Contract question

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  • #77524
    winstonfoot5
    Participant

    Im doing advisory services for a very early technology start up and they have offered equity compensation. The following is the language of the contract, “Subject to approval by the Company‚Äôs Board of Directors, the Company will recommend to the Board of Directors that the Company provide the Advisor a Non-Qualified Stock Option grant to purchase 20,000 shares of Common Stock, $0.0001 par value per share, with an exercise price equal to fair market value.”

    I’ve bought and read the excellent book “Consider Your Options” and now just want to do a sanity check here. Does this mean I have the option to buy 20,000 shares at $0.0001 per share ($2.00) total? And the value of the stock at time of exercise will be fair market value? There is a vesting schedule, but there does not appear to be an expiration date of this option.

    Thanks for your guidance

    #77525
    TaxMaster
    Keymaster

    The par value of $0.0001 per share has nothing to do with the price you will pay to exercise the option. Technically it says your option price cannot be lower than that amount, but realistically it will be higher. How much higher depends on the value of the company’s stock at the time the option is granted. For a company whose stock is not publicly traded, the value is determined by the Board based on various factors, including the value of the company implied by the most recent round of funding.

    Even if the description you were offered did not indicate an expiration date, you should expect that the option will expire after a specified period, which is often ten years but may be less. The option will most likely terminate early upon the occurrence of certain events, such as a change in control of the company.

    #77527
    winstonfoot5
    Participant

    Hi TaxMaster,

    I see, this makes perfect sense. Thank you very much for clarifying.

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