Both a Share Vesting Agreement and a Share Option Plan have their benefits. One is not necessarily better than the other. The choice between the two will depend on your purpose for selling shares to employees. Additionally, various factors will come into play such as the availability of stock, the value of the company, and the financial structure of the company, as well as your growth prospects.
Below you will find a summary table, along with a detailed overview each program:
Share vesting is the process by which an employer grants equity in the company to employees (accrued rights over stock and assets), as a means to incentivise them to perform to established standards and remain with the company. If the employee is no longer with the company, his or her shares not yet vested will be bought back at a nominal fee or at no cost, as per the Share Vesting Agreement.
Key Considerations When Using Share Vesting
- It is unusual to give employees the full amount of equity promised all at once. The vesting of shares is useful to incentivise employees, as well as increase productivity and performance.
- A benefit of vesting shares is the ability for the company to control the shares. Prior to the end of the vesting period, the shares are usually held by a trustee who receives the dividends. Once the vesting period ends, the employee receives the shares and the dividend.
- Share vesting allows for a smooth buy-back of shares not yet vested. This ensures that an employee who leaves the company does not leave with shares not earned as per the agreement.
A Share Option Plan is used by companies to attract, compensate, and retain their employees. It is a contractual agreement between the two parties that allows employees to buy a defined number of shares at a fixed price within a certain timeframe. This price, referred to as the exercise price, acts as a baseline for employees to determine the moment at which to purchase shares in order to be profitable. Ideally, they will buy shares when they are trading at a price greater than the exercise price.
Key Considerations When Using a Share Option Plan:
- A Share Option Plan is not a way for existing owners to sell their shares. Rather, they act as a reward for employees.
- A Share Option Plan will not be an attractive tool for companies whose potential growth is uncertain.
- Smaller companies who wish to remain private without getting sold will have difficulty creating a market for their shares.
- Companies often need to revalue the exercise price in the event that the company’s share price falls below the initial exercise price. This is necessary to retain employees and to ensure that the stock options are still appealing.
- When introducing such a program, companies need to carefully assess the amount of stock they are ready to make available. They need to determine the specific employees who will receive options and anticipate workforce changes to adequately allot the shares each year. If not, there is a risk of granting too many options at an early stage, making it impossible to grant more to future employees.
- One way to control availability of shares throughout a certain timeframe is to use a vesting period, during which employees will be able to exercise their option to buy over a longer time period instead of purchasing all the shares at once.