In certain companies, such as ones experiencing high growth, or ones dealing with technology, it is common to have to deal with a high volume of contracts. In most cases, these types of companies can benefit significantly from automation, which, amongst other things, can help save time and improve efficiency.
In this article, we will look at how high growth scale-ups use option agreements. Specifically, we will look at why they are used, whom they concern, how they are agreed upon and managed, plus how and why companies may automate their workflow.
What is an Option Agreement?
An option agreement gives a party the right to buy a particular asset, according to a set of terms and conditions. It is not an obligation. Option agreements can be used in many different scenarios, including financial derivatives or transactions involving property.
They are commonly used in scale-ups and startups to provide share options to staff who work there. They provide an incentive to staff so that they have a stake in the company’s success. In other words, they are a somewhat controlled way of distributing equity.
Staff may be granted some degree of ownership within the company. However, companies do prefer to keep this limited. Vesting cliffs are typically used, for example, if voting rights don’t need to be provided, or the ability for staff to exercise a short term opinion.
Companies often favour options over shares as they offer tax incentives. For example, the 409a valuation in the US, or the EMI scheme in the UK. Ultimately, different approaches are used in other jurisdictions, so if you’re unsure about what applies in your area, it would be worth researching your options.
Considering just how many benefits automation can bring to option agreements, it’s surprising just how many tech-driven and innovative companies are still using paperwork and manual processes.
Who is Likely to Have to Deal with Option Agreements?
There are several different people right across an organization who may have input. Such as:
- Chief Financial Officer. If the organization has a CFO, they’re the one usually responsible for closely monitoring option agreements or managing the table cap.
- As new staff join, they may be issued with options. As existing staff progress within the company, they may have the chance to achieve additional options.
- Legal Counsel. With the potential input from outside counsel, the legal team are the ones who make use of templates whenever a staff option pool is amended or created.
- Board of Directors. These people are usually heavily interested in ownership options, particularly as funding rounds are being approached.
- People Team. This team is responsible for distributing option agreements among existing and new employees. They may also work with legal from time to time when options at scale need to be considered.
- Authorized Signatory. This is usually the CEO or CFO, or another party opposite employee.
How a Manual Process Works for Option Agreements
The problem with issuing share options manually is that the process involves a lot of paperwork. It’s surprising just how many tech-driven, innovative companies are still doing this.
Typically, a document is used for the option agreement template, which may sit in a shared folder or on a shared drive. For each person requiring a contract, the template has to be edited as appropriate. The people team are the ones who usually have to make changes, with minor amends not requiring any kind of legal approval.
For more senior staff, they may feel the need to negotiate their agreement. Or, negotiation might occur under a particular set of circumstances. For example, negotiating strike price, accelerated vesting, good or bad leaver positions or timing of exercise.
Once the negotiation is complete, documents then move between the employee, people team and finally the legal department for review. The leadership team may also want to see it. Along the way, different versions will probably be created, and any amendments will be managed using track changes. Once everyone has reviewed, the contract is then produced as a hard copy, signed by all parties, then filed away.
There are several problems managing these types of contracts manually. Metadata is challenging to preserve, while it is more difficult to identify bottlenecks or make changes to make the process more efficient.
Difficulties of Manually Managing Option Agreements
As the company grows, the ability to issue options becomes more and more difficult.
As many different tools are usually needed throughout the process, it’s common for friction to occur between departments. Furthermore, the process can be slow, considering that staff have to move around between many different platforms. To make matters worse, many other departments also need to input around amends and reviews.
Valuable data can become lost because contracts are always moving between different systems, and it can be challenging to discover when clauses were changed by certain people or the time they were made. This makes accountability more difficult. Additionally, metadata is challenging to preserve, as is spotting possible bottlenecks, which can make the entire process more problematic.
Finally, manually managing contracts can also cause legal implications. Yet, despite option schemes being reasonably complex, significantly when businesses are scaling, the arrangements themselves are actually quite simple. Legal departments can waste time having to find templates and answer basic questions surrounding option agreements over and over again. This is not very productive, as legal departments are restricted with time and need to use it on high-value activities.
It is usually this very issue which results in legal teams automating this process.
How do Organizations Automate Option Agreements?
Legal teams can automate their agreements by setting up a frictionless workflow, which allows the people team to use self-service contract generation from only one system record.
Legal teams can use one master template within a contract collaboration platform to create agreements, and they have full ownership of this. Changes can be made along the way as business priorities change and all edits are tracked and audited.
The legal team creates the contract template, then allows the people and talent teams to edit them with self-serve functionality. All key fields can be changed, yet the workflow is made quicker, while natural language can still be used.
Legal departments are usually the ones who approve the workflow. However, cap table management might also require input from the CFO or board of directors who typically oversee broader ownership. Other stakeholders might be involved as well so that they can review any negotiations or deviations.
Useful Features of Automated Option Agreements
Teams wishing to automate their workflow should look for these features within a content collaboration platform.
- Q&A Workflow. Using an existing template, the people team will be able to create new contracts using a self-serve approach, by simply answering several basic questions.
- Leadership and legal teams will be able to gather full oversight of share option awards.
- Mass Generation. Some companies, particularly venture-backed ones, need to vary options at scale. For example, they might want to offer everyone an added equity award or change their exercise rights. Doing these kinds of tasks in bulk, rather than individually, helps save a lot of time.
- Mass Signing. Mass actions are an essential part of a content collaboration platform, allowing potentially hundreds of contracts to be generated, approved and signed in only one click. This saves the CEO or CFO from having to check every agreement manually.
- Date Reminders. Most platforms feature a ‘renewals reminders’ feature which reminds users of important dates which may be approaching.
- Custom Dashboards & Table Views. Option agreements can be viewed in different ways thanks to features such as vesting date, number of options and signing status, amongst many others.
Integrations to Look Out for
Google Drive can be very useful as it saves all documentation automatically in one central location. It also has benefits when it comes to data rooms or due diligence for future funding rounds. Also, look out for integration with HR systems or Slack. Notifications can provide stakeholders with progress updates; for example, those associated with mass options.
Why is it Important to Automate Option Agreements?
There are many different benefits to automating your option agreements.
Firstly, they help provide a system of record. All option agreements are stored in the same location, and they can also be searched, meaning there is a lower risk of contracts becoming lost or critical data being lost. Visibility of signatures either before or after signing no longer becomes an issue.
People teams can self-serve, and friction between other teams is minimized. Activities like finding, incentivizing or retaining talent becomes more efficient, while legal teams have more time to complete important activities.
No longer will they need to worry about having to follow up documents over multiple different systems. Instead, they can focus on high-value work, such as fundraising rounds which can impact share options.
The overall candidate experience is improved, as the need to sign complex paper documents is taken away, and automatic workflows help to create a better first impression. Rather than staff feeling like they are tied into a contract, instead they feel empowered, with an opportunity to thrive.