legal-terms
Meaning of typical statement in the legal document of Stock option grant
<p>I am reading a legal document related stock option agreement here <a href="https://media.orrick.com/Media%20Library/public/files/o/option-agreement.docx" rel="nofollow noreferrer">https://media.orrick.com/Media%20Library/public/files/o/option-agreement.docx</a>. One section reads like</p>
<blockquote>
<p><strong>Termination upon Disability of Optionee.</strong>  In the event of termination of Optionee’s Continuous Service Status as a result of Optionee’s Disability, Optionee may, but only within 12 month(s) following the Termination Date, exercise this Option to the extent Optionee is vested in the Optioned Stock.</p>
</blockquote>
<p>I could not understand what is the meaning of &quot;<code>Optionee is vested in the Optioned Stock</code>&quot;? An option is granted against some exercise price, based on some schedule, not the underlying stock, right? Therefore, as I understand, the holder is holding the option not the underlying stock itself, right? Therefore, should not be the right statement would be &quot;<code>Optionee is vested in the granted option</code>&quot;?</p>
<p>Additionally, the vesting schedule looks like</p>
<p>&quot;<code>&lt;x%&gt; of the Total Number of Shares shall vest and become exercisable..</code>&quot;</p>
<p>How exactly underlying shares will become exercisable? Should not this statement read as &quot;<code>&lt;x%&gt; of the Total granted options shall vest and become exercisable..</code>&quot;</p>
<p>I am not particularly from a legal background, so it is a bit difficult to understand above statement. Any insight will be very helpful</p>

<p>Typically, an employee stock option plan will come with a vesting schedule.</p>
<p>The employee gets new stock options each year, but only really gets to own those stock options gradually over a period that is typically two to five years. This provides an incentive for an employee who receives stock options to stay with the company in order to obtain this form of deferred compensation. It is a type of &quot;golden handcuffs&quot; arrangement.</p>
<p>Say that the company has a five year vesting period and the employee has worked there for six years.</p>
<p>The employee's stock options from years one will be 100% vested and available to exercise. The employee's stock options from year two will be 80% vested. The employee's stock options from year three will be 60% vested. The employee's stock options from year four will be 40% vested. The employee's stock options from year five will be 20% vested. The employee's stock options from year six will not be vested at all.</p>
<p>Usually, the higher up you are in the company, the more seniority you have, or the higher your base salary, the more initial pre-vesting grants of stock options you get in a year. So, if you are moving up the corporate ladder, this number will gradually increase. Maybe you got 100 options in year one, 200 in year two, etc.</p>
<p>So, you do the math and that's how many stock options you can exercise.</p>
<p>Year - Option Grants - Vesting Percentage - Vested Shares</p>
<p>1- 100 - 100% - 100</p>
<p>2- 200 - 80% - 160</p>
<p>3- 300 - 60% - 180</p>
<p>4- 400 - 40% -160</p>
<p>5- 500 - 20% -100</p>
<p>6- 600 - 0% - 0</p>
<p>Total Granted Share Options 2100 - Total Vested Share Options 700</p>
<p>It's really more complicated than this because the exercise price is probably different each year. The option price is probably lower in the earlier years and higher in the later years.</p>
<p>Under this provision, if you are disabled, your stock options cease to continue to vest. But, the stock options which are not vested are forfeited if your employment is terminated by disability. The company does this since the company no longer needs to use unvested stock options as an incentive to keep you working for them.</p>
<p>For some tax preferred <a href="https://www.nerdwallet.com/article/investing/isos" rel="nofollow noreferrer">incentive stock options</a>, the delayed vesting is mandatory (at least if the tax benefit is to be realized) in order to create an incentive that Congress deemed desirable when writing the tax code to think about the long term, rather than the short term, as a result of receiving option grants.</p>
