Startup stock option agreements, can former employees exercise them?

Law firm Veat received a request from a home service platform (hereinafter referred to as the "client") to review the possibility of exercising stock options.

The stock option system, commonly used in startups and venture companies, has become a means of attracting talent and rewarding performance. However, in practice, complex issues related to contract interpretation, the loss of rights upon resignation, and the exercise period frequently arise.

Exercise of Stock Options After Resignation

The client requested a review regarding whether former employees who had received stock options while employed and had met the legally required minimum employment period before resigning could exercise those options after resignation.

First, Law firm Veat thoroughly reviewed the main clauses included in the articles of incorporation and the stock option grant agreement. These typically include employment requirements, exercise conditions, and exercise period, and particularly examined whether the possibility of exercising rights after resignation was explicitly stated. If there were restrictive clauses in the contract or articles of incorporation, a process was necessary to verify the legal validity of those clauses and review their actual application.

Simultaneously, the reasons for the cancellation or expiration of stock options as stipulated in the contract were also important considerations. Some stock option agreements stipulate that even granted rights are extinguished if certain events occur, such as involuntary resignation or a move to a competitor. Law firm Veat comprehensively analyzed the client's internal personnel records, the circumstances of the resignation, and subsequent actions to determine whether such events had occurred.

Review of Stock Option Contract and Laws

Considering that stock options are not a short-term incentive for personnel but rather a rightful reward for those who have contributed to the company's medium- to long-term growth, Law firm Veat comprehensively reviewed the interpretation of applicable laws in addition to the individual clauses of the contract. Based on this review, Law firm Veat meticulously compared the definition of 'employee' in the stock option contract drafted by the client, the employment requirements, and the exercise conditions with the legal requirements. This process aimed not only to determine the possibility of exercising rights but also to establish criteria that the client could consistently apply in similar cases in the future.

While stock options have a positive aspect of attracting talent and rewarding long-term performance, we recommend obtaining a clear contract design and comprehensive review from the outset to avoid disputes arising from differences in the interpretation of the articles of incorporation, contracts, and laws.

Law firm Veat, Your Legal Partner Supporting Corporate Growth

Law firm Veat has accumulated practical experience in various fields, including venture companies, startups, venture capital (VC), and private equity funds (PEF). In particular, it provides practical-oriented reviews and strategic advice on the legal issues related to the operation of stock option systems for startups and venture companies.

Furthermore, Law firm Veat accurately diagnoses the legal challenges that startups face at each growth stage and provides optimized legal advice from articles of incorporation design to investment contracts and M&A. Moreover, Veat provides customized legal services for startups and venture capital, the 'Law Series,' providing end-to-end legal advice from drafting articles of incorporation in the early stages of creation to designing stock options, concluding investment contracts, and M&A in the Exit stage.

If you require various corporate legal advice, including stock options, please do not hesitate to contact Law firm Veat.

This case study can also be viewed on the Law firm Veat blog below.

- Can Former Employees of a Startup Exercise Stock Options?

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