Employee share option agreement: performance based

About this document

This agreement can be used by any company to set up a motivational option scheme. Given certain conditions by a certain time, the employee is awarded the right to buy shares in the company at a specified price.

The employee could be working at any level, including as a director or a senior manager.

The company could be established and offering the option rights as motivation, or a start-up offering the options as compensation to an early employee for a lower salary or the risk of working for an unknown business.

The performance criteria that trigger the grant of the options could be any single or multiple events (including length of service in employment) as agreed between the parties and set down in the schedule.

We have provided for the employee exercising the option to pay for the right and also to pay for the shares on exercise. Either or both provisions may be deleted or the sums increased or reduced.

Alternatives to this agreement

We offer variations of this agreement for:

• the trigger being a higher share price and not performance criteria
• where the incentivised person is a third party such as a consultant or contractor or marketer, and not an employee
• where the deal is required to qualify as an EMI share scheme

Since on exercise the employee becomes a shareholder with additional rights, at the same time as granting option rights, it would also be a good time to put into place a new shareholders’ agreement whilst you are in charge of the shares. If you wait until the employee is a new shareholder, you will have to take greater account of his or her views about how the company is managed.

The law in this agreement

This document is drawn under basic contract law. There is no statutory law of which it needs to take account. That enables you to make the exact agreement you want.

The government also permits an Enterprise Management Incentive scheme, which provides that small share options, to a maximum value at the time of grant, may be made to a qualifying employee by a qualifying employer. There is no charge to tax at or after exercise but capital gains tax still applies on ultimate disposal. There are restrictions and conditions. 

HMRC also publishes guidance on this subject.

• Definitions and interpretation
• Reference to main contract for work
• Options data
• Grant of options
• Conditions for the exercise of the options
• What happens if contract of employment is terminated before the options are exercised
• Warranties by the company
• Draft notice by option holder to exercise
• Draft list of matters that may affect option holder’s decision