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A Sample Stock Option Plan
Salary.com asked some of its stock options experts to interpret a stock option plan from Dell Computer Corporation. Bill Coleman and Keith Fortier, neither of whom is a lawyer, have summarized each section in plain English and explained why it matters to the person who has stock options under the plan. The sections in italics are the actual language of the plan; the sections in regular type are Salary.com's interpretation.
Stock option plans are the large contracts that govern stock options programs. Stock option agreements are the individual options grants, vesting schedules, and other employee-specific information.
Stock option plans are written by lawyers. The language is difficult to understand - employees, human resource professionals, even top executives have a tough time interpreting stock option plans.
Salary.com asked some of its stock options experts to interpret a stock option plan from Dell Computer Corporation. Bill Coleman and Keith Fortier, neither of whom is a lawyer, have summarized each section in plain English and explained why it matters to the person who has stock options under the plan. The sections in italics are the actual language of the plan; the sections in regular type are Salary.com's interpretation. Overall, the Dell plan says the following.
AMENDED AND RESTATED
DELL COMPUTER CORPORATION
1998 BROAD-BASED STOCK OPTION PLAN
EFFECTIVE DATE: OCTOBER 30, 1998
I. PURPOSE OF THE PLAN
Why this matters. Incentive stock options can be better for employees than nonqualified stock options because the taxes can be lower.
Why this matters. Since the vesting period and the number of options are not part of the plan itself, these things are negotiable.
III. OPTION AGREEMENTS
(b) The OOC may at any time and from time to time, in its sole discretion, accelerate the time at which an Option then outstanding may be exercised. Any such action by the OOC may vary among individual Optionees and may vary among Options held by any individual Optionee.
(c) For all purposes under the Plan, the fair market value of a share of Stock on a particular date shall be equal to the average of the high and low sales prices of the Stock (i) reported by the Nasdaq National Market on that date or (ii) if the Stock is listed on a national stock exchange, reported on the stock exchange composite tape on that date; or, in either case, if no prices are reported on that date, on the last preceding date on which such prices of the Stock are so reported. If the Stock is traded over the counter at the time a determination of its fair market value is required to be made hereunder, its fair market value shall be deemed to be equal to the average between the reported high and low or closing bid and asked prices of Stock on the most recent date on which Stock was publicly traded. In the event Stock is not publicly traded at the time a determination of its value is required to be made hereunder, the determination of its fair market value shall be made by the OOC in such manner as it deems appropriate.
(d) Each Option and all rights granted thereunder shall not be transferable other than by will or the laws of descent and distribution.
(e) As used in Option Agreements, the following terms shall have the respective meanings set forth below:
(i) "Disability" shall mean, with respect to a person, a physical or mental impairment of sufficient severity that, in the opinion of the Company, the person is unable to continue performing the duties the person performed before such impairment and that impairment or condition is cited by the Company as the reason for termination of the person's employment with the Company and its Subsidiaries (as defined below).
(ii) "Normal Retirement" shall mean, with respect to a person, the termination of such person's employment with the Company and its Subsidiaries by reason of retirement at any time on or after the date on which the person reaches age 65 if the person is employed in the United States of America or such other age as provided for by the OOC as the normal retirement age in the country where the person is employed.
Why this matters. You usually can't transfer the options before exercising them. Terms are defined because death, disability, and retirement are often cases of special treatment. Types of special treatment include accelerated vesting and longer terms to exercise options.
IV. ELIGIBILITY OF OPTIONEE
Eligibility of optionee
Why this matters. This exclusion leads one to conclude that Dell also has other stock option plans.
V. SHARES SUBJECT TO THE PLAN
Shares subject to the plan
Why this matters. The number of shares outstanding affects the price per share. If the company issues new shares, it is "diluting" the existing shares. For example, if there are 100 shares outstanding at $1 per share, the company is worth $100. If the company issues 10 new shares, but the value of the company has not increased, each share is now worth only 91 cents. Dell's dilution is very small: 1.3 billion plus 7 million over 1.3 billion, or about half a percent. Dell is making up for the small dilution by creating a means to recapture some outstanding shares.
VI. OPTION PRICE
Why this matters. Since Dell is a public company whose stock price has become relatively stable, this plan may have less potential upside than that of a startup. The employee has the option to purchase the stock at the market price as of the date the options were issued, not at a discount. But an employee who remains with the company for some time might see some nice gains, if the stock price continues to climb.
VII. TERM OF PLAN
Term of plan
Why this matters. This doesn't have a significant impact on the employee granted options right now.
VIII. RECAPITALIZATION OR REORGANIZATION
(b) The shares with respect to which Options may be granted are shares of Stock as presently constituted, but if, and whenever, prior to the expiration of an Option theretofore granted, the Company shall effect a subdivision or consolidation of shares of Stock or the payment of a stock dividend on Stock without receipt of consideration by the Company, the number of shares of Stock with respect to which such Option may thereafter be exercised (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and the purchase price per share shall be proportionately increased.
(c) If the Company recapitalizes, reclassifies its capital stock, or otherwise changes its capital structure (a "recapitalization"), the number and class of shares of Stock covered by an Option theretofore granted shall be adjusted so that such Option shall thereafter cover the number and class of shares of stock and/or securities to which the Optionee would have been entitled pursuant to the terms of the recapitalization if, immediately prior to the recapitalization, the Optionee had been the holder of record of the number of shares of Stock then covered by such Option. If (i) the Company shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity), (ii) the Company sells, leases or exchanges all or substantially all of its assets to any other person or entity, (iii) the Company is to be dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the 1934 Act, acquires or gains ownership 3 or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting stock (based upon voting power), or (v) as a result of or in connection with a contested election of directors, the persons who were directors of the Company before such election shall cease to constitute a majority of the Board (each such event is referred to herein as a "Corporate Change"), no later than (a) ten days after the approval by the stockholders of the Company of such merger, consolidation, reorganization, sale, lease or exchange of assets or dissolution or such election of directors or (b) thirty days after a change of control of the type described in Clause (iv), the Board, acting in its sole discretion without the consent or approval of any Optionee, shall act to effect one or more of the following alternatives, which may vary among individual Optionees and which may vary among Options held by any individual Optionee: (1) accelerate the time at which Options then outstanding may be exercised so that such Options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by the Board, after which specified date all unexercised Options and all rights of Optionees thereunder shall terminate, (2) require the mandatory surrender to the Company by selected Optionees of some or all of the outstanding Options held by such Optionees (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of a date, before or after such Corporate Change, specified by the Board, in which event the Board shall thereupon cancel such Options and the Company shall pay to each Optionee an amount of cash per share equal to the excess, if any, of the amount calculated in Subparagraph (d) below (the "Change of Control Value") of the shares subject to such Option over the exercise price(s) under such Options for such shares, (3) make such adjustments to Options then outstanding as the Board deems appropriate to reflect such Corporate Change (provided, however, that the Board may determine in its sole discretion that no adjustment is necessary to Options then outstanding) or (4) provide that the number and class of shares of Stock covered by an Option theretofore granted shall be adjusted so that such Option shall thereafter cover the number and class of shares of stock or other securities or property (including, without limitation, cash) to which the Optionee would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets and dissolution if, immediately prior to such merger, consolidation or sale of assets and dissolution, the Optionee had been the holder of record of the number of shares of Stock then covered by such Option.
(d) For the purposes of clause (2) in Subparagraph (c) above, the "Change of Control Value" shall equal the amount determined in clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the per share price offered to stockholders of the Company in any such merger, consolidation, reorganization, sale of assets or dissolution transaction, (ii) the price per share offered to stockholders of the Company in any tender offer or exchange offer whereby a Corporate Change takes place, or (iii) if such Corporate Change occurs other than pursuant to a tender or exchange offer, the fair market value per share of the shares into which such Options being surrendered are exercisable, as determined by the Board as of the date determined by the Board to be the date of cancellation and surrender of such Options. In the event that the consideration offered to stockholders of the Company in any transaction described in this Subparagraph (d) or Subparagraph (c) above consists of anything other than cash, the Board shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash.
(e) Any adjustment provided for in Subparagraphs (b) or (c) above shall be subject to any required shareholder action.
(f) Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into 4 such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to Options theretofore granted or the purchase price per share.
Recapitalization or reorganization
This section determines what will happen if there is a change of control in the company: if Dell is acquired, if it sells all or most of the company, if the company dissolves or is liquidated, or of there is a change of more than half of the directors. If one of these things occurs, the board can do one of four things with each outstanding option (it can do different things for different people and different things for different grants). It can accelerate vesting or the ability to exercise; it can require the optionee to forfeit the right to the option in exchange for cash settlement; it can modify options to reflect the change of control; or it can adjust them to keep the optionee whole (same economic position).
The value of stock after a change of control is defined for use in the previous section. If shareholders need to approve action, it must be approved. The adjustments made to outstanding options under this plan in the event of a change of control are limited. Other items, like warrants and outright shares owned, are not included.
Why this matters. This is very important language. With the language above, if someone has 10,000 options with an exercise price of $48, and a 2-1 split occurs, that person would have twice as many shares at half the price (20,000 shares at a $24 strike price). The optionee's economic position would not change. But if this language weren't here and the stock split, the employee with 10,000 options with an exercise at $48 would still have 10,000 options with an exercise price of $48. The optionee would have the economic equivalent of half the options at twice the strike price.
This happened to three top executives of Computer Associates International Inc. in a highly publicized case in November 1999. The shareholders had never agreed to adjust the number of shares awarded in the event of a stock split. Consequently, a court ruled that the executives must forfeit a potential gain of more than half a billion dollars.
IX. AMENDMENT OR TERMINATION OF THE PLAN
Amendment or termination of plan
Why this matters. The company has considerable latitude to change the plan, but if you already have options under this plan, the changes won't affect you unless you agree to them.
X. SECURITIES LAWS
(b) The Company intends to register for issuance under the Securities Act the shares of common stock issuable upon exercise of Options and to keep such registration effective throughout the period any Options are exercisable. In the absence of such effective registration or an available exemption from registration under the Securities Act, issuance of shares of common stock issuable upon exercise of Options may be delayed until registration of such shares is effective or an exemption from registration under the Securities Act is available. The Company intends to use its best efforts to ensure that no such delay will occur. In the event exemption from registration under the Securities Act is available upon an exercise of Options, the Option holder (or the person otherwise permitted to exercise such Options), if requested by the Company to do so, shall execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to assure compliance with applicable securities laws.
(c) At the time of any exercise of an Option, the Company may, as a condition precedent to the exercise of such Option, require from the holder of the Option such written representations, if any, concerning the holder's intentions with regard to the retention or disposition of the shares of stock being acquired pursuant to such exercise and such written covenants and agreements, if any, as to the manner of disposal of such shares as, in the opinion of counsel to the Company, may be necessary to ensure that any disposition by that holder will not involve a violation of the Securities Act or any other applicable securities law or regulation.
(d) The certificates representing the shares of common stock issued pursuant to an exercise of Options may bear such legend or legends as the OOC deems appropriate in order to assure compliance with applicable securities laws and regulations. The Company may refuse to register the transfer of the shares of common stock issued pursuant to an exercise of 5 Options on the stock transfer records of the Company if such proposed transfer would, in the opinion of counsel to the Company, constitute a violation of any applicable securities law or regulation, and the Company may give related instructions to its transfer agent, if any, to stock registration of the transfer of the shares of common stock issued pursuant to an exercise of Options.
Why this matters. Most option holders can ignore this section, which more or less is boilerplate language that says the company will abide by the laws governing securities. But it is cause for alarm if your stock option plan doesn't contain this or similar language.
XI. NON-U.S. EMPLOYEES
Why this matters. Dell is an international corporation. Employees working in offices in countries other than the United States, and employees who are not U.S. citizens, are not excluded from the plan.
XII. GOVERNING LAW
Why this matters. Delaware has the most favorable corporate laws in the United States. Many businesses are incorporated in Delaware. In the event of a legal action, the prevailing laws would be favorable to the company.
- Johanna Schlegel, Salary.com Editor-in-Chief
Copyright 2000-2004 © Salary.com, Inc.
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