Option Agreement

Option Agreement gives the optionee the right to acquire from the optionor the shares during the time period and on the terms named in the agreement. Avokaado’s Option Agreement may be used if:

  • optionee is given a right to acquire shares of a company
  • option is priced or free of charge
  • option is given to an employee or another person

Price with Free plan 59 € / time ~15 min
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Frequently asked questions

Can the company give options not to the employee but his/her company?

It is not forbidden to give options to the private or legal persons connected to the employee, but a possible tax-risk must be taken into consideration. For example, in case the option is given to the employee’s company, whose sole shareholder is the employee himself, and the exercise price of the option is nominal value of the shares, it might be considered to be a fringe benefit and therefore taxable if exercised earlier than three years as of granting of the share option.

But it has to be remembered that if the shares acquired are transferred, the income received shall be taxable.

Under § 48 s.3 of the Income Tax Act natural people who work or provide services on the basis of a service agreement, contractor agreement or any other contract under the law of obligations act are deemed to be employees.

Why should the employee’s right to exercise options earlier than three years as of granting of the share option be limited?

Under the § 48 s. 53 of the Income Tax Act if the underlying assets of a share option are the holding in the employer or a company that belongs to the same group as the employer, the acquisition of the holding that constitutes the underlying assets of the share option is not classified as fringe benefits, if the holding is acquired no earlier than three years as of the granting of the share option. This means that if the option is exercised earlier than three years, it is deemed to be fringe benefit and therefore taxable, meaning additional expenses for the employer.

Usually the moment of granting the share option is deemed to be the moment the option agreement is signed, if the agreement states the granting conditions clearly enough.

It is employer’s interest to prohibit the employee to exercise options earlier than three years. If the employee does exercise the options earlier, then it is possible to agree that the employee compensates additional expenses to the employer, including the income tax. Paying the income tax is the employer’s obligation, meaning that the employee cannot pay the income tax himself, but the employer must pay it and the employee can compensate it.

What does the vesting of options mean?

Vesting means that the optionee does not receive the right to acquire the shares promised to him/her full at once, but instead will earn the right during time. This provision is usually applied in agreements concluded with employees or shareholders in order to motivate them.

For example, if the vesting period is four years and the optionee should finally receive 50% of the sharers, he will receive at the end of the first year 25% of his/her shares, which is 12,5% of the total share capital. This means that if the optionee leaves the company before the end of the vesting period, he/she will own only the part of the shares that have been earned by that time.

If the optionee leaves the company before the end of the option period, the vesting stops and parties can agree whether the optionee maintains the right to retain the exercised options or he has to transfer them back to the optionor or they are revoked.

How is the option exercised?

When the necessary condition (e.g. a date) to exercise the option has come past, the optionee has the right (not an obligation) to exercise the option, i.e. acquire the company’s shares which are the underlying assets of the share option. In order to do that, the optionee submits a petition to the optionor, stating the amount of shares to be acquired and the data about his account in the Estonian Central Register of Securities, if the shares are registered there. In addition to that, the optionee has to pay the exercise price, if the parties have agreed on that. When the petition is submitted and the exercise price paid, the parties conclude the transfer agreement of the shares.

What happens, if the share capital of the company is increased or reduced before the exercise of options?

In that case the optionor is obliged to adjust the conditions of the option agreement so that the nominal value of the shares proportionally increases or decreases in accordance with the changes of the share capital. It has to be ensured that the underlying assets of the option will constitute a certain agreed amount of the share capital.

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