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Employee Share Option Plan

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teecee90
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Employee Share Option Plan

#258227

Postby teecee90 » October 16th, 2019, 1:29 pm

My son works for a company called DisplayLink in Cambridge. They have offered him a share option plan which appears to give him the option to buy 88,400 shares at $1.25 per share with an expiry date of 2025. They have sent him all the paperwork, but frankly it is undecipherable from a layman's perspective. As far as I can tell, DisplayLink is a non-listed US based company so it's not at all clear to me how he would be able to sell the shares if he signed up and exercised the option in any case.

Can anybody who has any experience of these sort of schemes provide any general information or advice or point me in the right direction?

Thanks

vrdiver
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Re: Employee Share Option Plan

#258230

Postby vrdiver » October 16th, 2019, 1:46 pm

He may want to read the paperwork carefully. I worked for a non-listed North American company that gave share options, but they had a vesting period, which might be the case here?

In my case, the shares were free, but didn't become mine for four years, during which time it was expected we would get a public listing. Additional shares were available at a set price, but I didn't have to pay anything until the option was about to expire. Does he have to pay cash upfront (or only at the point he decides to exercise his option (i.e. any time between now and the expiry date?)

If the company does well and gets a listing, this could be quite valuable, but if he has to part with significant cash now for shares that are unsellable and of dubious worth, then it's more of a punt.

Whilst the paperwork may seem indecipherable, it will be well worth spending the time to "translate" it into plain English. You may wish to copy specific complex sentences in further posts for clarification.

Here's hoping he's landed on a goldmine!

VRD

teecee90
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Re: Employee Share Option Plan

#258233

Postby teecee90 » October 16th, 2019, 2:15 pm

Some potentially relevant extracts:

OPTION AGREEMENT entered into pursuant to the DisplayLink Corp. Enterprise Management Incentives and Unapproved Share Option Plan 2015.

“Exercise Price” means US $1.25000 per Plan Share subject to the Option payable upon the exercise of the Option.

“Lock Up Period and Compulsory Transfer Provisions” means the restrictions on dealing in Plan Shares acquired on exercise of the Option and the provisions for compulsory transfer of such Plan Shares set out in Schedule 4.

2.1 The Company hereby grants to the Option Holder under the Plan an option to subscribe for 88,400 Plan Shares at the Exercise Price.

2.4 The Vesting Commencement Date of the Option is the date on which the Option Holder’s employment started.

3.1 The Option shall not in any circumstances be exercisable later than midnight on the 27 September 2025.

3.2 The Option may only be exercised to the extent vested in the circumstances provided for in Rule 9 and by the procedure set out in Rule 7.5 and using the form of notice of exercise set out in Schedule 1 (or if different such other form as may be approved by the Board). Notwithstanding any provision of this Agreement, the Option may in no circumstances be exercised in respect of any Plan Shares over which the Option has not vested.

3.3 The Board have determined, using their discretion as provided for at Plan Rule 12.2, that the exercise of the Option is conditional upon the Option Holder beforehand either paying an amount to the Company or Group Member in respect of the Employer’s NIC which may arise as a result of the exercise of the Option or other arrangement to ensure that such amount is available.

3.4 The Board have determined, using their discretion as provided for at Plan Rule 12.3, that the exercise of the Option is conditional upon the Option Holder joining with the Company in validly electing under section 431 ITEPA 2003 to disapply in whole the provisions of Part 7 Chapter 2 ITEPA 2003.

Schedul4 - The Option Holder hereby agrees that he or she will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the Company’s first public offering of its Common Stock (the “Initial Offering”) and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (180) days, or such longer period requested by the underwriters to comply with regulatory restrictions on the publication of research reports, including, but not
limited to, NASD Rule 2711) (i) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, or otherwise transfer any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or Preferred Stock or any securities convertible into or exercisable for Common Stock held immediately prior to the effectiveness of the registration statement for such offering, or (ii) enter into any swap or other arrangement that transfers to another, in whole or part, any
of the economic consequences of ownership of the Common Stock or Preferred, whether any such transaction described in clause (i) or (ii) above is settled by delivery of Common Stock or Preferred Stock or other securities, in cash or otherwise. The foregoing provisions shall apply
only to the Company’s Initial Offering and shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement. The Option Holder further agrees to execute such agreements as may be reasonably requested by the underwriters in the Company’s Initial Offering that are consistent with this provision or that are necessary to give further effect thereto.

Rule 9 is a very long section titled CHANGE IN CONTROL, INITIAL PUBLIC OFFERING OR WINDING UP OF COMPANY. Perhaps the most pertinent of which is:

9.2.2 Each Option Holder agrees that the sale or transfer of any Plan Shares by the Option Holder shall be subject to restrictions in such terms and of such duration as the Board (in consultation with the Company’s advisers) shall determine (“Approved Restrictions”) and the Option Holder shall give such undertakings in respect of such Approved Restrictions to such persons (if any) as the Board shall determine, in each case prior to the Initial Public Offering, PROVIDED THAT:
(a) the duration of the Approved Restrictions shall not exceed 24 months from the date of the Initial Public Offering; and
(b) the Approved Restrictions may (if the Board so determine) allow the sale of Plan Shares to meet any amount in respect of taxation due from the Option Holder by reference to Rule 12 unless the rules of relevant the investment exchange require that restrictions are not so qualified.

teecee90
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Re: Employee Share Option Plan

#258235

Postby teecee90 » October 16th, 2019, 2:26 pm

I guess this is also pretty pertinent:

7.2 Exercise of Options
7.2.1 Whilst an Option Holder remains a Group Employee, any Option held by that Option Holder may (to the extent it shall not already have lapsed pursuant to these Rules) only be exercised:
(a) in the event of a Change of Control or, if applicable, the issue of a notice to Option Holders under Rule 9.3 or 9.4, to the extent such Option has vested (in accordance with Rules 7.1.1, 7.1.2, 7.1.3 and 7.1.4) but has not been exercised;
(b) in the event of an Initial Public Offering, to the extent such Option has vested (in accordance with Rules 7.1.1, 7.1.3 and 7.1.4) but has not been exercised; or
(c) at any time at his or her discretion, but only to the extent of the Eligible Vested Portion of such Option.

7.2.4 If and for so long as an Option Holder remains a Group Employee, the “Eligible Vested Portion” of each Option held by that Option Holder shall on any date (the “relevant date”) be that number of Plan Shares as is calculated in accordance with the following formula:

A minus B

WHERE: A = that percentage of the total number of Plan Shares in respect of which such Option has been granted, calculated in accordance with the following table:

Before the fifth anniversary of the Vesting Commencement Date of the Option - 0%

On or after the fifth anniversary of the Vesting Commencement Date of the Option but before the sixth anniversary of the Vesting Commencement Date of the Option - 25%

On or after the sixth anniversary of the Vesting Commencement Date of the Option but before the seventh anniversary of the Vesting commencement Date of the Option - 50%

On or after the seventh anniversary of the Vesting Commencement Date of the Option but before the eighth anniversary of the Vesting Commencement Date of the Option - 75%

On or after the eighth anniversary of the Vesting Commencement Date of the Option - 100%

teecee90
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Re: Employee Share Option Plan

#258241

Postby teecee90 » October 16th, 2019, 2:48 pm

Presumably this just gives him the ability to buy shares at the exercise price in the event of an IPO or before an IPO (on a sliding scale) provided he has been there 5+ years. Doesn't seem much point exercising the option prior to an IPO, or am I missing something?

vrdiver
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Re: Employee Share Option Plan

#258248

Postby vrdiver » October 16th, 2019, 3:34 pm

teecee90 wrote:Presumably this just gives him the ability to buy shares at the exercise price in the event of an IPO or before an IPO (on a sliding scale) provided he has been there 5+ years. Doesn't seem much point exercising the option prior to an IPO, or am I missing something?

That's how I read it. The various sections such as change-in-control refer to what happens in the event of a takeover, as opposed to an IPO, and the rest restricts his ability to try to sell his options before he fully owns them or during the early days of a public listing.

Looks like a nice set of "golden handcuffs", as in, if he stays until the shares are his to buy, and the market price is significantly above the option price, he could do well, but if he leaves before then, his options will lapse, and there is the risk that the company does not do so well and the market price is close to, or below the option price.

In summary, if it was me I'd sign, file the options paperwork and get on with my career.

VRD

(Nb - that's what I'd do. What he does is up to him!)

teecee90
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Re: Employee Share Option Plan

#258257

Postby teecee90 » October 16th, 2019, 3:59 pm

Many thanks VRD.

Looks like he doesn't really have anything to lose by signing, but potentially something to gain if the planets happen to align.

Cheers

TUK020
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Re: Employee Share Option Plan

#258329

Postby TUK020 » October 16th, 2019, 8:39 pm

I haven't gone through all the detail, but the other important opportunity to capitalise is the possibility of a trade sale of the company.
Usually this results in all options automatically vesting. That may happen a lot sooner than an IPO, and at no notice.

b0f77
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Re: Employee Share Option Plan

#258342

Postby b0f77 » October 16th, 2019, 10:01 pm

Well, your son works for a good Cambridge tech company founded by a couple of well known entrepreneurs. DisplayLink has been around for a while and been reasonably successful.

He probably just needs to sign something to accept the options that have been assigned to him, then he can decide whether he wants to exercise the options at a later date when they become exercisable (if he doesn't accept them, he won't have an option on anything!).

I've worked for some US tech companies, and the way these options worked is you are assigned 1000s of them as a new employee (hopefully!) and they have a vesting schedule when you can exercise a tranche of the options to get shares. In my case the shares were listed on NASDAQ or whatever so the broker just sold enough of my exercised shares to cover the option strike price and I got to keep the rest or sell them. You obviously only exercise when the options are "above water" compared to the stock value which is known in the case of a listed company.

In this case, as discussed the options are not for listed stocks so your son has to pay something to exercise the options when they vest, if he even wants to. So at that point he has to decide if the shares are worth having. Presumably if he exercised, the shares would remain his even if he left the company.

If the scheme is not clear, then he should probably ask someone in HR (if they have HR) for more information - it is part of his employment package after all. HR should also be telling him if he has any UK tax liability on accepting the options. I used to even find that HR would send out a helpful email to staff before options expired due to some predetermined event (but this was at bigger companies).

The other thing he could do is download the company accounts / reporting from companies house. In the annual reports details it may have some information on the staff option schemes and in particularly director holdings and if any directors have exercised a large tranche of options. Here: https://beta.companieshouse.gov.uk/comp ... ng-history

If he can find out any information about whether directors or people he works with who have been there longer are exercising their options, this would be useful for a decision. They wouldn't be exercising if it wasn't worthwhile! Hopefully it will work out to be profitable for your son.

teecee90
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Re: Employee Share Option Plan

#327597

Postby teecee90 » July 20th, 2020, 9:37 pm


teecee90
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Re: Employee Share Option Plan

#334670

Postby teecee90 » August 20th, 2020, 1:47 pm

And now he is being made redundant..... :(

vrdiver
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Re: Employee Share Option Plan

#334909

Postby vrdiver » August 21st, 2020, 2:52 pm

teecee90 wrote:And now he is being made redundant..... :(

Sorry to hear that.

One small silver lining may exist - he may have the right to exercise his share options immediately upon being made redundant.
Might be worth checking if this is the case, and if so, whether the option price and current market price make it sensible to do so.

VRD

teecee90
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Re: Employee Share Option Plan

#335732

Postby teecee90 » August 25th, 2020, 10:38 am

vrdiver wrote:
teecee90 wrote:And now he is being made redundant..... :(

Sorry to hear that.

One small silver lining may exist - he may have the right to exercise his share options immediately upon being made redundant.
Might be worth checking if this is the case, and if so, whether the option price and current market price make it sensible to do so.

VRD


The option price is about twice the market value on take over, but staff got a small 'bonus' instead.

Unfortunately, he has only been employed about 20 months so wont be entitled to any statutory redundancy pay if made compulsory redundant. Voluntary redundancy is being offered at 8 weeks pay. About 90 staff being made redundant (about half) and the project he was working on is being ditched. He has until the end of this week to decide whether to apply for voluntary redundancy or take his chances but risk having to leave with nothing.


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