So you’ve got yourself an option plan with plenty of room in the option pool. So how do you go about making your first grant of options?
First things first. An option grant is not a gift (unlike the featured image above). And in fact, that’s a pretty good rule of thumb for anything relating to your company and the law generally – you can’t get something for nothing. There are exceptions, of course, but we won’t go into those here.
Now, on to the granting…
Start by checking your option plan, as it may have certain minimum requirements around to whom the options can be granted to. For example, some option plans require that options only be issued to people who qualify under the private issuer exemption of National Instrument 45-106. Other plans will let you grant options to consultants. But if you do that, your company loses its private issuer status, so be careful and consult a securities lawyer to see how securities laws apply.
For the sake of simplicity, let’s assume your option plans allows you to issue options to directors, officers and employees of your company.
Number of Options to Grant
There is no hard and fast rule to follow here. The number of options you grant to any individual can vary. But keep in mind that options are, at least in part, a form of compensation. So for example, if you are paying certain employees below market (i.e. less than what they would be paid if they were working at another company), you may want to grant some options to them to make up the difference. But keep in mind that just because the company is worth $X today, it may be worth more or less tomorrow. So by its nature, granting options to someone involves some level of risk sharing.
If you’re looking for a simple rule of thumb, an employee will typically receive anywhere from 0.1% to 1% of a company’s equity. It all depends on their role and contributions to helping make the company grow.
If you retain anything, it should be the following – talk to your tax advisor before you go about setting the exercise price. Canadian tax and corporate laws can be strange beasts, and the exercise price of options is one of the most common problems that comes up.
The general rule is that options have to have an exercise price per option equal to the fair market value of the underlying share. But there can be exceptions, under certain circumstances. If you grant options with an exercise price below fair market value and you don’t meet certain requirements set out in tax laws, you may have just caused a potentially massive tax liability for the employee who received the options. Be careful. Call your tax advisor.
And no, the price per share used in your last round of financing does not necessarily equal the fair market value at the time of grant today. So don’t think you can always rely on a valuation from 12-18 months ago for the today’s fair market value.
Now that you’ve got an eligible participant in your plan, you know how many options you plan to grant and you know the exercise price, you need to put some paper around this. Chances are that your option plan has a form of grant agreement or certificate attached to it as an exhibit. Use that!
There may be some additional fields to complete, like a vesting schedule for example. Option plans may provide for a default vesting schedule, while others may not. So keep an eye out for that.
And you’ll also want to put together a board resolution to go with the options grant. Investors love to see good record-keeping practices. Make sure there’s a paper trail showing that the board has approve the grant of the options and its terms.