SINGAPORE Law and Practice Contributed by: David He, Benjamin Teo, Kinnari Sahita and Binh Vong, Gunderson Dettmer Singapore LLP
5.2 Securities Share Options
earned out over a number of years through time- based vesting. Other employees are granted options when they commence their services to the company, also subject to time-based vesting. After the company has raised funding, options are typically granted in lieu of shares because under the tax laws of most countries, the appreciation in value of options becomes taxable only at exercise, whereas the increase in value of shares is taxable as the shares vest. At the time of a financing, re-vesting of all or a portion of vested equity may be required. The amount and duration of a re-vest are terms typi - cally negotiated in a term sheet. Founders and key employees may also negotiate for: • “single trigger” acceleration, where all or a portion of unvested equity accelerates and becomes vested upon a liquidity event; or • “double trigger” acceleration, where unvested equity accelerates if a founder/key employee is terminated immediately before or within a period following a liquidity event. In some cases, founders/key employees may negotiate for partial single or double trigger on a portion of unvested equity. Acceleration fea - tures are meant to incentivise employees to work towards a successful exit event, with the assur - ance that they will not be denied an opportunity to earn out or realise unvested value. Founders and key employees diluted over time may be rewarded with refresh equity. Such equi - ty may be subject to milestone and KPI vesting terms or to non-traditional time-based vesting schedules.
Options are the most common form of equity awards for start-up employees, and form an important part of an employee’s compensation package. Most grants are subject to a vesting schedule with “cliff” , whereby a portion vests on the one-year anniversary of the employee’s employment with the company, and the remain - ing vests monthly or quarterly in equal instal - ments thereafter. Vested options may be exercised for shares. Companies typically require employees who have left the company to exercise options within a 60- to 90-day timeframe, failing which, options lapse and are deemed forfeited. The intention is to ensure that departed employees who are no longer contributing to the business do not benefit from the continued upside. Strike Price To exercise an option, the holder typically needs to pay an exercise price or strike price set at the time of the option grant. Employees sub - ject to US tax may only receive options with a strike price at or above fair value, but Singapore and most other countries do not have specific requirements relating to the setting of the strike price. A nil or nominal strike price is not uncom - mon in Singapore and is highly beneficial for option holders. However, having a meaningful strike price (even if at a discount to fair value) rewards earlier employees and may better align the incentives of later employees. Acceleration In contrast to founders and key management, acceleration of vesting for rank-and-file employ - ees is uncommon. Investors view acceleration terms as being dilutive to their interests at the time of exit, and a potential acquirer will also
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