It can be a bit tricky to learn legal terms and determine the heap of paperwork you get whenever starting a new job for a company. When I reviewed such documents (in between jobs in marketing), I found them extremely challenging to understand but interesting enough to narrow down. The following information is what I found to be a simple but useful breakdown. In the next few paragraphs, we will list the particular paperwork relating to equity that I found easier to understand along with comprehension of rights and options.
What are the Equity Incentive Plans?
The company’s equity incentive package (or stock options for employees) is the paperwork that gives you the whole company’s method associated with awarding various kinds of equity payout. The typical styles are ISOs ( Incentive stock options), RSUs (restricted stock units), SARs (Stock appreciation rights), and NSOs (none qualifying stock options). The most common payout for employees are these options and so we will focus mostly on that here. The main aim here is to sort out the procedure pertaining to how options are exercised and granted and gain a better understanding overall.
Your Grant Documents
Your company grants you awards and options through what is called grant documents. These documents will usually include information such as Stock Option Agreements or Grant notices. The papers that list Notice of Grant will display the number of shares you can buy, the exercise price, as well as the vesting commencement date and the expiration for the option. The ones that list Stock Option Agreement will identify in depth the terms of your grant as well as the techniques you can apply. It will also inform you of how the vesting program works and its restrictions.
Your Exercise Documents and their Worth
The Notice of Exercise is the main focus in this section as it deals with the documents by which you exercise your options. It is going to consist of the amount of shares you want to exercise, the price for every share and how much the total paid. From time to time, some companies may add in information associated with tax consequences. IRS Form 3921, which offers the particular fair market worth of the stock you are exercising, will usually be provided by your company. If not, the company should inform you of the Fair Market Value themselves.
Understanding Your Shareholder Agreement
Once you are finally taking action of exercising your options, you may or may not have to sign what is called a Restricted Stock Agreement. This may also be called Shareholder Agreement. This agreement differs from the Stock Option Agreement in that this specifically covers your control of your particular shares, while the Stock Option Agreement covers the terms of your options (if that makes sense). The provisions covered in the Shareholder Agreement include the company’s rights of refusal as well as your own rights to obtain information, to vote on your shares, and the restrictions pertaining to transfers.
Keep handy Your Share Certificates
When further along in your options exercise, your company and their legal team will most likely hand you share certificates. You should keep and comprehend these documents carefully and also make handy some PDF versions of these certificates. Within the certificates are the information about restrictions of transfer that you should make sure to understand.
Understand your Company’s By-Laws
In this section, we will briefly focus attention to the company’s specific by-laws involving your rights. These days, many corporations and businesses would have already included certain provisions in their by-laws that affect your rights as a stockholder. Such provisions consist of restrictions in your ability to sell your shares. It’s important to be aware of your company’s by-laws regarding this area especially the complicated process they may have in order to sell your shares. Therefore, you should ask the company to provide you the by-laws that clarify the provisions. Another option is to obtain in writing that there are no provisions that impact your rights in regards to shares.
Keep handy your Separation Letter
If you ever decide to leave your job, companies will normally issue what is called Separation letter. This may also be called Termination letter in some cases even if you resign. You’ll want to understand this letter carefully and file it safely. The reason being is that if you have options, this letter may show you the amount of options you’ve vested, the pricing, and the length of time you have left to exercise those options. In the case of ISOs for example, the amount of time left after your last day of employment is 3 months.