It is becoming increasingly common for start-ups to offer key employees share options as part of their compensation package.
If you are thinking about offering a share incentive, take care to ensure that you do not accidentally create a contractual right that the company cannot follow through on.
What is a contractual right?
A contractual right is an enforceable right afforded to a party under the contract.
If a contractual right is created the company will have a binding commitment. Failure to deliver on the commitment could result in a claim for breach of contract.
Sometimes a contractual right can arise if the company consistently acts in a particular way over a period of time.
What happens if I create a contractual right?
By creating a contractual right for an employee to participate in a share plan, the company must be sure that it is able to fulfil its commitment.
For example, if you offer a new employee the right to receive options in a specific type of scheme but it later transpires that the company does not meet the statutory qualifying requirements of such a scheme, then the employee may claim for breach of contract.
Alternatively, if you want to make any future changes to the plan, such as varying the terms or terminating the plan, then you may require employee consent.
Can I include details of the share plan in a staff handbook?
It is usual for a company to provide information to employees via a staff handbook or online.
Provided that any information published is of a general nature and not specific, then it is unlikely to create a binding commitment.
What information can I provide a future employee?
As a rule of thumb, it is not advisable to refer to a share option plan in an employee offer letter or contract.
However if you do decide to include details then you should:
Make it clear that any invitation to participate in a share plan is conditional upon the employee the qualifying requirements of that plan
Be clear that the company is not required to fulfil its obligations by a set deadline.
State that the right to join a plan is discretionary and that there is no contractual right for the employee to participate.
Ensure that the letter or contract does not refer to a specific plan.
Provide that the terms of any plan can be amended without the consent of the employee.
How can we help?
If you need help drafting an offer letter or contract of employment that refers to a share option scheme then please feel free to get in touch.
We offer a fixed fee service tailored to your individual needs and budget.