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Defining Key Terms in Equity Incentive Plans

Aug 23, 2008
Companies design Equity Incentive Plans ("Plans") to provide key, upper-level employees an equity interest in the company. The purpose of these plans is to motivate these employees to perform their best tie these employees' financial futures to the stock price of the company. As any transactional attorney knows, often the "Definitions" section of an Incentive Plan is the most important part. How key terms are defined make all the difference in applying the plan to the employees. This article will take a look at the key terms generally found in Equity Incentive Plans and will define these terms, hopefully assisting drafters who may be unfamiliar with some of them.

The following terms are generally found in Equity Incentive Agreements and are defined as such:

"Affiliate" - Affiliate generally means any corporation in an unbroken chain of corporations ending with the company, other than the company that owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the corporations in such chain.

"Board" - Refers to the Board of Directors of the Company

"Change in Control" - Defining this term is very important to the substance of the agreement and doing it properly generally takes several pages. A change of control of the company can occur in a number of ways: (a) if any person becomes the owner of securities of the Company representing more than 50% of the combined voting power of the company's outstanding securities other than by virtue of a merger, consolidation, or similar transaction; (b) a merger, consolidation, or similar transaction involving the company whereby the merger or consolidation results in another company owning more than 50% of the combined voting power of the surviving entity; (c) the stockholders or Board approve a plan of sale, complete dissolution or liquidation of the Company; or (d) the individuals on the Board at the time the Plan is approved cease to constitute at least a majority of the members on the Board.

"Code" - refers to the latest adopted Internal Revenue code.

"Continuous Service" - means that the participant's service with the Company, whether as an employee, director, or consultant is not interrupted or terminated.

"Fair Market Value" - refers to the price of the stock, as is defined as the closing sales price for the company's stock as quoted on the appropriate exchange, as reported in The Wall Street Journal.

"Incentive Stock Option" - means an option intended to qualify as an incentive stock option within the meaning of Section 422 of the IRS Code.

"Option Agreement" - is generally defined as a written agreement between the Company and an Optionholder evidencing the terms and conditions of an option grant.

"Optionholder" - means a person to whom an option is granted pursuant to the plan.

"Participant" - means a person to whom a stock award is granted pursuant to the Plan.

"Performance Goals" - means the one or more goals established by the Board of Directors for the Performance Period based upon the Performance Criteria

"Stock Award" - means any right granted under the Plan, including an Option, a Stock Purchase Award, Stock Bonus Award, Stock Appreciation Right, or any other Stock Award.

These are the definitions for the most common terms found in Equity Incentive Plans. Before adopting one of the above-mentioned definition, be sure to consult the Board of Directors or Plan Administration Committee of your client to ensure correct usage.
About the Author
Mark Warner is a Legal Research Analyst for RealDealDocs.com. RealDealDocs gives you insider access to millions of legal documents drafted by the top law firms in the US. Search over 10 million Documents, Clauses, and Legal Agreements for Free at http://www.RealDealDocs.com
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