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Stock Option Agreement
I need a stock option agreement for an employee who is eligible to purchase shares after 2 years of service, with a vesting schedule of 25% per year over 4 years, and includes provisions for accelerated vesting in the event of a company acquisition.
What is a Stock Option Agreement?
A Stock Option Agreement gives employees the right to buy company shares at a fixed price within a specific timeframe. In South Africa, these agreements follow the Companies Act and often form part of employee share ownership programs (ESOPs) designed to align worker interests with company success.
The agreement spells out crucial details like the strike price, vesting schedule, and exercise period. It provides tax benefits under South African Revenue Service guidelines when structured correctly, though recipients must understand both the potential upside and the risks of these instruments. Most JSE-listed companies use these agreements to attract and keep top talent.
When should you use a Stock Option Agreement?
Stock Option Agreements become essential when your company aims to attract and retain key employees without increasing immediate cash compensation. They work particularly well for South African startups and growth-phase companies looking to conserve capital while offering valuable incentives to staff.
Use these agreements during strategic hiring negotiations, employee promotions, or when implementing broader share incentive schemes. They're especially valuable for JSE-listed companies competing for talent in tech and financial sectors. The timing often aligns with funding rounds, company restructuring, or when establishing BEE compliance through employee ownership programs.
What are the different types of Stock Option Agreement?
- Stock Option Purchase Agreement: Core agreement for direct share purchases, typically used by larger companies with immediate exercise rights
- Phantom Share Agreement: Offers cash-settled benefits linked to share value without actual share transfer, popular in private companies
- Employee Share Agreement: Broad-based ownership plan compliant with BEE requirements, suitable for all employee levels
- Employee Share Option Agreement: Standard vesting-based option structure for retention purposes
- Option Grant Agreement: Simplified format for one-time option grants, often used for consultants or advisors
Who should typically use a Stock Option Agreement?
- Companies and Their Boards: Create and approve option schemes, set terms, and ensure JSE listing requirements compliance
- HR Directors: Manage implementation, track vesting schedules, and coordinate with payroll for tax purposes
- Legal Teams: Draft agreements, ensure SARS compliance, and align with Companies Act requirements
- Employees/Recipients: Accept offers, monitor vesting periods, and exercise options when eligible
- Share Plan Administrators: Handle day-to-day management, record-keeping, and regulatory reporting
- External Auditors: Review and verify option schemes for financial reporting and tax compliance
How do you write a Stock Option Agreement?
- Company Details: Gather current share price, total authorized shares, and JSE compliance requirements
- Option Terms: Define strike price, vesting schedule, exercise period, and any performance conditions
- Employee Information: Collect recipient details, position, tax status, and BEE classification
- Board Approval: Secure necessary corporate resolutions and shareholder authorizations
- Tax Structure: Confirm SARS requirements and section 8C Income Tax Act compliance
- Share Plan Rules: Align agreement with existing company share scheme policies
- Final Review: Our platform generates compliant agreements, ensuring all essential elements are included
What should be included in a Stock Option Agreement?
- Grant Details: Number of options, strike price, and exercise period clearly stated
- Vesting Schedule: Timeline for option maturity, including any performance conditions
- Exercise Terms: Procedure and conditions for converting options into shares
- Tax Provisions: SARS compliance requirements and section 8C declarations
- BEE Compliance: Ownership structure impact and verification requirements
- Termination Clauses: Rights and obligations upon employment ending
- Shareholder Rights: Voting, dividend, and transfer restrictions
- Governing Law: South African Companies Act and JSE regulations references
What's the difference between a Stock Option Agreement and a Stock Purchase Agreement?
A Stock Option Agreement differs significantly from a Stock Purchase Agreement in several key aspects. While both deal with company shares, their timing, purpose, and implementation vary considerably under South African law.
- Timing of Transfer: Stock Option Agreements grant future rights to purchase shares at a predetermined price, while Stock Purchase Agreements facilitate immediate share transfers
- Payment Structure: Options typically require no upfront payment beyond a nominal amount, whereas Purchase Agreements demand immediate consideration
- BEE Implications: Option schemes can help companies gradually achieve BEE ownership targets, while Purchase Agreements create immediate ownership changes
- Tax Treatment: Options are taxed under section 8C when exercised, while share purchases trigger immediate CGT considerations
- Vesting Requirements: Options usually include vesting periods and performance conditions; Purchase Agreements typically complete the transaction immediately
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