Grant of option: Overview, definition, and example
What is a grant of option?
A grant of option refers to the formal offer provided by one party (the grantor) to another party (the grantee), giving the grantee the right, but not the obligation, to buy, sell, or otherwise act on certain terms specified in the agreement. Options are commonly granted in contexts such as real estate, stock options, or intellectual property agreements and are typically accompanied by specific conditions like an exercise price or time frame.
For example, a company might grant an employee the option to purchase a certain number of shares at a fixed price within a specific period.
Why is a grant of option important?
A grant of option is important because it provides flexibility and strategic advantages to the grantee, allowing them to act based on favorable conditions without being forced to commit immediately. For the grantor, it can incentivize actions, such as encouraging employee retention through stock options or securing potential buyers for property or assets.
Clearly defining the terms of the grant, such as the exercise period, price, and conditions, ensures that both parties understand their rights and obligations, reducing the risk of disputes.
Understanding grant of option through an example
Imagine a technology company grants an employee stock options as part of their compensation package. The grant of option gives the employee the right to purchase 1,000 shares at $10 per share, exercisable over the next five years. If the market price rises to $20 per share within that period, the employee can exercise the option to buy at the lower price, gaining significant value.
In another example, a real estate owner grants a developer an option to purchase a parcel of land for $1 million within two years. The developer gains time to secure financing and conduct due diligence, knowing the purchase price is locked in. If the developer decides to proceed, they exercise the option and purchase the land.
An example of a grant of option clause
Here’s how a grant of option clause might appear in an agreement:
“The Grantor hereby grants to the Grantee the option to purchase [Insert Asset or Rights] at an exercise price of [Insert Price], exercisable during the period commencing on [Insert Start Date] and ending on [Insert Expiration Date]. The exercise of this Option is subject to the terms and conditions set forth in this Agreement.”
Conclusion
A grant of option provides the grantee with a flexible right to act under specified terms, offering opportunities for strategic or financial benefits. For the grantor, it can incentivize desired actions or secure commitments without immediate obligations.
By including a well-drafted grant of option clause, businesses can ensure clarity, reduce risks, and create agreements that benefit both parties while maintaining legal compliance.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.