Option Agreement template
Share option agreements are a routine contract for scaling businesses that typically offer employees some form of ownership, through equity awards that give them options to buy shares in the company. Discover how to create (and automate) share option agreements in this guide. Alternatively, use this free option agreement template to get started right away.
The template below is based on participation in the UK’s EMI share options scheme - other schemes are available and you can tailor the template to your particular needs.
Option agreements help startup and scaleup employees to share in the value that they create, by growing their companies so quickly. They also help businesses to reward employees, and keep them loyal and invested in the company’s long-term success, by offering them a path to ownership.
So what’s in a share option agreement, who uses them, and how can you create one? Let’s find out.
What is an option agreement?
An option agreement is a legal agreement that entitles an employee to purchase shares in the company they’re employed by under pre-established conditions.
This type of contract sets out the various terms and conditions under which the option holder (employee) can purchase these shares, and the terms under which the grantor (usually the company) can put or call the shares.
Like most legal documents, a share option agreement becomes a legally binding contract once the option holder (employee) formally accepts the offer and signs the option agreement, either electronically or using wet ink.
How does an option agreement work?
An option agreement works by providing the holder with a formal offer to buy company shares within a specified period of time and for an agreed price. However, the conditions under which this purchase can be made will vary from company to company, and will be detailed within the option agreement itself.
Although the holder might only be able to purchase the shares within the company in the future, the price at which they can be purchased is usually fixed at the time of the agreement. This means that option holders can benefit from profitability if the company’s value increases during this time.
But it’s important to note that when employees sign a share option agreement, they aren’t promising to buy these shares. In fact, they are under no obligation to buy the shares at all. Signing an option agreement simply solidifies this right to purchase within the future, if they wish.
What is the purpose of an option agreement?
The main purpose of an option agreement is to reward talented and loyal employees with a share of equity.
By enabling employees to invest directly into the company they work for, option agreements allow businesses to incentivize employees and reward them for their commitment to achieving company-wide goals. This can help companies to align their employees’ aspirations with those of their other shareholders, as well as strengthening their affiliation with the company.
Who is responsible for managing option agreements?
A wide range of stakeholders can be involved in the creation, issuing and management of option agreements. A typical option agreement will have the following touch points:
- Legal teams: responsible for drafting an option agreement template
- HR teams: responsible for using the option agreement template and sharing it with the employee once complete
- Finance teams: responsible for signing off the option agreement template
Fortunately, once terms have been standardized and an option agreement template has been approved, legal and finance teams take a backseat. That is, if they have successfully enabled HR teams to self-serve on these contracts.
What are the elements of an option agreement template?
To help get a better idea of what sections to include when drafting your option agreement template, we’ve listed the typical elements of an option agreement below.
Option agreements aren’t shared between lawyers, they’re given to employees, the majority of whom won’t have the luxury of legal expertise. Therefore, it’s important to draft option agreement templates with the end user in mind. Definitions are a great way to do this.
It’s good practice for option agreement templates to define legal jargon that needs to be included in the contract and remove jargon that doesn’t. This makes option agreements more accessible to your employees and ensures that they actually understand what they’re committing to when exercising their right to options in the future.
2. The shares subject to the option
One of the most obvious things to include in an option agreement template is information about the options being issued. This section will usually outline either a fixed number of shares or a percentage that the holder is entitled to, as these are usually limited. This part will also need to explain what the option shares actually are.
3. The price of the option
Any option agreement template should also include a section that details the price of an option and the calculations behind this price. This can either be a fixed price or a figure that can be calculated using a particular formula.
Either way, you should make employees aware of exactly what options will cost them and how this sum is determined for full transparency.
4. Conditions for exercising the right
Like most contract templates, an option agreement should also outline the specific terms and conditions that apply when exercising the rights being given. Perhaps shares cannot be awarded before a certain date, or there is a threshold for the amount of working time that must be committed to be eligible, for example.
Making these conditions clear within the option agreement template is essential to ensuring that employees understand exactly how and when they can purchase these shares in the future.
5. Warranties and departure terms
Many option agreement templates will also outline the warranties provided by the company, if any. This is something that the holder will be keen to know before investing into shares or stocks.
An option agreement template will also provide more detail about what happens in instances where the holder leaves the company and ends their employment, among other things.
What is the traditional workflow for managing option agreements?
We know who manages option agreements, but what does this workflow look like in more detail? Well, it depends on how businesses choose to approach option agreements, and whether they have an option agreement template in place.
Imagine the legal team needing to do this every time someone new joins the company. Now imagine that pain as the company begins to scale.
How can using an option agreement template help?
Fortunately, it’s quite rare for legal teams to not have created a option agreement template today. Most businesses will have drafted templates for simple contracts like share option agreements and stored them in shared drives for HR teams to use.
Having an option agreement template stored and ready to personalize removes the need for HR teams to wait around for the legal team’s support when making an offer to a successful candidate. This helps to reduce the time to hire and capture the best talent before anyone else can.
It also means that the majority of option agreement terms are standardized, leaving less scope for mistakes and discrepancies.
But even if legal teams have created an option agreement template, there’s still a lot of administrative work required on the part of HR teams to get them over the line. When these contracts are managed in Word, HR teams need to manually input all of the new employee’s data and update the conditions within the contract to suit their specific terms of employment.
This is a tedious process as Word documents are static files, so altering an option agreement template usually requires creating new versions and pasting certain sections of the agreement into a new file to update the conditions.
Even with a share option agreement template in place, managing these contracts manually can be a repetitive and time-consuming process for HR teams.
Can automation improve how you manage option agreements?
Fortunately, it’s also a process that can be automated.
Contract automation software can remove this friction by automating the contract admin that HR teams spend the most time laboring over. Juro’s contract automation software can help businesses to manage option agreements more effectively using the following features:
- Automated contract templates: legal teams can create flexible option agreement templates that are quick and easy to amend or reset in Juro’s rich-text editor
- Conditional logic: instead of creating patchwork contracts for different employees, Juro users can automatically add certain conditions to an option agreement based on the employee’s employment status
- Integrations with HR platforms: Juro integrates with Workday and Greenhouse, making it easy to pull data directly from employee profiles into contract smartfields to eliminate manual data inputs
- Mass generation: Juro’s bulk actions enable HR teams to produce, auto-fill and send option agreements out for signing at scale - perfect for growing companies!
- Mobile-responsive eSignature: candidates can quickly sign option agreements as soon as they’ve read and received them using Juro’s native eSignature functionality
- In-platform commenting: option agreements can prove confusing for employees, but Juro’s browser native contract negotiation features enable employees to add questions and comments directly onto the contract for review
Automate share option agreements in Juro
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