An Option to Purchase Shares is an offer from a company to a certain individual with an option to purchase from the company a pre-determined number of shares in that company at a pre-determined price.
An Option to Purchase Shares is a formal promise by a company to sell to the option-holder shares in the company at a particular price. It operates as a type of security that gives the holder the option, but not the obligation, to buy the shares at this particular price.
An Option to Purchase Shares will have an expiry date after which the option becomes null and void.
For example, a company may offer the option-holder an option to purchase one share in the company at an offered price with an expiry date of 1 October 2017. This means that, at any time before 1 October 2017, the option-holder can pay the company the offered price and require that the company issue him with a single share in the company. This is known as exercising the option.
A company can attract employees and incentivise existing employees or shareholders by giving them the opportunity to purchase shares in the company at a fixed pre-determined price and for a specified period of time.
An Option to Purchase Shares means there is no upfront cost to the option-holder upon receiving the Option to Purchase Shares, since the holder only needs to exercise their option to buy the shares when they choose to do so and at any time before the expiry date.
When drafting an Option to Purchase Shares, it is important to focus on a number of key clauses, in particular: