Option subject to plan: Overview, definition, and example
What is an option subject to plan?
An "option subject to plan" refers to a type of stock option or employee benefit that is granted to an individual, typically an employee, but is contingent upon the terms and conditions outlined in a specific plan or agreement, such as an employee stock option plan (ESOP). The option gives the holder the right to buy or sell company stock at a predetermined price within a specific time frame, but the exercise of this option is governed by the rules and provisions of the plan it is subject to.
For example, an employee may be granted the option to purchase company shares at a discounted price, but they must meet certain conditions such as a minimum length of employment or company performance milestones for the option to become exercisable.
Why is an option subject to plan important?
An option subject to plan is important because it provides a structured way to manage stock options or other financial incentives for employees or stakeholders. The plan governs how options are granted, exercised, and managed, ensuring that there are clear guidelines and restrictions in place. This structure helps protect both the company and the recipient, ensuring that stock options are used to incentivize employees in alignment with the company’s goals.
For companies, having an option subject to a plan is a way to attract and retain talent, while for employees, it offers a potential financial benefit tied to their performance and the company’s success. Additionally, the plan provides clarity on how the options will be treated, including how they can be exercised, what happens if the employee leaves the company, and any other relevant terms.
Understanding option subject to plan through an example
Imagine an employee at a tech company who is granted the option to purchase 1,000 shares of company stock at $10 per share, as part of the company's employee stock option plan. However, the option is subject to the plan's conditions, which stipulate that the employee must work at the company for at least three years before the option can be exercised. If the employee leaves before the three years are up, they lose the right to exercise the option. If they stay for three years and the company performs well, they can exercise the option to purchase the shares at the discounted price and potentially sell them at a higher market price.
In another case, a startup offers stock options to its founders and key employees as part of a vesting plan. The plan may state that 25% of the options vest after one year, with the remaining options vesting monthly over the following three years. This ensures that employees are incentivized to stay with the company and help it grow, while giving the company control over how the options are granted and exercised.
An example of an option subject to plan clause
Here’s how a clause like this might appear in a stock option agreement or employee benefit plan:
“The Employee shall be granted an option to purchase [X] number of shares of common stock at an exercise price of $[Y] per share, subject to the terms and conditions of the Employee Stock Option Plan. The option will vest in accordance with the plan’s schedule and may be exercised only upon the Employee’s continued employment with the Company for a period of [Z] years.”
Conclusion
An option subject to plan is a mechanism used by companies to offer stock options or similar incentives to employees, governed by a formal plan that outlines the conditions for exercising the options. These plans help align employee interests with company goals and provide a structured way to manage employee compensation and retention. For employees, the option subject to plan represents an opportunity for financial gain, but the terms and conditions of the plan must be met in order to fully benefit from the option.
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.