Can I Issue Stock Options Without A Plan?

Business Law Blog
Authored by Bryan Springmeyer
The information on this page should not be construed as legal advice.

The short answer is: yes, it can be done, but the tax and securities treatment will not be optimal without a plan.

Stock plans provide companies with a range of equity instruments that it can provide employees and consultants with.  The plan is designed to account for (and optimize) certain tax and securities issues. 

Securities: Any time company equity is issued, securities laws are implicated.  When securities laws are triggered, issuers must find an exemption to registration (registration is the cumbersome process of disclosure reporting that companies engage in for IPOs).  Rule 701 is a flexible self-executing (meaning no notice filings are required) exemption to federal securities registration.  Use of the exemption requires that there be a stock plan in place that exempted securities are issued from.

It is possible to issue securities to employees or consultants using different securities exemptions than Rule 701 and its state counterparts.  However, all other private-issuer exemptions will take into account certain characteristics of the recipients.  This will make compliance a case-by-case determination.

Taxes: When issuing stock options to employees, most plans and stock option agreements intend for the options to be treated as Incentive Stock Options (ISOs) as defined in the Internal Revenue Code §422. ISOs provide employees with more favorable tax treatment. ISOs are only available if granted pursuant to a plan.  If an option does not meet the statutory qualifications of §422, it is a nonstatutory option or nonqualified stock option (NSO).  Compensatory NSOs require the company to conduct a 409A valuation.

Usually, when my clients have simple employee equity needs, I implement a simple employee equity plan, rather than making grants and awards without one.  This allows them the flexibility of Rule 701 and the ability to grant ISOs.

Related Pages:

Considerations for Employees Reviewing Job Offers with Stock Options
Employee and Consultant Stock Incentives/Options
Should I Pay Employees with Options or Restricted Stock?
Restricted Stock vs. Restricted Stock Units (RSUs)
Taxation of employee ISOs, NSOs, and Restricted Stock