Venture capital firm ON&BOARD (Headquarters: Toranomon, Minato-ku, Tokyo; Co-CEOs: Masato Shimodaira and Kosuke Nakayama; hereinafter “ON&BOARD”) and law firm ZeLo (Headquarters: Toyosu, Koto-ku, Tokyo; Managing Partner: Masataka Ogasawara; hereinafter “ZeLo”) have jointly developed and released a template agreement for tax-qualified stock options (SOs), the “SO ONBOARDING KIT,” which reflects the 2024 tax reform and the latest related regulatory guidance. The template is available for free download via the provided link.

For more details about the “SO ONBOARDING KIT” (Stock Option Onboarding Kit), please click here:

Background of the Release

Stock options (SOs) are widely used by startups as an accessible tool for designing compensation and incentive plans for executives and employees. However, their structure involves complex tax and legal requirements, making it difficult to determine how to properly design and manage them. In particular, tax-qualified stock options, which offer favorable tax treatment, involve a wide range of considerations—such as exercise price and custody requirements—leading many to view them as challenging to implement.

However, in recent years, the requirements for tax-qualified stock options have been significantly relaxed as part of initiatives to support the growth of startups. These changes include clearer guidelines on determining exercise price, an increase in the annual exercise value limit, and the easing of custody requirements.

In addition, as mergers and acquisitions (M&A) are increasingly considered a viable exit strategy, there is growing demand for designing stock options in a way that allows employees to benefit from their incentives in the event of an M&A.

In response to these developments, ON&BOARD and ZeLo have jointly released a practical and flexible stock option agreement template that reflects the latest regulatory updates. This joint initiative was driven by our shared desire to support startups and provide them with a useful resource for designing effective stock option plans.

Along with the release of the template, we have also prepared a dedicated webpage that outlines the fundamental concepts of stock options and key considerations for entrepreneurs. We encourage you to take a look.

Key Points on Stock Options Based on the 2024 Tax Reform

1. Increased Flexibility in Setting the Exercise Price
   Regardless of the share price in the most recent funding round, it is now possible to set a lower exercise　price based on net asset value, which is expected to enhance employee incentives.
2. Increase in the Maximum Allowable Exercise Value
   The annual exercise value limit for tax-qualified stock options has been raised to a maximum of 36 million yen, allowing for more flexible stock option grants even at higher valuations, such as those in the N-2 fiscal period and beyond.
3. Relaxation of Custody Requirements
   The procedural hurdles for exercising stock options before a company goes public have been significantly lowered, making it easier to exercise options in the context of M&A or before expiration.
4. Eased Grant Requirements for Highly Skilled External Personnel
   With the expansion of eligibility requirements, it has become easier to grant tax-qualified stock options to talented individuals outside the company, such as external experts and university affiliates.

Overview of the “SO ONBOARDING KIT”

The “SO ONBOARDING KIT” template incorporates the latest key points regarding tax-qualified stock options, as well as practical considerations in stock option design, and is characterized by the following features:

1. Flexible Options for Handling Stock Options Upon Resignation
   The template supports not only the traditional design where stock options expire upon resignation, but also a structure that introduces vesting based on the length of service, allowing employees to retain a certain portion of their options even after leaving the company.
2. Clarified Treatment of Stock Options in the Event of M&A
   The template is designed to allow companies the flexibility to decide whether tax-qualified stock options can be exercised in the event of an M&A.
3. Provisions Enabling Simplified Acquisition and Cancellation
   The template includes provisions that allow the company to unilaterally acquire and collectively cancel expired or unexercisable stock options, thereby reducing the administrative burden of registration procedures.
4. Commentary with Explanatory Notes
   Each clause is accompanied by a simple explanation, making it easier to understand the background of the system and the key points to consider during implementation.

The template also provides a clear explanation of the stock option issuance process, including the flow of procedures, required shareholder resolutions, and key points for registration. While it can be used immediately after download, we recommend customizing it based on your business model, equity strategy, and HR policies, and consulting with experts as needed for actual implementation.

This template is intended solely for general informational and reference purposes and does not constitute legal advice for any specific case. Before use, please ensure that you review the latest laws and regulations, and consult with legal, tax, or other relevant professionals as needed.

ZeLo Law Firm’s Stock Option Implementation Support Services:https://zelojapan.com/service/stock-options

Company Overview

ON&BOARD Inc.

Fund Name: ON&BOARD Investment Limited Partnership
Fund Establishment: June 2024
Co-CEOs: Masato Shimodaira, Kosuke Nakayama
Address: Toranomon Hills Business Tower 15F (CIC Tokyo), 1-17-1 Toranomon, Minato-ku, Tokyo 105-6415, Japan
Business Description: Management and operation of a venture capital fund, and incubation-related services
URL：https://onboardvc.com/