreement to provide you with a better understanding of your rights as a shareholder.
Documentation: It is crucial to have proper documentation, such as a stock option plan, equity incentive plan or restricted stock purchase agreement which clearly outline the terms and conditions of the stock vesting arrangement. These documents should be carefully reviewed and understood before accepting the grant of shares.
It is highly recommended that employees in startups who are granted Incentive Stock Options consult with an experienced business lawyer in Denver, Colorado and a tax professional who specialize in equity compensation and business law to ensure a comprehensive understanding of their stock vesting arrangement. Reach out to Lotus Law, a business law firm in Denver, providing legal services for startups in Denver, for a comprehensive review of your stock option plan and grant documents.