As a startup nation, the issue of employee stock options plan (ESOP) in high-tech companies is not strange to the Israeli corporate world. This topic entailed many details to which sometimes employers do not pay attention or do not understand their importance. One of such is the exercise of the options.
An option within an ESOP, like any other option in a company, is in fact a contract between the company and the recipient of the option, under which the company offers to purchase shares therein within a certain period and at a certain price. The option becomes especially attractive where the company becomes public, so that the shares are tradable, and certainly when it is a growth company which share value is rising. The exercise dates of the options are stipulated in the company's ESOP and in the options agreement executed thereunder (and the correct drafting of both, by a lawyer with experience in the field, is vital to avoid conflicting provisions), with such usually stipulating a vesting mechanism according to which it is not possible to exercise all options immediately, but only after a certain period and/or compliance with certain terms and conditions, and generally expire (if not exercised) several months after the end of the employment (or immediately, if the employee was terminated under circumstances of breach of contract).
In the matter discussed at the Regional Labor Court in Tel Aviv-Yafo in July, 2024, a claim filed by a former employee of a high-tech company to exercise options several years after termination was dismissed. Nevertheless, the Court emphasized that there is an obligation of the company to inform the employee of his right to exercise the option and specifying the time limits. Another example is a matter discussed at the High Court of Justice in April, 2008, concerning an Israeli startup company that was purchased by Microsoft Global and incorporated as a division of Microsoft Israel. The merger agreement stipulated that the options would be converted into Microsoft options. The employee contended that he was terminated in order to prevent him from exercising the options, but the National Labor Court decided that the termination was duly made and that because his work ended several months before the options vested, under the specific agreements that regulated the entitlement in Microsoft's option plan, he is not entitled to exercise the options.
Another important matter is the date from which the deadline for exercising the option is counted. In a matter discussed at the National Labor Court in August, 2009, about an employee who was hired for a set period but was terminated before the period ended, the Court found that the date from which the period in which he can exercise the options after termination commences is the end of the pre-agreed set period and not the actual date of termination. This decision may also be of great importance in the event that an employee is unduly terminated (e.g. without prior notice) and he may contend that the period should be counted from the date that should have been the correct date of termination.
In conclusion, option agreements sometimes seem standard, but they are a complex set of contracts which drafting may be crucial. Therefore, when drafting an option plan, when allocating options and also when terminating employees who hold options, it is extremely important to consult an attorney who has expertise on the subject, as well as in corporate and labor laws, and who knows how to construct a synchronized set of agreements, but also handle delicate issues of termination of employees who hold options.