Stock Option Grant Agreement

Stock Option Grant Agreement

Drafts a binding option grant agreement governing ISO or NQSO issuance, integrated with the company's equity incentive plan.

Prerequisites

Collect before drafting:

• [ ] Adopted equity incentive plan (with amendments)
• [ ] Board/committee resolution (grant date, share count, exercise price, recipient)
• [ ] Certificate of incorporation + bylaws (authorized shares, stock classes)
• [ ] Recipient's employment/consulting agreement (equity, acceleration, post-termination terms)
• [ ] Cap table context (stockholders' agreement, ROFR/co-sale/drag-along)
• [ ] 409A valuation (private) or closing price (public) establishing FMV at grant date
• [ ] Insider trading / equity admin policies (if any)

Quick Start

1. Confirm option type: ISO (§422) or NQSO — tax treatment diverges significantly
2. Verify exercise price meets FMV floor (100% FMV for ISO; 110% for >10% shareholders)
3. Draft agreement sections below in order
4. Cross-check acceleration terms against all existing agreements

Document Sections

1. Caption & Recitals

Include: grant date (from board resolution), company legal name + state, optionee name, plan title with adoption/amendment dates, "Subject to and governed by the Plan" incorporation clause.

2. Definitions

3. Grant Terms

• [ ] Number of shares and exercise price per share
• [ ] ISO: exercise price ≥ 100% FMV (110% for >10% shareholders)
• [ ] NQSO: exercise price ≥ FMV (§409A compliance)
• [ ] Maximum term: 10 years (5 years for >10% shareholder ISOs)

4. Vesting Schedule

Standard four-year structure:

Cliff:     12 months — 0% before first anniversary
Year 1:    25% on first anniversary of Vesting Commencement Date
Years 2–4: 75% in 36 equal monthly installments
Condition: Continued Service through each vesting date

For performance vesting: specify milestones, verification method, certification process.

Acceleration provisions:

Confirm alignment with separate employment/severance/CiC agreements.

5. Exercise Procedures

Payment methods (include all that apply): cash/check, broker-assisted cashless, net exercise/share withholding, stock swap.

Post-exercise delivery: book-entry or certificate; private companies add securities law + stockholders' agreement legends; public companies add lock-up obligations.

6. Termination Matrix

Change in Control treatment:

1. Assumed/substituted → vesting continues (+ acceleration terms)
2. Not assumed → full vesting pre-closing; limited exercise window
3. Cash-out → cancellation for spread payment
4. All CiC provisions must comply with §409A

7. Tax Provisions

NQSO: Ordinary income at exercise (FMV − exercise price); income + employment tax withholding required; withholding is condition-precedent to exercise.

ISO: No ordinary income if holding periods met (2yr from grant + 1yr from exercise); AMT adjustment = spread at exercise; require disqualifying disposition notice to company.

Reporting: W-2 (employees), 1099 (consultants), Form 3921 (ISO exercises), Form 3922 (ESPP).

8. Securities Law Compliance

• [ ] Unregistered shares; issued under §4(a)(2), Rule 701, or Reg D
• [ ] Investment representations (acquiring for investment, not distribution)
• [ ] Transfer restriction (non-transferable except by will/intestacy)
• [ ] Reference stockholders'/ROFR/co-sale/drag-along agreements
• [ ] §16 officers/directors: Rule 16b-3 compliance

9. Administrative Provisions

• [ ] Governing law (state of incorporation)
• [ ] Severability; plan controls over agreement; administrator interpretations final
• [ ] Amendment requires written consent; company may amend unilaterally for §409A/securities/tax compliance
• [ ] Notice mechanics with delivery method + deemed-received timing
• [ ] At-will acknowledgment; data privacy consent
• [ ] International addendum placeholder for non-US optionees

10. Execution & Exhibits

Signatures: Company authorized officer + optionee, with dates.

Optionee acknowledgment: receipt of plan document, opportunity to consult advisors, understanding option is subject to agreement and plan.

Exhibit A — Grant Summary:

Grant Date:                [DATE]
Option Shares:             [NUMBER]
Exercise Price Per Share:  $[PRICE]
Option Type:               [ISO / NQSO]
Vesting Commencement:      [DATE]
Vesting Schedule:          [CLIFF + MONTHLY/QUARTERLY]
Expiration Date:           [DATE]

Critical Rules

• ISO $100K limit: Annual vesting cap of $100,000 FMV (measured at grant) first exercisable per year; excess auto-converts to NQSO [IRC §422(d)]
• §409A floor: NQSO exercise price must never be below FMV at grant — discounted options trigger immediate taxation + 20% penalty
• Private company valuation: Require current 409A valuation; safe harbor = independent appraisal within 12 months
• >10% shareholder ISOs: 110% FMV exercise price + 5-year max term [IRC §422(c)(5)]
• Tax disclaimer: Do not draft tax advice as legal advice — include disclaimer directing optionee to personal tax advisor
• Preferred stock check: If company has outstanding preferred, confirm common stock class and any anti-dilution or protective provisions affecting option shares
• Acceleration conflicts: Cross-check all acceleration terms against existing agreements