Many of our clients often ask: Which is better: an Incentive Stock Option (aka a…
Checklist for for granting stock options
Every startup grants stock options sooner or later. Below is checklist for private corporations (not LLCs) granting stock options.
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.
- 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.
- 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.