3. Employee Stock Ownership Plan – Entity Considerations
• Chinese limited company
• Cayman exempted company
• U.S. corporation
– C-corporation
– S-corporation
– LLC
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4. Employee Stock Ownership Plan – Legal Considerations
• PRC – restrictions on foreign exchange, including ownership of
offshore securities
• US – securities law
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5. Employee Stock Ownership Plan – Tax Considerations
• PRC taxation on sale of stock
• US taxation of option and stock
– Options
• Incentive Stock Option
• Non-Qualified Stock Option
• 409A Valuation
– Restricted Stock
– Restricted Stock Units
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6. Employee Stock Ownership Plan – Corporate Governance Considerations
• Special consideration for ESOP for PRC entities
– Registered capital
– Shareholder rights
– ESOP holding company
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7. Employee Stock Ownership Plan – Sample Plan Summary
2
Size of Share Pool 919,000 shares.
Securities
Regulations
The Plan and the form(s) of Stock Option Agreement are designed to comply with SEC Rule 701
and the rules under Section 25102(o) of the California Corporations Code, as amended in July
2007.
Types of Grants 1. Incentive Stock Options (ISOs),
2. Nonstatutory Stock Options (NSOs), and
3. Shares of Restricted Stock.
Administration The Board of Directors or a committee consisting of at least one director.
Eligibility 1. Employees,
2. Non-Employee Directors, and
3. Non-Entity Consultants.
ISOs are available only to employees.
Exercise Price of Options The minimum exercise price of all options is 100% of fair value at the time of grant (110% of fair
value for ISOs granted to 10% stockholders).
8. Employee Stock Ownership Plan – Sample Plan Summary
2
Vesting of Options [Alternative 1: If Company primarily intends to grant installment exercisable options.]
1. [In general, the Company intends to grant options that become exercisable only after the
shares have vested (“installment exercise”), with 25% vesting after a one-year cliff and equal
monthly increments vesting over for the next three years.
2. The Plan also permits the grant of immediately exercisable options (“early exercise”).
Unvested shares will be subject to repurchase at the lower of the then-fair market value or
the exercise price if the optionee’s service terminates for any reason. The optionee should
make a Section 83(b) election.]
[Alternative 2: If Company primarily intends to grant early exercisable options.]
1. [In general, the Company intends to grant immediately exercisable options (“early exercise”),
with 25% vesting after a one-year cliff and equal monthly increments vesting over the next
three years. Unvested shares will be subject to repurchase at the lower of the then-fair
market value or the exercise price if the optionee’s service terminates for any reason. The
optionee should make a Section 83(b) election.
2. The Plan also permits the grant of options that become exercisable only after the shares have
vested (“installment exercise”).]
9. Employee Stock Ownership Plan – Sample Plan Summary
2
Term of Options Maximum term is 10 years (5 years for ISOs granted to 10% stockholders).
Post-Termination Exercise
Grace Period
3 months, except 6 months in case of disability and 12 months in case of death.
Corporate
Transactions
In the event of a merger or consolidation or in the event of a sale of all or substantially all of the
Company’s stock or assets, options will be treated as described in the definitive transaction
agreement or as determined by the Board of Directors, including in one or more of the following
ways:
The continuation of the options by the Company, if the Company is the surviving corporation.
The assumption of the options by the surviving corporation (or its parent).
The substitution by the surviving corporation (or its parent) of new options for the
outstanding options.
The cancellation of the options and a payment to the optionees equal to the option spread as
of the closing date. The payment may be made in the form of cash or securities of the
surviving corporation (or its parent). Such payment may be subject to any escrow, holdback,
earnout or similar contingencies to the same extent and in the same manner as such
provisions apply to stockholders.
The cancellation of the options without the payment of any consideration.
Option vesting generally does not accelerate in the event of such transaction. However, the Board
may provide for full or partial acceleration in a particular case at the time of granting an option, on
a single-trigger or double-trigger basis.
10. Employee Stock Ownership Plan – Sample Plan Summary
2
Payment of
Exercise Price
1. Cash,
2. “Stock swap” (paying the exercise price with shares already owned), or
3. Same-day sale (only possible after an IPO).
The Plan also allows the use of promissory notes and permits “net exercise,” but the Company
does not intend to use those features for now.
Transfer
Restrictions
1. The Company has the right of first refusal on option shares.
2. The optionees are subject to a market stand-off (lock-up) in the event of an IPO.
Stockholder
Approval
Stockholder approval is required within 12 months after adoption of the Plan (but should occur as
soon as possible for accounting reasons).
