This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.
Set a Lenient Post-Termination Exercise Period When Possible
If a director or advisor’s term is discontinued, a lenient post-termination exercise period may be very valuable to an option holder. I advise clients to draft the option grant to permit exercise up to ten years after termination, depending on when the option was granted in relation to when the option plan was adopted. This is because most small companies do not have quick and easy exits, it is onerous to require directors and advisors to pay cash for shares in a company that is far from a liquidity event.
My argument for this method is that subjecting a director or advisor to the typical 30-day to 90-day post-termination exercise period used for an employee optionee holding Incentive Stock Options (ISOs) would be unduly harsh on directors and advisors. Employee optionees holding ISOs receive other forms of compensation, while directors and advisors of start-ups typically do not.
Check back Wednesday, October 3, for Rule of Thumb No. 5: Try Not To Jeopardize Relationships.
