Stock options offer letter template

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What is a stock option offer letter

A job offer letter contains information about the job, compensation, and other important details related to the position. But not all job offers are created equal—some of them come with stock options!

A stock option offer letter is a formal document issued to an employee or contractor, giving them the legal right to the options. It sets out all of the specific terms that apply to that individual employee or contractor, including the number of options they get, the vesting that will apply to those options, and the price they have to pay to exercise them. 

Understanding stock options

As a startup founder or employer, offering stock options is an effective way to attract and retain top talent. It is important to understand what stock options are, how they work, and what to consider before including them in an offer letter.

Stock options are a form of equity compensation that allow employees to buy a certain number of shares of a company's stock at a predetermined exercise price. The value of the options will increase if the stock price increases above the exercise price. This can result to significant financial gains if the company becomes profitable, which is why this is good way to incentivize employees to play the long game in contributing to the company's success.

Learn more about startup stock options.

The value of a good offer letter with stock options

Offer letters with stock options are essential tools for startups. An employee compensation package that includes stock options can be an attractive incentive for prospective employees, especially in a startup environment where there is potential for significant growth and financial reward.

Creating an offer letter with stock options, therefore, requires careful consideration, as well as legal, accounting, and financial review. A poorly drafted offer letter can lead to confusion and misunderstandings down the line, which can ultimately harm both the employer and the employee.

Best practices for creating an offer letter with stock options

When drafting an offer letter with stock options, there are some best practices to keep in mind to ensure that the document is clear, effective, and legally binding. Here are some tips to help you create an offer letter that meets your needs:

  • Be clear and concise. Your offer letter should be easy to read and understand. Some employees will be receiving stock options for the first time so a list of helpful terminologies is beneficial.
  • Consider tax implications. Stock options can have significant tax implications for both the employer and the employee. It's important to understand these implications and to ensure that your offer letter includes language that addresses tax issues. Consider consulting with a tax professional to ensure that your agreement is structured in a tax-efficient manner.
  • Customize the agreement to your needs. Every company is unique, and the terms of your stock options agreement should reflect the specific needs and goals of your business. Consider customizing your offer letter to include provisions that are tailored to your company's circumstances.
  • Communicate clearly with employees. Stock options agreements can be complex and confusing, and it's important to ensure that employees understand the terms of the agreement. Consider providing additional resources or training to help employees understand their stock options and how they work.
  • Consult with legal counsel. Stock options agreements can be complex, and it's important to ensure that your offer letter is legally binding and enforceable. Consulting with legal counsel can help you ensure that your agreement is compliant with all relevant laws and regulations and that you are protecting your company's interests.
  • Use equity management softwares. Legal contracts can be costly and time-consuming, especially for busy startup founders. Equity management softwares like Cake exist to simplify this process and provide contract templates that are already reviewed by lawyers.

In the Cake platform, the Offer Letter comes built-in with your equity plan. Reviewed by lawyers and used by hundreds of startups around the globe, it removes a lot of the research and guesswork while giving you room to still customize Offer Letters to your needs.

Plan Rules + Offer Letter

In the Cake platform, we refer to these documents as the Plan Rules and the Offer Letter. These two documents should be read and understood together.

The Plan Rules set out the rules and processes for option-holders and stockholders. You can think of the Plan Rules like an additional Stockholders Agreement that only applies to employee stock option recipients. Plan Rules provide full transparency, helps avoid disputes, and gives the company peace of mind that it’s protected in various scenarios.

Generally, the Plan Rules includes terms that apply to all the recipients of the equity program:

  • Eligibility to participate
  • Treatment of options for leavers
  • Rules on transfers
  • Determination of Fair Market Value (in case of a buy back of shares)
  • Process for exit events
  • Powers of the company to amend the rules
  • Other formal contract requirements, such as governing law, and approvals required

The Offer Letter, on the other hand, contains information that are specific to the option-holder:

  • Automated employee details
  • Number of options (grant details)
  • Exercise price
  • Vesting schedules
  • Exercise expiration date
  • Local tax statements

In some jurisdictions the Offer Letter is referred to as an Equity Compensation Agreement or a Stock Option Agreement.

Cake's Plan Rules and Offer Letter templates are reviewed by lawyers and used by many companies around the world. It prompts you to fill in these details and automatically populates the applicable restrictions into your Plan Rules and Offer Letters.

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1. Can I customize the terms of stock options in an offer letter?

Yes, you can customize the terms of the stock options for each individual employee. Terms such as the exercise price, the number of options, and the vesting period, are usually specific to the individual, depending on unique factors like start dates and position.

2. How can offering stock options benefit my company?

Offering stock options can benefit your company by attracting and retaining top talent, aligning employee interests with company success, conserving cash, and providing tax benefits. It can also motivate employees to work harder and be more committed to the company's goals.

3. Can offering stock options lead to dilution of ownership?

Yes, offering stock options can lead to dilution of ownership if the number of outstanding shares increases. However, it is important to balance the potential for dilution with the benefits of offering stock options.

4. What happens if an employee leaves before the vesting period is over?

If an employee leaves before the vesting period is over, they may forfeit their unvested stock options. However, some companies offer accelerated vesting in certain situations, such as termination without cause or a merger or acquisition.

5. Should I offer stock options to all employees?

It is not necessary to offer stock options to all employees. You can limit stock options to key employees or offer them as part of a performance-based compensation plan. It is important to consider the company's goals and the roles of the employees before deciding who should receive stock options.

How it works


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Set up your option pool. Your offer letter will be generated based on the details of your option pool.

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