Could it be possible to grant stock options to external specialists? Stock option grant recipients and legal grant methods.

Law firm Veat received a request from cosmetics manufacturer A (hereinafter "the client") to review the possibility of granting stock options to external professionals.

The client wanted to establish a system where external professionals, serving as long-term partners by performing outsourced services, could become shareholders of the client, grow together, and share profits based on the results. They requested a review to determine if granting stock options to external professionals was possible.

Considering that the client's external professionals were separately conducting their own businesses in addition to the company’s work, making it difficult to become employees, Law firm Veat reviewed the eligibility for stock options and the legal feasibility of granting them and provided our opinion.

A stock option (Stock Option) is a system whereby a company grants employees or specific targets the right to purchase its own shares under certain conditions. This is an important incentive measure that primarily encourages long-term contributions from employees and ensures that the company and its employees have the same interests. The stock option system is an effective method for employees to become shareholders of the company, grow with the company, and share its performance.

Stock Option Eligibility

According to domestic Commercial Code and the [Special Measures Act for the Promotion of Venture Businesses] (hereinafter "the Venture Special Act"), the principle is that stock options can only be granted to "individuals who can become shareholders," that is, to the company’s employees. Therefore, it is generally impossible to grant stock options to external individuals who are not employees. However, according to Article 16 of the Venture Special Act, if the company is subject to the Venture Special Act, stock options can be granted to external professionals who contribute to the company’s growth through technology development, research, or management.

Legal Issues Regarding Stock Options for External Professionals

If external professionals are operating their own businesses while performing work for the company, it may be difficult to register them as employees. Particularly, for external individuals to be granted stock options under the Venture Special Act, it must be proven that the external professional has actually contributed to the company's growth, which may be difficult to demonstrate with a typical outsourced service contract. Therefore, the company needs to evaluate the specific performance and contribution of the external professional to prove their contribution.

In addition, a board resolution must be passed to grant stock options, and in some cases, shareholder approval may also be required. Furthermore, to ensure legal stability, the stock option contract should clearly define the exercise conditions, such as allowing exercise after a certain period or when specific goals are achieved.

Alternatives for Stock Option Grants

If granting stock options to external professionals is legally difficult or uncertain, the company can consider various alternatives. For example, they can consider granting shares in a manner that meets certain legal requirements or providing compensation based on performance. They can also adjust the contractual structure to establish a more stable cooperative relationship. However, each alternative must be carefully reviewed for legal requirements, and the appropriate method may vary depending on the company’s situation. It is important to seek professional advice when considering legal reviews regarding stock option grants and alternative measures.

To proceed with a cooperative relationship with external professionals legally safely, the company must find the most appropriate method within the company’s long-term goals and within the legal boundaries, and legal advice is essential for this. While stock options are a useful tool for companies and key personnel to grow together in the long term, they must meet legal requirements and their feasibility must be carefully reviewed.

Law firm Veat provides legal advice to resolve complex legal issues faced by companies and to provide the most efficient alternative solutions. We review not only a precise understanding of stock option grants but also alternative legal measures, design the optimal stock option structure tailored to the company’s situation, and support minimizing legal risks.

If you need a customized legal consultation regarding stock options, please feel free to contact Law firm Veat.

Thank you.

Law firm Veat