[Startup Lawyer] Legal requirements and limitations of stock option exercise for fixed-term employees Legal Review
Article posted in 2025-02-26 10:07:10 | VEAT
Law firm Veat received a request from an IT startup (hereinafter referred to as “client”) to review whether a contract employee could exercise stock purchase options.
The client had previously granted stock purchase options to a contract employee, and the employee wished to exercise them after a certain period. However, considering the requirements of the Commercial Code and the Act on Promotion of Venture Businesses, the client deemed that a legal review was necessary to determine whether a contract employee could actually exercise stock purchase options and requested advice from Law firm Veat.
Stock purchase options are actively utilized by startups as a means of attracting and motivating talented individuals. However, the exercise of stock purchase options is subject to strict requirements of the 「Commercial Code」 and the 「Special Act on Fostering Venture Businesses」(hereinafter referred to as “Venture Business Act”), and the possibility of exercise may vary depending on the employee's employment type.
Requirements for Exercising Stock Purchase Options
The Commercial Code and the Venture Business Act stipulate that a person who has been granted stock purchase options must meet certain requirements, such as serving for a certain period. In particular, according to Article 16 of the Venture Business Act, employees to whom a venture business grants stock purchase options must work for a certain period before they can exercise them.
For contract employees, the key issue is whether they are included in the definition of “employee” under the Commercial Code and the Venture Business Act. The concept of an employee is not clearly defined by law, and there is some room for interpretation according to precedents and academic opinions. Therefore, Law firm Veat comprehensively analyzed the stock purchase option grant agreement and relevant laws and regulations entered into by the client with the contract employee to review whether the contract employee could exercise stock purchase options.
In addition, the startup lawyer carefully analyzed the stock purchase option grant agreement entered into by the client with the contract employee. They examined whether the agreement included a definition of “employee,” whether the status and rights of the contract employee were clearly defined, and other factors. They also compared the residency period requirements stipulated in the agreement with those stipulated in the laws and regulations to determine whether the contract employee could practically exercise stock purchase options.
Legal Check Items Before an Employee Exercises Stock Purchase Options
To determine whether a contract employee can exercise stock purchase options, it is necessary to verify compliance with the laws stipulated in the Commercial Code and the Venture Business Act, and especially startups should review various factors such as the employee's residency period and the time of possible exercise with a legal expert.
- Review of Requirements under the Commercial Code and the Venture Business Act
Since both the Commercial Code and the Venture Business Act have provisions related to stock purchase options, it is necessary to first identify which law applies to the contract employee. It is also important to review whether those laws have been complied with. In particular, for startups, it is necessary to consider various factors such as the employee's residency period and the time of possible exercise and to work with a legal expert to refine the agreement and minimize legal risks.
- Review of Stock Purchase Option Grant Agreements
Check the definition of “employee” in the agreement and the rights and obligations of the contract employee to confirm the time and procedure of possible exercise: It is necessary to examine whether the timing, procedure, and required period of residency for the exercise of stock purchase options are clearly defined. Also, it is important to review whether the agreement is legally valid if it is stricter or unfair than the legal requirements.
- Confirm Possible Exercise Time and Procedure
It is necessary to examine whether the timing of exercise, the method of claim, the deadline, the method of payment, and the required period of residency are clearly defined.
- Review Possible Restrictions and Expiry
It is necessary to check whether there is a possibility of restriction on exercise or expiry of stock purchase options according to specific conditions.
Stock purchase options are an important means of attracting and rewarding talent in startups, but if they do not meet the requirements of relevant laws and regulations, they may lead to legal disputes. In particular, the possibility of a contract employee exercising stock purchase options may vary depending on the interpretation of the Commercial Code and the Venture Business Act, so it is recommended to receive a legal review in advance.
Law firm Veat: A Partner Growing with Startups
Law firm Veat, which has expanded and developed its business areas in various fields such as venture businesses, startups, venture capital (VC), and private equity fund (PEF) investment, deeply understands the characteristics of startups and provides optimal solutions in various corporate legal fields, including stock purchase option legal advice.
In particular, Veat has launched a customized legal service for startups and venture capital (VC), called “Law Series”, providing legal advice tailored to each stage from initial founding to growth, and receiving high praise from startups and VCs.
Together with Law firm Veat, which provides optimal solutions in various corporate legal fields, minimize legal risks in the growth process of startups.
The business case mentioned above can also be confirmed on the Law firm Veat blog.
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