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Companies design Equity Incentive Plans ("Plans") to provide key, upper-level employees an equity interest in the company. The purpose of these plans is to motivate these employees to perform their best tie these employees' financial futures to the stock price of the company. As any transactional attorney knows, often the "Definitions" section of an Incentive Plan is the most important part. How key terms are defined make all the difference in applying the plan to the employees. This article will take a look at the key terms generally found in Equity Incentive Plans and will define these terms, hopefully assisting drafters who may be unfamiliar with some of them.

The following terms are generally found in Equity Incentive Agreements and are defined as such:

"Affiliate" - Affiliate generally means any corporation in an unbroken chain of corporations ending with the company, other than the company that owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the corporations in such chain.

"Board" - Refers to the Board of Directors of the Company

"Change in Control" - Defining this term is very important to the substance of the agreement and doing it properly generally takes several pages. A change of control of the company can occur in a number of ways: (a) if any person becomes the owner of securities of the Company representing more than 50% of the combined voting power of the company's outstanding securities other than by virtue of a merger, consolidation, or similar transaction; (b) a merger, consolidation, or similar transaction involving the company whereby the merger or consolidation results in another company owning more than 50% of the combined voting power of the surviving entity; (c) the stockholders or Board approve a plan of sale, complete dissolution or liquidation of the Company; or (d) the individuals on the Board at the time the Plan is approved cease to constitute at least a majority of the members on the Board.

"Code" - refers to the latest adopted Internal Revenue code.

"Continuous Service" - means that the participant's service with the Company, whether as an employee, director, or consultant is not interrupted or terminated.

"Fair Market Value" - refers to the price of the stock, as is defined as the closing sales price for the company's stock as quoted on the appropriate exchange, as reported in The Wall Street Journal.

"Incentive Stock Option" - means an option intended to qualify as an incentive stock option within the meaning of Section 422 of the IRS Code.

"Option Agreement" - is generally defined as a written agreement between the Company and an Optionholder evidencing the terms and conditions of an option grant.

"Optionholder" - means a person to whom an option is granted pursuant to the plan.

"Participant" - means a person to whom a stock award is granted pursuant to the Plan.

"Performance Goals" - means the one or more goals established by the Board of Directors for the Performance Period based upon the Performance Criteria

"Stock Award" - means any right granted under the Plan, including an Option, a Stock Purchase Award, Stock Bonus Award, Stock Appreciation Right, or any other Stock Award.

These are the definitions for the most common terms found in Equity Incentive Plans. Before adopting one of the above-mentioned definition, be sure to consult the Board of Directors or Plan Administration Committee of your client to ensure correct usage.

An Equity Incentive Agreement is a contract between a key employee and his employer, where the employer provides the employee with an equity share in the society around him or her to work for a high level of motivation to on-the-job performance. The idea is that if the financial participation of workers, usually a director, manager or other high-level executive, is linked closely with the financial future of the company, that employee representatives have the incentive to workdifficult financial situation of the company to achieve goals. The package will be offered to an employee as an Equity Incentive Agreement described, will normally contain a mixture of shares and options, and carefully adapted to the growth of such firms are set to reward the employee for reasonably good performance .

For the elaboration of such arrangements, it is important that the following provisions:

1. Purpose. The purpose of the agreement, namely, motivation and reward the employees and allowthe company to attract and retain able persons as employees, directors, and consultants, should be explained at the top of the agreement.

2. Definitions. Key terms should be defined in this paragraph. Such terms could include "annual incentive award," "beneficiary," "change of control," "contribution agreement," "covered employee," "effective date," "restricted stock", and several others.

3. Plan Administration. The name of the committee that will be administering the equity Incentive plan should be addressed. In general, the Board of Directors of the company will be a committee for the purposes of the plan. This provision should discuss who to include in the Committee or, as it is to define the scope of authority of the Committee, amend or repeal rules and regulations governing the plan and the limitations on the liability of the committee.

4. Delivery by arrangement. The total number of shares, the application ofRestrictions on grants of awards, the availability of the offered shares issued under these awards, and the exact nature of the camp should be all covered in this section.

5. Exercise of the option. If the agreement provides for granting stock options, you must include the right of the worker and the method to train.

a. a legal exercise. This provision should state how long to exercise the option and refer to a vesting schedule, if applicable.

b. Type of exercise. ThisProvision should specify how the option is exercised, either by delivery of written or electronic form.

6. Change of Control. The agreement should, what impact a change of control of the address of the company, as defined in, would have on the agreement. Would the agreement still exist? Would it be terminated? Some provisions could be accelerated? The agreement should address this scenario.

7. Entire Agreement / Governing Law. The final determination should be made to the employeeincentive plan is incorporated into the agreement by reference and that the plan and the agreement constitute the entire agreement of the parties with respect to the subject matter hereof, superseding in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter addressed. The provision should also refer to the jurisdiction whose laws will govern the agreement.

These are some of the most important provisions found in Equity Incentive. Above all, the author of the Equity Incentive Plan will be incorporated by reference into the Agreement, and shall carefully draft any provision on the intentions of the parties into account.