The Stock Incentive Plan (“Plan”) is the vehicle used to grant company equity to eligible grantees. The Plan lays out the rules for how stock options, restricted stock, and other types of equity awards can be granted and repurchased by the company. It also includes the document templates, known as Grant Forms, that will be used when granting the equity awards. The Plan is approved by the Board of Directors and the company’s Stockholders.
What are some other names the Stock Incentive Plan goes by?
A few of the names that the plan goes by include: "Stock Incentive Plan," "SIP," "Plan," "Employee Equity Plan," "Employee Option Plan," and "Stock Option Plan." Some are misleading, since shares under the plan are not limited to options, and the shares are also not limited to employees, either.
Parts of Your Plan
- Board Consent approving SIP
- Shareholder Consent approving SIP
- The SIP itself
- Form of RSA (Restricted Stock Award)
- Form of NQO (Non-Qualified Option)
- Form of ISO (Incentive Stock Option)
- Form of Exercise
- If the plan allows early exercise (see below for more info on early exercise), the following forms will also be required: Form of Early Exercise ISO, Form of Early Exercise NQO, and the Form of Exercise and Restriction Agreement for Early Exercise.
The Difference Between a Form Document and a Grant Agreement
Note that four of the documents bulleted above are "Form of" documents. The difference between a form document and an actual agreement is important. For example, an actual "ISO" will have someone's name on it and how many shares that person gets, where a "Form of ISO" is the blank template used to grant someone ISOs.
Why are there so many different forms?
There are many different types of forms (Form of RSA, Form of NQO, Form of ISO) because they each have a different purpose. One is for granting RSAs, one is for NQOs, and another is for ISOs. The "Form of Exercise" is for someone with an NQO/ISO to tell the company that they are exercising this option and buying this stock.
What types of OPTIONS can I grant under a plan? What about granting SHARES under the Plan?
The following grants/options can be granted under a plan: ISOs, RSAs, and NQOs. To learn more about these are, check out our post on the differences between them!
The difference between an option and a share is that an option is merely the OPTION to buy shares at a later date for a pre-stated price. One can accept an option by signing it and one can decide not to pay for/buy shares until later (or never). Unlike options, where accepting and paying are different steps, if you are granted shares, you must pay for it—accepting and paying happens at the same time. Paying for it will immediately make you a shareholder of the company.
Options (ISO and NQOs) can ONLY be granted under the plan, they cannot be granted outside of the plan. Shares (RSAs) can be granted both inside and outside of the plan.
What is Early Exercise?
A plan can grant shares that are either eligible for early exercise or not. Ordinarily, options cannot be exercised until they have vested. If the plan supports early exercise, then the employee is able to exercise the shares BEFORE they vest. This can benefit your employees because there are potential tax benefits associated with this.
Can I only grant to employees under the plan?
No—you can grant equity to a whole lot of people. ISOs generally go to employees, but NQOs and RSAs can go to employees, advisors, consultants, etc. There is one catch—most plans state that the people that get shares under the plan must have a "Service Relationship" with the company, meaning they must work for the company or do some service for the company. One example of this prohibition would be, if you tried to grant an RSA or NQO to your mom who is not involved in your company. If she is not considered to have a "Service Relationship" with your company (ask your lawyer if you're unsure), you cannot grant her shares under the plan.
What's the difference between a grantee Exercising and Accepting options under a plan?
Options (ISO/NQO) must be "accepted" first. This happens when the grantee signs the signature block and acknowledges that they've received this option. If the grantee ever decides to buy the option, they will do this by "exercising" the option. This involves filling out a form of exercise document, signing it, and giving the proper amount of money to the company to buy the shares. Only options have the two step process of first "accepting" and then later "exercising." A grant (RSA) has only one step; acceptance. When an RSA is signed, the money must be paid and the shares are owned.
Can I grant to an entity under a plan?
Many plans will not allow you to grant shares to entities, only individuals. If you need to grant shares to an entity, you might consider talking to your lawyer about what your options are. Granting to an entity OUTSIDE of the plan might be an option (for example an RSA granted outside of the plan or a warrant outside of the plan).
Additional Resources:
How to Upload Your Stock Incentive Plan
Fidelity does not provide legal or tax advice.
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