Venture Company Stock Option Legal Guide: Understanding everything from grant method (difference settlement type) to limits and procedures.

Law firm Veat received a request from unlisted venture company A (hereinafter referred to as “the client”) to review inquiries regarding stock options (stock purchase options) granting limits and related matters in accordance with the Venture Enterprise Act.

The client inquired about how the stock option (stock purchase option) granting limit is determined when granting stock options, whether there is a limit to the granting of stock options even when adopting a difference settlement method, and whether the remaining limit is restored by the amount exercised when the granted stock options (stock purchase options) are exercised.

Considering that the client is an unlisted venture enterprise, Law firm Veat reviewed the granting limit, method, and whether the limit is restored upon exercise of stock options (stock purchase options) in various aspects in accordance with the Venture Enterprise Act.

Stock Purchase Options (Stock Options) Granting Method / Limit / Procedure

1. Method of Granting Stock Options (Stock Purchase Options)
Stock options (stock purchase options) are designed as a system to provide motivation and compensation to employees or external experts, so they can only be granted in accordance with the permitted methods, and if they deviate from this, they have no legal effect. Therefore, they must follow one of the three granting methods specified in Article 16-3(2) of the Venture Enterprise Act to be recognized as stock options.

The client’s difference settlement method refers to a method of receiving the difference between the exercise price of the stock and the current stock price in cash or treasury stock. This is a frequently used stock option exercise method in startups and unlisted venture enterprises, which can simultaneously achieve liquidity and reduce the burden of issuing shares. It is more flexible compared to the traditional stock payment method, but a clear review of the legal basis is necessary.

2. Limit of Stock Options (Stock Purchase Options)
As an unlisted venture enterprise, the client is subject to the Venture Enterprise Act, which stipulates that the stock purchase option granting limit shall not exceed a portion of the total outstanding shares, and the law stipulates that there is a separate limit for those granted to external experts. Therefore, the stock option (stock purchase option) granting limit may differ depending on the specific circumstances of those who receive stock purchase options, so a review is needed.

If granted in excess of the stipulated limit, it will be deemed a violation of the regulations established to protect shareholder value and prevent abuse of stock options, and may be nullified by law or subject to a claim for damages from shareholders.

3. Board of Directors’ Resolution and Article of Incorporation are Required for Stock Purchase Options (Stock Options)
Board of directors’ resolution and amendment of the article of incorporation are essential procedures to secure the transparency and legitimacy of stock option granting. This proves to all shareholders that the decision has been made fairly and legally. A special resolution requires the approval of more than two-thirds of the voting rights of the attending shareholders and more than one-third of the total outstanding shares, as stipulated in Article 195 of the Commercial Law. The article of incorporation must include contents regarding stock option granting in advance. If not specified in the article of incorporation, the granting of stock options may lose its legal effect.

Matters requiring a board of directors' resolution include the stock option granting targets, number of grants, exercise price and conditions, and granting method.

4. Whether the Limit is Restored After Exercise of Stock Options (Stock Purchase Options)
The stock option granting limit is set as a relative ratio to the total number of issued shares. Exercised stock options are treated as the issuance of new shares or the transfer of existing shares, and can be considered as deducting from the granting limit.

The Venture Enterprise Act does not explicitly specify whether the granting limit is restored when stock options are exercised. Therefore, Law firm Veat reviewed based on related materials such as the “Stock Purchase Options Manual for Unlisted Venture Enterprises.”

Stock options (stock purchase options) are an important system that provides various benefits such as attracting and retaining talent, reducing the company’s financial burden, and increasing corporate value.
Law firm Veat goes beyond simple legal advice and deeply understands the client’s business environment and provides customized legal solutions tailored to the growth stages of venture enterprises and startups. In particular, it discusses various aspects of the granting limit, method design, and management after exercise of stock options, which are complex legal issues, to support the introduction of stock options, and can also provide one-stop services including related registration work.

Legal advice may be required not only for the stock option contract but also at the time of exercise. Those who need regular or intermittent legal advice can subscribe to Law firm Veat's regular legal advisory service or membership service to receive legal advice. Law firm Veat reviews a comprehensive range of legal issues that venture enterprises and startups may face in actual business environments and provides legal advice optimized for each company's growth stage and characteristics.

For inquiries regarding stock options, regular legal advisory services, and membership services, please inquire through the link below.

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