| An Equity Incentive Agreement is a contract | | | | 4. Stock Subject to Agreement. The overall |
| between a key employee and his or her | | | | number of shares of stock, the application of any |
| employer, whereby the employer provides the | | | | limitations to grants of awards, the availability of |
| employee with an equity interest in the company | | | | shares not issued under those awards, and the |
| in order to motivate him or her to strive for high | | | | exact type of stock offered should all be |
| levels of on-the-job performance. The idea is that | | | | addressed in this section. |
| if the financial stake of the employee, generally a | | | | 5. Exercise of Option. If the agreement provides |
| director, CEO, or other high-level executive, is tied | | | | for stock options to be awarded, it must cover |
| closely to the financial future of the company, | | | | the employee's right and method to exercise.a. |
| then that employee will have the incentive to | | | | Right to exercise. This provision should state for |
| work hard to meet the company's financial goals. | | | | how long the option is exercisable and refer to a |
| The package offered to an employee, as | | | | vesting schedule if applicable.b. Method of exercise. |
| described in an Equity Incentive Agreement, will | | | | This provision should state how the option is |
| usually contain a mix of stock and stock options, | | | | exercisable, be it by delivery of written or |
| carefully adjusted and fixed to company growth | | | | electronic notice. |
| so as to adequately reward the employee for | | | | 6. Change of Control. The agreement should |
| good performance. | | | | address what effect a change of control of the |
| For those drafting such agreements, it is | | | | company, as defined within, would have on the |
| important to include the following provisions: | | | | agreement. Would the agreement still be in place? |
| 1. Purpose. The purpose of the agreement, that | | | | Would it be terminated? Might some provisions be |
| being to motivate and reward the employee and | | | | accelerated? The agreement should address this |
| permit the company to attract and retain able | | | | scenario. |
| persons as employees, directors, and consultants, | | | | 7. Entire Agreement / Governing Law. The final |
| should be explained at the top of the agreement. | | | | provision should state that the employee incentive |
| 2. Definitions. Key terms should be defined in this | | | | plan is incorporated into the agreement by |
| paragraph. Such terms could include "annual | | | | reference and that the plan and the agreement |
| incentive award," "beneficiary," "change of control," | | | | constitute the entire agreement of the parties |
| "contribution agreement," "covered employee," | | | | with respect to the subject matter hereof, |
| "effective date," "restricted stock", and several | | | | superseding in their entirety all prior undertakings |
| others. | | | | and agreements of the Company and Optionee |
| 3. Plan Administration. The name of the | | | | with respect to the subject matter addressed. |
| committee that will be administering the equity | | | | The provision should also refer to the jurisdiction |
| incentive plan should be addressed. Generally the | | | | whose laws will govern the agreement. |
| Board of Directors of a company will set up a | | | | These are some of the most important |
| committee for the purpose of administration of | | | | provisions found in Equity Incentive Agreements. |
| the plan. This provision should discuss who is on | | | | Most importantly, the drafter will want to |
| the committee or how it is comprised, the extent | | | | incorporate the Equity Incentive Plan by reference |
| of the committee's authority to adopt, amend, or | | | | into the agreement, and carefully draft each |
| rescind rules and regulations respecting the plan, | | | | provision to reflect the intentions of the parties. |
| and the limitations on the committee's liability. | | | | |