Every startup grants stock options sooner or later. It can be a fairly painless process, but if you’ve never been through it before you might be daunted by some of the details. To help make it easier, I have put together the following checklist for private corporations (not LLCs) granting stock options. Please let me know if you think this is helpful, or if you have anything to add.
Prior to Granting Stock Options
- Adopt a stock option plan – First, adopt a plan and draft standard stock option agreements under the plan. If shareholders do not approve the plan, you cannot grant incentive stock options, and you may be required to make special filings with state securities regulators.
- Grant all of your stock options under the plan-If you are granting options outside the plan, special considerations will arise, which are not addressed in this checklist.
- Confirm that you have sufficient shares- Prior to granting stock options; confirm you have the number of shares under the plan to grant the new batch of options.
- Rule 701- Before every grant of stock options, confirm that you are compliant with Rule 701′s mathematical limitations. Rule 701 has mathematical limitations, meaning–there is a limit to the number of securities you can issue under Rule 701, and you do not want to exceed that limit. For a summary of the limits, see What Is Rule 701 and Do I Need to Worry About It? [Be aware that Rule 701 is only available to companies that are not subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act]
- Prospectus- If you have granted more than $5M in options during the last 12 months, make sure to provide the prospectus required by Rule 701.
- Eligible recipients- Confirm each prospective option recipient is eligible under the plan. Generally, only individuals qualify. Non-employee/consultants can qualify as long as they are natural persons providing bona fide services and not receiving the options in connection with a capital raising transaction.
- Confirm the residency of recipients – Before every grant of stock options, confirm the residency of the prospective optionees and confirm that you are compliant with the Blue Sky law of each state in which investors are resident. If you are granting options to optionees in California, special attention will need to be given to California’s requirements.
- Fair market value- Make sure that the options are being granted at fair market value in compliance with Section 409A of the Internal Revenue Code.
- Board approval- Have the Board approve the option grants pursuant to a Board Consent or resolutions adopted at a meeting. If the vesting schedules for any of the options are different from the standard specified in the standard agreements, make sure the Board consent describes the vesting schedule.
- Signed agreements- After each grant of stock options, give each recipient a copy of the stock option plan and their stock option agreements, and have them sign the agreements required under the plan.
- Capitalization ledger- Update the capitalization ledger once the option is approved.
Exercising Stock Options
Now that you have gone through the preparation process, check out our Stock Option Exercise Checklist when you’re ready.
By William Carleton November 30, 2010 - 12:29 pm
Joe, the porting of this post to the new platform has somehow lost the hyperlinks and messed with the autonumbering.
By Joe Wallin November 30, 2010 - 1:11 pm
Thanks for saying so. I’ll look into it…
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By Anonymous October 23, 2014 - 12:54 pm
I’m hoping you can help me or refer me to an answer to this dilemma:
I left a large ($20B annual sales) public German company this past February. They did not inform me I could purchase options owed me until it was too late. (The window to purchase was June. I received a voice mail on June 30th about this.) In prior years they informed me about options by mail but did not do so this year. The other means by which I could conceivably have found out was through a company web-page for ex-employees, but they never informed me I had to sign up on this site nor did they provide any related training.
Do I have any recourse via the SEC or DOL or any other legal means?
Thank you.