Incentivise your team and encourage growth by putting an equity plan in place and allocating share options.
What are Share Incentive Plans and Grant Agreements?
A Share Incentive Plan (also known as a “SIP” or an “ESOP”) sets aside a pool of share options that you can allocate in the future to employees, directors, advisors and consultants (“participants”), incentivising contributions to a startup's success and growth. These equity incentives also allow startups to hire talent at lower salaries.
A Grant Agreement allows you to then allocate options from the SIP pool to a particular participant.
Why generate these documents?
Generate these documents to attract, incentivise and retain team members, and empower them as part owners.
Share Incentive Plan (SIP)
What does a Clara SIP do?
Empowers the board to get the SIP in place, identify participants, allocate grants, sign Grant Agreements under the SIP and amend the SIP where necessary.
Restricts a participant from selling their shares without the approval of the board.
Sets out the good leaver and bad leaver triggers: participants who leave the company are categorised as “good” (meaning their time with the startup has naturally come to an end, resigned after any lock-up periods or were terminated without cause) or “bad” (meaning they are not leaving the startup in good circumstances, e.g. they committed a material breach).
Confirms that a leaver will lose their unvested shares.
Permits buy-back of the vested shares of a participant who leaves (at fair market value for good leavers and at nominal value (i.e. virtually nothing) for bad leavers).
Additional info - SIPs
Once you’ve put a SIP in place, the share options set aside in the pool will count as part of your fully diluted capitalisation. This means that all existing shareholders will effectively be diluted by the number of share options in the pool, including those that remain unvested.
Clara recommends...
Considering the buy-back right carefully. Some startups prefer not to have a buy-back right over vested shares for a good leaver (so that the participant can be assured that they can keep their vested shares and share in the upside as the startup grows and eventually exits). On the other hand, the buy-back allows a startup to clear people who are no longer part of its journey from its cap table, leaving room to re-allocate the shares to new joiners.
Grant Agreement
What does a Clara Grant Agreement do?
Sets out the participant’s allocated options, the vesting schedule, exercise price and exercise mechanics.
Gives the startup the right to buy-back (i.e. a call option) any shares issued to a participant under the Grant Agreement , when they leave the company.
Provides for a drag along on the participant’s shares in the case of an exit. This means that they can be forced to sell their shares at the same price and on the same terms as the other shareholders.
Permits the startup to require the participant to sign any other documents that may be required in the future (e.g. a shareholders’ agreement).
Is governed under English law with a dispute resolution mechanism using expedited ICC arbitration procedures to be held in a place you can select in the form.
Additional info – SIPs and Grant Agreements
Since the participant’s shares under the SIP are typically non-voting shares and cannot be transferred without board approval, there is generally no need to have participants sign your shareholders’ agreement (or similar governance document). However, should it ever be required, the Grant Agreement gives you the power to require participants to sign it in the future.
Clara’s SIP and Grant Agreement are designed for the exercise price to be the par value of the shares (i.e. virtually nothing: an essentially “free” grant of shares). This is a common approach where your startup’s topco is in a low or no tax jurisdiction (e.g. Cayman Islands, BVI, ADGM).
While you can select any exercise price (e.g. the fair market value or a percentage of it), the participant would still be required to pay this amount within 3 months of each vesting date.
If you intend to allow a participant not to pay the exercise price until an exit and instead, have it set off against any proceeds from the exit, you will need to consult with a lawyer to amend the exercise mechanics in the Grant Agreement.
Clara recommends...
Advising each participant to obtain their own tax advice. Participants may have tax implications arising from their grant of options and any exercise of these options.
Signing a ‘Team Agreement’ (e.g. Consulting Agreement for a consultant, Employment Agreement for an employee (Clara has one for Abu Dhabi Global Market and for Dubai International Financial Centre), Advisory Agreement for advisors etc.), to formalise the services being provided to your startup.
How do you put these documents in place?
Generate the SIP (this will automatically create the SIP, an FAQ explaining its key terms in plain language and a board resolution for your startup’s topco to adopt the SIP).
Adopt the SIP (the SIP is not itself signed - adoption happens through a board resolution of your startup’s topco, which attaches the SIP and a template of the Grant Agreement to be entered into with each participant).
Now you are ready to start allocating share options under the SIP to participants.
Next, generate a Grant Agreement.
Agree the terms of the Grant Agreement with the participant.
Once the draft is finalised, sign the Grant Agreement with the participant, through Clara’s DocuSign integration.