Option agreements are often high-volume contracts, particularly for high-growth tech companies. Can you save time by automating them?
This deep dive is from our specialist blog, Superpowered contracts, and looks at how option agreements are used at high-growth scaleups. We explore what the contract is for, who it affects, how it’s agreed and managed manually, and how and why companies choose to automate their workflow. Use the navigation below to find out more, or explore our deep dives on other contracts, like NDAs and employment offer letters.
What’s an option agreement?
An option agreement details the terms and conditions that give a party a right – though not an obligation – to buy an asset. The term ‘option agreement’ is used in lots of contexts, from property transactions to financial derivatives. But we see option agreements and their automation most frequently discussed in reference to the contracts that startups and scaleups use to give share options to their employees.
For the company, issuing share options is a great way to align the incentives of the business with those of its employees – and to give them a stake in the company’s success. It distributes equity, but in a limited way. While a company might want its employees to have a degree of ownership, for all sorts of reasons, it probably doesn’t want them to have voting rights or to be able to exercise their options short-term, for example. This is why options tend to come with vesting cliffs.
Companies also get favourable tax treatment when they issue options, rather than shares. In the US, this is achieved through a 409A valuation; in the UK, it’s the EMI scheme. Different jurisdictions have different approaches.
Even in innovative, tech-driven companies, the issuing of share options is often unfortunately still often governed by a manual process involving lots of paperwork
Who do option agreements affect?
Option agreements affect various people across the business, usually including:
Legal counsel. The in-house legal team will own the template, likely with input from outside counsel when the employee option pool is created or changed.
People team. The people team will likely be responsible for sending out option agreements to current or new employees. They’ll also work with legal to vary option arrangements at scale from time to time – check out this case study to see how.
CFO. The company’s chief financial officer (if it has one) will usually be responsible for management of the cap table, so she’ll want to monitor option agreements closely.
Board of directors. The company’s board members will be interested in the precise details of ownership options, particularly as they approach funding rounds.
Employees. New joiners will be issued options and existing employees might be granted additional option awards as they progress in the company.
The party opposite the employee is usually the corporate legal entity, with the CEO or CFO as the authorized signatory.
What’s the manual process for option agreements?
Even in innovative, tech-driven companies, the issuing of share options is often still governed by a manual process involving lots of paperwork.
The option agreement template exists as a Word document on a shared drive, or perhaps on a team folder owned by legal or HR. The business’s people team will amend this template to create an individual’s contract. Comments on and changes to the document will, for the most part, happen within these people teams; options are an employee incentive, so minor amends probably don’t need legal approval.
Some more senior employees might, however, negotiate their option agreement. Points like accelerated vesting, good/bad leaver provisions, the timing of exercise and even the strike price may be negotiated in certain circumstances.
The Word document will then bounce between the employee, the people team, legal for review and perhaps even the leadership team. Different versions will be created, with tracked changes denoting amendments, until finally it makes its way to a hard copy or a PDF, is signed by both parties and saved to a shared drive.
It’s hard to preserve contract metadata with a manual process, and this means the company misses out on spotting bottlenecks and making the process more efficient
Why it’s painful to manage option agreements manually
Managing option agreements manually creates difficulties for various teams. These problems get worse as the company grows and more employees are issued with options.
Multiple tools create friction
Moving between versions in Word, email, PDFs and shared drives is a slow process, particularly when there are lots of parties amending and reviewing – legal, HR, employees and perhaps leadership. Chasing documents between these systems slows the process of getting the contract agreed.
Valuable data is lost
As the contract moves between systems, valuable information about which clauses were negotiated or changed, by whom and when. It’s hard to preserve contract metadata with a manual process, and this means the company misses out on spotting bottlenecks and making the process more efficient.
It’s a burden on legal
Although options schemes are complex – and increasingly so as companies scale – the contract itself is relatively straightforward. It’s a bad use of legal’s precious time to be digging out templates and resolving the same basic queries about option agreements over and over again.
These problems often lead innovative legal teams to automate.
How to automate option agreements
By setting up a frictionless workflow, legal teams can automate option agreements and allow colleagues in the people team to self-serve from one system of record.
Create a watertight template
The in-house legal team will still retain ownership of option agreement templates. It’s likely that the first option agreements were issued before the first lawyer joined the company; legal will often rely on the core structure of this agreement going forward, making changes to reflect business priorities. The legal team will create the master template in their contract collaboration platform.
Empower people teams with self-serve
People and talent teams will be contract creators, self-serving on new contracts from the template defined by legal. People and talent teams can make changes to key fields like name, date, share options amount, and so on. It may be faster to do this through a natural language Q&A flow.
Set up approvals – just in case
The approvers for this contract workflow will likely be legal, but they might also include the CFO – for cap table management – and perhaps the board of directors, who will want to oversee company ownership more broadly. If points have been negotiated, the same stakeholders will want to approve those deviations.
Teams looking to automate workflow should look out for the following features in a contract collaboration platform:
Q&A flow. Creating a simple set of questions will allow people teams to self-serve perfect documents from a watertight template in minutes.
Approvals. With an approval workflow you can make sure legal and leadership retain oversight of share option awards.
Mass generation. Venture-backed companies will sometimes vary options at scale – perhaps to give everyone an additional equity award or to change the exercise rights. Being able to do this en masse, instead of individually, is a massive time-saver.
Mass signing. Similarly, the CEO or CFO signing all those agreements doesn’t want to trawl through them manually, one by one. With a contract collaboration platform like Juro, mass actions mean you can generate, approve or sign dozens or hundreds of contracts at a time with a few clicks.
Date reminders. You can use the renewal reminders feature of your contract collaboration platform to alert you when key vesting dates approach.
Table views and custom dashboards. Custom dashboards allow you to filter option agreements by various different information – like the number of options, vesting date, signing status, and so on.
Google Drive. Automatically saving key documents about the cap table so they’re all in one place is invaluable when it comes to due diligence and data rooms for future funding rounds.
HR systems. Option agreements are part of ongoing incentive management, so it’s useful if they can integrate with the systems that people teams use every day.
Slack. Notifications in Slack are a great way for stakeholders to monitor progress through a mass options issue, for example.
Why automate option agreements?
Automating option agreements offers massive benefits – which explains why they’re often one of the first workflows that legal teams choose to automate.
Maintain a system of record. Keeping all options agreements in one searchable database removes the risk of contracts going missing and key data being lost. Visibility pre- and post-signature is no longer an issue.
Enable your people team. Empowering people and talent to self-serve on these documents removes friction between teams and makes sure paperwork doesn’t slow things down when it comes to finding, incentivising and retaining talent.
Free up legal time. Without having to worry about chasing Word documents across multiple systems, legal teams can focus on high-value work – like the fundraising rounds that affect share options in the first place!
Give candidates a great experience. It’s a poor introduction to a high-growth, innovative tech business if candidates have to sign a confusing paper document and keep it in a cupboard somewhere. Automated workflows make a great first impression – employees should feel like you’re offering them a chance to thrive, rather than trapping them in a fusty contract.
Automate your supplier agreements with Juro
Is managing routine contracts at scale a pain point for your business? Is your SaaS company or marketplace growing so fast that the contract process is out of control, with friction pre-signature and a lack of visibility post-signature?
If so, try Juro for free and see if you could benefit from a contract collaboration platform that enables businesses to agree and manage contracts all in one unified workspace.