And how exit-based option schemes work.
With an exit-based option scheme, option holders only receive their shares in the organisation after the completion of any required vesting and an 'exit.'
In short, recipients can only exercise their options when the business is sold, there's a change in control, or when another significant change in company structure occurs — alongside any time-based vesting schedules and performance milestones.
Exits are specifically defined in each option agreement, but typically include the following:
- The sale of your company to another
- A merger with another company
- A management buy-out
- A company buy-back
- A change in control
- An asset sale
- Partial or full floating on a public exchange
Does a >50% sale count as an exit event and trigger the exercise clause?
This is a question we're asked every so often, and the answer is, it depends on a number of things, such as:
The details of the purchase: If a single entity purchases more than 50%, that would be classed as an exit as the control of ownership has changed to another individual or company. Likewise, if the purchase is for more than 50% of the shares with voting rights, that too would be classed as an exit.
The Vestd standard option agreement: If you've used our standard option agreement for your option holders, the options will become exercisable in the event of a >50% takeover. The option holder will be given 14 days' notice of the exit event, and will only be able to exercise their options immediately prior to the completion of the exit.
In the event the exit falls through, the Option (in whole or in part as applicable) shall continue to be exercisable in accordance with Clause 3.
The company's Articles of Association: If your company has adopted the Vestd Articles of Association, the exit provisions state that the shareholders will benefit from the proceeds of a Share Sale or Asset Sale once all the company's outstanding liabilities have been paid up.
The Vestd Articles include “drag along and tag along” clauses in case of an exit. This ensures that any minority shareholders will have the option to sell their shares if they so wish.
This also applies to option holders; once they have exercised their options, they too can sell their shares if they so wish.
If your company is on Custom Articles or you have your own option agreements, please review the exit clauses as they may differ from the above. If in any doubt, seek professional legal advice.
Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal or financial advice.'