An Employee Stock Option Plan is a remuneration and incentive tool for the staff of a company. Stock options give the beneficiaries the right to subscribe in the future shares or quotas of the company at a predetermined and convenient price (strike price). The price is set so that if the value of the company increases the beneficiary can make a profit.
The stock option plan, therefore, favors a greater work commitment of employees and an alignment of their interests with that of shareholders. The advantage of exercising the option, in fact, increases with the growth in value of the company.
In addition, the assignment of stock options is, as a rule, conditional on performance objectives and the maintenance of the employment relationship. Typically, beneficiaries must work for the company for a certain period of time (vesting period) or achieve certain results in order to purchase shares or stakes. This allows the company workers to be retained and further motivated.
When using a stock option plan
The stock option plan can be used by Spa and, in the case of SMEs or innovative startups, also by Sal. However, it is not possible to use this tool in simplified Sols.
The start-ups and innovative SMEs benefit from a tax and favorable contributions scheme. In fact, the income deriving from the granting of stock options or other financial instruments does not constitute taxable income for tax and contribution purposes. This favorable regime, on the other hand, does not apply to the sale of such financial instruments that follow the ordinary rules.
The recipients of the stock option plan are the employees of the company and workers with an income similar to that of employees (directors and continuous collaborators). For other collaborators (workers), however, it is possible to use a different remuneration and incentive plan, the work for equity. The latter is a different incentive and remuneration system which, unlike the stock option plan, is used to transfer the share or stake and not the right to purchase. In fact, with the stock option plan, only one purchase options right is assigned. To transfer shares or quotas instead, it is necessary to use a work for equity plan.
How exercise, strike price, vesting, and holding period work
Once the incentive plan has been approved, the company assigns the stock options to employees free of charge. In this way, the recipient receives the option to buy shares or shares of the company at a predetermined price (strike price) by a certain date. The beneficiaries will have an advantage in the purchase if, on the exercise date, the strike price is lower than the price of the shares or units purchased. For example, an employee receives the option to buy a company share for $ 5 in a year. If the company share is worth $ 8 in a year, the employee gets the $ 3 difference as a benefit.
The recipient cannot immediately exercise the option right but must wait for a predetermined period of time (vesting or vesting period). As a rule, if the employment relationship is terminated early, the recipient loses the right to exercise the option in whole or in part. In particular, it is possible to condition the exercise of the options right to the way in which the employment relationship is interrupted (good leaver or bad leaver). For example, an employee has a 3-year vesting period. The company may decide that in the event of dismissal, during the 3 years, the employee will lose the right to exercise the options assigned.
At the end of the vesting period, the recipients will be able to purchase the shares or quotas at the price determined at the assignment. The recipient can then decide to sell the purchased shares immediately and make a profit or remain a shareholder of the company. The company can also prevent the sale for a fixed period of time (holding period) to motivate the beneficiaries to keep the employment relationship even after the purchase of the shares.
Our advice for stock option plans
LexDo.it offers a complete service to create the most suitable stock option plans for the employees and collaborators of your company. Here’s how it works:
1) Verification of the requirements and methods
You will be able to describe your situation to an expert who will verify the possibility of activating a stock option plan for your company and will indicate how to implement it
2) Analysis of the needs of the company
The lawyer will examine the needs of your company and help you identify the types of beneficiaries within your company
3) Formulation of the stock option plan
Based on your needs, the lawyer will help you choose the most suitable stock option plan project. Any applicable tax and social security benefits will also be identified
4) Preparation of documents
After completing the previous steps, the lawyer will proceed with the drafting of the documents necessary to implement the chosen incentive plan
Useful documents for an employee stock option plan
All the documents necessary for your specific case can be created, in a few minutes, in a personalized way directly on LexDo.it:
- Work for Equity Regulations: to govern the operation of an equity incentive plan at the company level
- Work for Equity for Innovative Startups, Sal or Spa: to create a work for equity plan with the assistance of a lawyer and a notary
- Corporate Welfare Plan: to increase the well-being of a company’s employees and collaborators through the provision of benefits and services
- Non-Disclosure Agreement: to protect you if you have to share confidential information
- Letter of Intent: to establish the points on which the parties who are negotiating a negotiation have already reached a general agreement
- Bylaws and Deed of Incorporation Sal: to create the founding documents of a single-member limited liability company or with several partners and regulate its operation
- Executives Employment Agreement: to hire a manager or executive