The Incentive Stock Option Agreement is a crucial document used by Canadian companies to grant employees the right to purchase company shares at a predetermined price as part of their compensation package. This agreement is commonly implemented when companies wish to align employee interests with shareholder interests, attract and retain top talent, or conserve cash while providing competitive compensation. The document must comply with Canadian federal and provincial securities laws, tax regulations (particularly Section 7 of the Income Tax Act), and relevant stock exchange rules if the company is publicly traded. It typically forms part of a broader equity compensation strategy and must be approved by the company's board of directors. The agreement is particularly important for start-ups, growth companies, and established corporations looking to incentivize key employees through equity participation.
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1. Parties: Identification of the company granting the options and the employee receiving them
2. Background: Context of the agreement, reference to the stock option plan, and board approvals
3. Definitions: Key terms used throughout the agreement including 'Option', 'Option Shares', 'Exercise Price', 'Vesting Date', etc.
4. Grant of Option: Details of the stock option grant including number of shares, exercise price, and grant date
5. Vesting Schedule: Timeline and conditions for when options become exercisable
6. Exercise of Option: Procedures and requirements for exercising the options
7. Term and Expiry: Duration of the option and circumstances of expiration
8. Termination of Employment: Treatment of options upon various types of employment termination
9. Compliance with Laws: Requirements for compliance with securities laws and regulatory requirements
10. Tax Matters: Tax implications and responsibilities related to the options
11. Non-Transferability: Restrictions on transfer or assignment of options
12. Shareholders' Rights: Rights (or lack thereof) of option holders prior to exercise
13. General Provisions: Standard contractual terms including notices, amendments, and governing law
1. Change of Control: Provisions dealing with acceleration or special treatment of options in case of company sale or merger
2. Non-Competition and Non-Solicitation: Restrictive covenants tied to the option grant, if applicable
3. Clawback Provisions: Terms allowing company to recoup benefits in cases of misconduct or restatement
4. International Provisions: Special terms for option holders in different jurisdictions
5. Electronic Exercise Provisions: Procedures for electronic exercise of options if company allows this method
6. Market Standoff Agreement: Restrictions on sale during public offerings, typically for private companies planning to go public
1. Notice of Exercise: Form to be completed by option holder when exercising options
2. Option Grant Details: Specific details of the grant including number of shares, exercise price, and vesting dates
3. Tax Election Forms: Required tax forms including Section 7 election forms for Canadian tax purposes
4. Stock Option Plan: Copy or summary of the company's stock option plan
5. Consent of Spouse: Spousal consent form if required by applicable law or company policy
6. Accredited Investor Questionnaire: Form to confirm accredited investor status if required by securities laws
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