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Drafting Option Agreements


									Keys to Drafting a Stock Option Agreement An option agreement is an agreement between two parties that provides one of the parties with the right, but not the obligation to buy, sell or obtain a specific asset at an agreed upon price at some time in the future. One common type of option agreement is a written outline that provides the details of an employee's ability to obtain stock options. Several key aspects must be addressed in any stock option agreement. For one, the exercise price should be listed. Second, the expiration date of the options must be provided. The vesting schedule should be provided. The agreement should also provide that the options are not transferable. The most important part of an option agreement is that the optionee is not committed to purchasing the shares at a certain price or at a certain time. As the word suggests, the optionee has the choice to buy or not to buy. As long as the optionee provides the company with adequate consideration, this option contract is perfectly valid and enforceable. Generally, the consideration provided by the optionee is the optionee’s services to the company by way of his or her employment. The drafters of a stock option agreement must be sure that the transaction comports with all applicable laws promulgated by the Securities Exchange Commission (SEC), most importantly the reporting and liability provisions of Section 16 of the Securities Exchange Act of 1934. These rules prohibit an optionee from selling, transferring, or otherwise disposing of any of the common stock underlying the exercised options during the six (6) months immediately following the grant of the option. In fact, the agreement itself may place even stricter limitations on transfer of the stock in an effort to curtail the risk of insider trading. Also, the employee must acknowledge that his or her decision to execute the Agreement was not based on any oral or written representation as to fact or otherwise made by or on behalf of company, and was only based solely upon a review of publicly available information. The company’s purpose in granting stock options to an executive is to motivate the executive to work hard towards the company’s growth. This purpose is undermined if the executive optionee is allowed to sell his stock immediately after exercising the option. Thus, it is reasonable to include a holding period whereby the stock cannot be sold, transferred, or otherwise disposed of. A valid stock option agreement must adequately address these legal issues and further cover in detail the representations and warranties made by each party. If the necessary language is included, a stock option agreement is valid and enforceable once executed by both parties.

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