Commencement of exercisability: Overview, definition, and example
What is commencement of exercisability?
Commencement of exercisability refers to the point at which a right or option, typically under a contract or agreement, can be exercised or activated. This term is often used in the context of stock options, employee benefits, or other contractual rights that are not immediately available but become exercisable after certain conditions or time periods are met. The commencement of exercisability marks the moment when a party can begin to exercise their rights under the agreement.
For example, in an employee stock option agreement, the commencement of exercisability might occur after a vesting period has passed, allowing the employee to buy company stock at a specified price.
Why is commencement of exercisability important?
The commencement of exercisability is important because it sets the timeline for when a party can begin to take advantage of a specific right or option. For businesses, establishing this point in contracts ensures clarity about when benefits or obligations come into effect. It also helps prevent disputes by clearly defining when parties can act on the rights granted under the agreement.
For individuals or employees, knowing when exercisability begins helps them plan when they can access or take advantage of stock options, benefits, or other contractual rights.
Understanding commencement of exercisability through an example
Imagine a company offers stock options to its employees as part of their compensation package. The options are granted but are subject to a vesting period of three years. The commencement of exercisability will occur once the vesting period is over, at which point the employees can begin exercising their options to purchase company stock at the agreed price.
In another example, a commercial lease might grant a tenant an option to renew the lease after five years. The commencement of exercisability for this option would occur after the initial lease term expires, allowing the tenant to exercise their right to extend the lease for another term.
An example of a commencement of exercisability clause
Here’s how a commencement of exercisability clause might look in a contract:
"The stock options granted to the Employee shall become exercisable on the third anniversary of the Grant Date, provided the Employee remains employed by the Company on that date."
Conclusion
The commencement of exercisability marks the moment when a right or option becomes available for exercise or activation under a contract or agreement. It is crucial for setting expectations regarding when certain rights can be accessed, such as stock options, lease renewals, or other benefits. By clearly defining the commencement of exercisability in contracts, businesses can ensure smooth execution and avoid confusion about when rights can be exercised.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.