Overview of an Option Certificate

What is an Option Certificate?

An Option Certificate is a certificate that sets out the detailed terms on which options given under a Share Option Plan can be exercised.

A Share Option Plan sets out the basic rules to govern how the options work. An Option Certificate sets out the exercise price, vesting dates, and specific conditions to be fulfilled (if any) in order to exercise the option.

The terms of an Option Certificate can be different for each option holder.

What is a Share option Plan?

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.

What are the components of an Option Certificate?

An option certificate is a valid proof of holding an option. These are the various components of an option certificate. I.e.;

Option Shares: Shares that will be issued to the buyer when the option is exercised. you can choose to input a fixed number of shares or a percentage i.e. when new shares are issued, what percent will these shares represent in the then entire issued share capital of the company? You should note that this “total issued share capital” is calculated on a fully diluted basis, i.e., all outstanding convertible instruments, notes, and warrants are assumed to be fully converted.

Exercise Period: The period during which the option can be exercised. You can also add conditions to the exercise of an option, i.e., those conditions that need to be fulfilled before the option can be exercised along with the condition to achieve funding of a target amount (called a “Target Funding” in the document).

Option Purchase Price: This is the price to be paid by the buyer for this option. It is different from “exercise price”. This price should be paid at the same time as the Option Agreement is signed.

Exercise Price: This is the price per share to be paid when the option is exercised. the exercise price can be either a fixed amount or a price that is determined by dividing an agreed valuation by the number of issued shares in the company.

What is Share Vesting?

Share vesting is a mechanism by which an employee’s options tie into a schedule and/or conditions. A vesting period is the length of time that an employee must wait in order to be able to exercise their options. It is customary for the first vesting period to include a “cliff”. This means the share options will be exercisable by the employee only at the end of this initial period.
A common vesting schedule can stipulate that 20% of the options will vest equally over the next 5 years. Performance targets can also tie into the vesting of the options.

Conclusion

An Option Certificate helps to formulate the exercise price, vesting dates, and other specific conditions to be fulfilled in order to exercise the option.

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