A stock option is a right to buy a specified number of shares of a corporation’s stock at a specified time, for a prearranged price. A corporation’s usual motive for granting stock options to its employees is to give the employee a stake in the company’s growth by allowing the employee to exercise the option when the stock is worth more than the exercise price. There are three main areas of concern that must be considered when developing a stock option plan. These are the tax aspects, the securities aspects, and the business aspects of any stock option plan. For a publicly held corporation, the securities aspects are minimal because the shares that will be covered by the option are typically subject to a registration statement. Likewise, the tax aspects for a public company are usually not too complex because it is relatively simple to satisfy the requirements for a statutory or incentive stock option plan in the public company context.
For a private company that plans on staying private, the tax and securities issues are still relatively simple, so long as the class of employees covered is limited to certain key officers and high-level executives who have no plans or desire to sell the stock shortly after its purchase. As the number and classifications of employees grows, so do the complexities of the tax and securities issues. In all categories of business, the business aspects of the plan can be quite complex. When a privately held company wishes to provide stock options to all employees and plans to go public at some time in the future, then the program must be well thought-out with a view to satisfying current securities, accounting, tax, and financial requirements, as well as not compromising future underwriters’ and investment bankers’ needs when it comes time to conduct the initial public offering.
Please see the following articles for additional information: Tax Aspects of a Stock Option Plan, Federal Securities Aspects of a Stock Option Grant, Option Plan Decisions, Stock-based Compensation, Stock Appreciation Rights, Phantom Stock, Performance Units, Non-Qualified Deferred Compensation Plans, Texas Exemption for Employee Stock Option and Similar Plans.
THIS INFORMATIONAL MEMORANDA FROM THE LAW OFFICES OF THOMAS D. SOLOMON, P.C. is provided as a courtesy to our friends and clients to provide them with items of interest in the stock option area. It is not and is not intended to be an exhaustive treatment of its subject matter, but rather an overview of the pertinent elements of such matter. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have any questions, please call us.
