Stock Compensation Agreement Template

In plain language: Identifies the type of equity granted, the number of shares or units, the grant date, and the exercise price or purchase price where applicable.

Common mistake: Omitting the type of award (ISO, NSO, restricted stock, or RSU) — this single omission determines the entire tax treatment and which regulatory rules apply, and courts cannot infer it from context.

In plain language: Sets out the timeline over which the recipient earns rights to the equity, including any initial cliff period and the monthly or quarterly vesting cadence thereafter.

Common mistake: Not specifying the vesting commencement date separately from the grant date — if they differ, leaving only a grant date creates ambiguity that typically resolves in the employee's favor.

In plain language: Describes how and when the holder may exercise vested options, the acceptable payment methods (cash, cashless exercise, net exercise), and any blackout periods.

Common mistake: Permitting only cash payment at exercise without specifying an alternative — this makes options effectively worthless for employees who cannot front the cash, creating retention and tax problems at liquidity.

In plain language: States how long a departing employee retains the right to exercise vested options after their last day, with separate windows for voluntary resignation, termination without cause, death, disability, and termination for cause.

Common mistake: Using a single 90-day window for all termination scenarios — ISOs automatically convert to NSOs if not exercised within 90 days of leaving, but death, disability, and cause terminations each carry different tax and legal consequences that require separate treatment.

In plain language: Defines the events — change of control, IPO, involuntary termination following an acquisition — that trigger immediate vesting of some or all unvested shares.

Common mistake: Granting full single-trigger acceleration (all unvested shares vest on change of control alone) without board approval — this can make the company less attractive to acquirers and is frequently renegotiated, creating friction at the worst possible moment.

In plain language: Describes the applicable tax treatment for the award type and, for restricted stock, notifies the recipient of the 30-day window to file a Section 83(b) election with the IRS.

Common mistake: Failing to inform restricted stock recipients of the 83(b) election window — a missed 30-day deadline cannot be extended and can result in the employee paying ordinary income tax on a much higher value at vesting rather than the lower value at grant.

In plain language: Prohibits the recipient from selling, pledging, or otherwise transferring shares without company consent, and grants the company the right to purchase shares before any third-party sale.

Common mistake: Not defining 'Transfer' broadly enough to cover pledging as collateral — employees who pledge shares to secure personal loans can inadvertently trigger a control or securities compliance issue the ROFR was designed to prevent.

In plain language: Records the recipient's acknowledgment that they are receiving the equity for investment purposes, are accredited or otherwise exempt from securities registration, and understand the illiquid nature of private company shares.

Common mistake: Skipping the accredited investor or exemption acknowledgment for non-employee recipients such as consultants — issuing unregistered securities to non-accredited investors without a valid exemption is a federal securities violation.

In plain language: States which unvested shares are forfeited upon departure and the conditions under which the company may repurchase vested shares at cost or fair market value.

Common mistake: Setting the repurchase price for forfeited unvested shares at fair market value rather than zero or original cost — unvested shares that were never earned should not carry a repurchase obligation at current value.

In plain language: Specifies the jurisdiction whose law governs the agreement and how disputes are resolved — typically arbitration for employment-adjacent disputes or the courts of the company's state of incorporation.

Common mistake: Choosing the company's state of incorporation (often Delaware) as governing law without considering that employment law in the employee's work state may override it — California courts routinely apply California law regardless of a Delaware choice-of-law clause.

A stock compensation agreement is a legally binding contract between a company and a recipient — typically an employee, director, or consultant — that governs the grant of equity as part of compensation. It sets out the award type (stock option, restricted stock, or RSU), the number of shares, the grant date, vesting schedule, exercise mechanics, and the tax and transfer rules that apply. Without a signed agreement, the grant has no enforceable terms and the company's cap table is exposed to dispute.

An Incentive Stock Option (ISO) qualifies for preferential tax treatment under IRC Section 422 — the recipient pays no ordinary income tax at exercise (though AMT may apply) and is taxed at long-term capital gains rates if the holding period requirements are met. A Non-Qualified Stock Option (NSO) is taxed as ordinary income at exercise on the spread between the exercise price and fair market value. ISOs are available only to W-2 employees; NSOs can be granted to anyone providing services to the company. Most private companies grant a mix of both.

The market standard for employee equity is a 4-year vesting schedule with a 1-year cliff — meaning no shares vest until 12 months of continuous service, after which 25% vests at once, and the remaining 75% vests monthly over the following 36 months. Shorter schedules (2–3 years) are used for senior executives or consultants engaged for defined projects. Performance-based vesting tied to revenue or EBITDA milestones is common for sales leaders and C-suite grants.

A 409A valuation is an independent appraisal of a private company's common stock fair market value, required by IRC Section 409A as the basis for setting a legally defensible option exercise price. Setting the exercise price below the appraised value triggers a 20% excise tax penalty and immediate income inclusion for the recipient — regardless of whether they ever exercise the option. For private companies, a 409A should be obtained before every new grant cycle and updated after any material event such as a new funding round.

For straightforward grants to employees under an existing equity plan, a high-quality template reviewed by counsel is typically sufficient. Legal review is strongly recommended for any grant to a non-employee, cross-border grant, executive grant with enhanced acceleration or severance, or any situation where the company is approaching a Rule 701 disclosure threshold. Securities violations in equity compensation carry personal liability — the cost of a 1–2 hour attorney review ($300–$600) is modest relative to the exposure.

A Section 83(b) election is a US tax filing that allows a recipient of restricted stock to pay income tax on the current fair market value of the shares at grant rather than at each vesting date. It must be filed with the IRS within 30 days of the grant date — the deadline cannot be extended for any reason. For fast-growing companies, filing the election can save the recipient tens of thousands of dollars in taxes if the share value increases significantly before vesting is complete.

Unvested shares are typically forfeited automatically upon termination of service and returned to the company's equity pool for no consideration. Vested options that have not been exercised must generally be exercised within the post-termination exercise window stated in the agreement — commonly 90 days for voluntary resignation — or they expire. For cause terminations, most agreements specify that all unexercised options (vested and unvested) expire immediately upon the termination date.

A stock option gives the holder the right to purchase shares at a fixed exercise price at some point in the future — the recipient must pay cash to acquire the shares. An RSU is a promise to deliver shares upon vesting with no purchase price required; the recipient receives shares (or their cash equivalent) automatically when the vesting conditions are satisfied. RSUs are simpler for recipients but create ordinary income tax liability at vesting equal to the full fair market value of the shares delivered.

Acceleration is a provision that causes unvested shares to vest immediately upon a defined trigger event. Single-trigger acceleration vests shares upon a change of control alone; double-trigger acceleration requires both a change of control and an involuntary termination within a defined window (typically 12–24 months after closing). Double-trigger is the market standard for most employees because it preserves acquirer retention incentives. Single-trigger is generally reserved for founders and is often negotiated out by acquirers before closing.