Option Agreement

An option agreement is used to issue options to an option holder, often an employee, contractor or advisor. The option will provide the option holder with the right to buy a certain number of shares in accordance with a vesting schedule, subject to certain conditions.

For example, a corporation can issue to an employee an option to buy 50 shares in accordance with the following vesting schedule: 25 shares after year 1 and 25 shares after year 2, provided that the employee is still an employee on the applicable date. So, after the first year, the employee can exercise their options (essentially fill out a form and pay the price) in order to purchase 25 shares. After the second year, they can exercise their option for the remaining 25 shares. However, if they resign before the second year, they will not be able to exercise their option for the remaining shares.

Although a stand-alone option agreement can be used, Groove Law’s option agreements must be issued pursuant to an option plan. The option plan sets out the general provisions that apply to all options and the option agreement sets out the specific provisions that apply in the particular circumstances.

The following are the main elements of an option agreement:

• the option holder’s name
• the number of shares
• vesting schedule
• any modifications to the option plan.