Non transferability of option: Overview, definition, and example
What is non transferability of option?
Non transferability of option refers to a contractual restriction preventing an individual from selling, assigning, or transferring an option to another party. This restriction is commonly found in stock option agreements, employee equity plans, and investment contracts, ensuring that the option remains personal to the original recipient.
For example, in an employee stock option plan (ESOP), an employee may be granted the right to purchase company shares, but a non transferability clause prevents them from selling or gifting the option to someone else before exercising it.
Why is non transferability of option important?
A non transferability of option clause is important because it helps companies retain control over who holds options, prevents unauthorized transfers, and maintains compliance with securities regulations. It ensures that options granted as compensation, investment opportunities, or contractual rights remain with the intended recipient.
For businesses, this clause protects corporate equity structures, reduces administrative complexities, and prevents unwanted third-party ownership. It is particularly relevant in startup equity plans, executive compensation agreements, and stock-based incentives.
Understanding non transferability of option through an example
A tech startup grants stock options to a key employee as part of their compensation package. The contract includes a non transferability clause, meaning the employee cannot transfer the options to a family member or sell them to an investor before exercising them. The options must be exercised by the employee directly.
In another case, a venture capital firm provides an investor with an option to purchase additional shares in a startup. The agreement specifies that the option is nontransferable, meaning the investor cannot sell or assign the option to another firm without company approval.
Example of a non transferability of option clause
Here’s how a non transferability of option clause might appear in a contract:
“The Option granted under this Agreement shall be personal to the Optionee and shall not be transferable, assignable, or subject to any sale, pledge, or encumbrance, whether voluntarily or involuntarily, except as required by law or as expressly authorized by the Company.”
Conclusion
A non transferability of option clause ensures that contractual options remain with the intended recipient and cannot be sold, assigned, or transferred to third parties. This restriction helps companies manage equity ownership, maintain compliance with securities laws, and prevent unauthorized transfers. Including this clause in agreements provides clarity and protects the integrity of employee stock options, investment deals, and contractual option rights.
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.