Designing An Appropriate Stock Option Plan

WHY HAVE A STOCK OPTION PLAN?  To convey “ownership” to key personnel  To provide investment upside to key personnel  To enhance compensation to key personnel  To establish a “golden handcuff”  To compensate directors, consultants, etc. in lieu of cash

KEY CONSIDERATIONS  What proportion of issued capital should be made available in stock option pool?  Who will Plan be targeted at?  CEO and senior management?  Outside Directors?  Middle management?  All employees?  Outside consultants/ contractors?

KEY CONSIDERATIONS-cont  How should available shares be allocated amongst target groups?  Initial pool  Future additions to pool  What should eligibility criteria be?  Position in Company?  Performance?  Term of service?  Recruitment/new hire?

KEY CONSIDERATIONS-cont  What should the vesting rules be?  At a prescribed date?  Incrementally over a period of time?  Procedures for persons leaving Company in middle of vesting period  What will the rules re timing of share purchase be?  Incrementally as options are vested?  Accumulation til end of vesting period?

KEY CONSIDERATIONS-cont  How should strike price be established?  Most recent issue price?  External valuation?  Internal formula?  Will pricing formula be locked into Plan document, or will Board and CEO have discretion from time to time?  Price must be seen to be fair to both option holders and existing shareholders

KEY CONSIDERATIONS-cont  Procedures at time of exercise  One annual date to ease administration?  Method of payment/financing?  RRSP eligibility of shares from perspective of both trustee and Company?  Shares issued in name of recipient or in street form?

OVERARCHING ISSUES  Authority Levels Unless covered by Bylaws or a Shareholders Agreement, Plan document must clearly assign authority levels amongst Shareholders, Board and CEO as to: - allocation of shares into stock option pool - number of share options to be granted at any given time, and to whom - issuance of shares

OVERARCHING ISSUES-cont  What are the future financing strategies of the Company?  Impact of lower priced options on valuation  Plan document should contemplate procedures related to forced expiration or exercise of options upon change of control

OVERARCHING ISSUES-cont  Financial Reporting Matters  Regulatory agencies and accounting standards are evolving towards full expensing of “cost” of stock options in annual financial statements  Impact is greatest on public companies concerned about earnings per share and valuation multiples  However, private companies could be impacted when raising capital or seeking bank financing

SUMMARY  Despite recent negative press, stock option plans remain a powerful way to reward key stakeholders of Company.  Keys to success are:  Clearly identify core objectives of plan  Design plan to meet those objectives  Remain sensitive to concerns of third parties not participating in Plan