Apr 14, 2022 | By Elliot Siegel | Read Time: 2minutes | Category Name
Employee disputes regarding stock options and equity agreements are on the rise. In one example, an employee recently sued his employer alleging that they lured him from his prior, higher-paying job with the promise of a stock grant based on a non-existent stock program. For example, in March 2022, approximately 80 employees of Buzzfeed sued alleging that the company put up informational barriers to allowing them to exercise their options or trade shares following the company’s IPO.
Whether you are an entry-level employee, or a highly paid executive, the spread of stock options and other equity grants as long-term performance-based compensation means you need to be on the lookout for any games your employer might be playing with this potentially very valuable benefit.
Vested Equity = Wages
As far back as 1955, California courts considered with how to deal with incentive compensation, such as employee stock awards. Since then, courts consistently hold that agreements to provide stock options, restricted stock units (RSUs), or other ownership rights count as wages under the California Labor Code.
This means, that once equity vests, an employee’s shares cannot be taken away without compensation under California law. This includes situations where the employer:
Fails to transfer ownership
Refuses to allow an employee to exercise options
Attempts to claw back ownership
In each of these situations, the employer’s conduct is illegal just the same as if the employer failed to pay cash wages due. It is also illegal to fire an employee to avoid granting them equity or to prevent them from exercising their stock options.
What is “Vested” Equity?
However, these rights only apply to vested stock and equity grants. “Vesting” means that the employee has met any preconditions to earning shares or options. Vesting is critical because the company sometimes can take away unvested stock, but cannot do the same to vested equity.
An employee’s right to equity in the company vests—i.e., becomes the employee’s property—according to the applicable agreement between the company and the employee. Often, stock awards vest on a “schedule,” with a portion vesting every month or year. Typically, a stock agreement also allows for the acceleration of vesting, where all the remaining shares or options immediately vest upon major events. Examples include an IPO or change in control of the company.
Many agreements limit the time an employee has to exercise options, which allow the employee to purchase shares of the company at a pre-determined “strike price.” Frequently, an employee has only 90 days from the date of termination or separation to exercise their options and pay the strike price. Otherwise, they could legally lose the options.
Stock option agreements vary dramatically, so you should immediately consult an attorney if you have any questions about how yours works. Often, they are written in a way to prevent easy understanding by the employee and trap the unwary.
Talk to an Experienced Stock Disputes Attorney
Every worker in California is entitled to receive all compensation benefits they were promised when they started working, including their right to stock or equity. If you have an employee stock agreement or were promised equity to join your company, make sure you’re protected and understand your rights about how to get your shares. We provide free consultations for all clients with questions about incentive compensation issues and represent clients in both litigation and arbitration to ensure they get their promised equity. Contact our experienced employment lawyers today.
Elliot J. Siegel
Elliot Siegel graduated with honors (cum laude) from NYU School of Law and practiced at some of the country’s biggest litigation firms where he learned to litigate strategically, aggressive, and efficiently by some of the best trial lawyers in the Country. It was here that Mr. Siegel saw how important access to competent and good counsel was in navigating the legal system, and how rarely employees and other members of the public could find that type of representation. This realization led him to dedicate his career to representing employees and consumers who lacked the resources to protect themselves from being preyed on by their employers or unscrupulous businesses by co-founding King & Siegel in early 2018.
This means, that once equity vests, an employee's shares cannot be taken away without compensation under California law. This includes situations where the employer: Fails to transfer ownership. Refuses to allow an employee to exercise options.
What happens to my equity if I'm fired? The status of your equity may depend on the reason you're fired. Many company plans cancel any vested or unvested options if an employee is terminated for cause. If you're laid off—not fired for cause—your company plan might allow you to keep or exercise vested awards.
If you took advantage of an early-exercise policy and exercised options before they vested, your company has the option to repurchase any exercised-but-unvested shares when you leave.
Income resulting from an NSO that has a fair market value at the time it is granted is considered wages for California employment tax purposes and is subject to UI, ETT, SDI, and PIT withholding and reportable as PIT wages at the time the option is granted.
But your job offer or employment agreement may include something else: a clawback provision. Meaning that your vested shares can be repurchased at a value that the company decides - like maybe $0. If you worked hard for those shares, they suddenly have no value, and are no longer yours.
Equity financing is the process of raising capital through the sale of shares. Companies raise money because they might have a short-term need to pay bills or need funds for a long-term project that promotes growth. By selling shares, a business effectively sells ownership of its company in return for cash.
You keep whatever is vested. RSUs typically have a four year vesting period, 1/48th each month, but it depends on the specifics of the company's RSU plan. Any unvested shares are probably lost if you're fired.
If your vested stock options are not exercised prior to the expiration of the post-termination exercise period, they expire and are canceled! The post-termination exercise period generally starts on the date of termination (ie, the actual end of your service with your employer, not the date when you give notice).
Each company pays out equity differently. The two main types of equity are vested equity and granted stock. With vested equity, payments are made over a predetermined number of installments delineated by a contract. Granted stock is provided at the beginning of a contract.
The answer is usually no, but there are vital exceptions. Shareholders have an ownership interest in the company whose stock they own, and companies can't generally take away that ownership.
This means that you have a right to a portion of the company's profits and assets based on the percentage of equity you own. However, this doesn't necessarily mean you will get a monthly check. The way you get paid as an equity owner depends on the type of company and how it chooses to distribute profits.
Once they are vested, RSUs can be sold or kept like any other shares of company stock. Unlike stock options or warrants, RSUs always have some value based on the underlying shares. For tax purposes, the entire value of vested RSUs must be included as ordinary income in the year of vesting.
The price that you will pay for those options is set in the contract that you signed when you started. You may hear people refer to this price as the grant price, strike price or exercise price. No matter how well (or poorly) the company does, this price will not change.
First, it's important to understand that in strict terms, options don't pay dividends. Even if you own an option to purchase stock, you don't receive the dividends that the stock pays until you actually exercise the option and take ownership of the underlying shares.
If your vested stock options are not exercised prior to the expiration of the post-termination exercise period, they expire and are canceled! The post-termination exercise period generally starts on the date of termination (ie, the actual end of your service with your employer, not the date when you give notice).
You can cash out your equity in a home by refinancing your current home loan. Some banks will decline your application due to the amount of equity you want released and how you plan to use it. Some examples of purposes of cash out most banks will accept include: Minor cosmetic renovations.
A capital reduction is when a company reduces the amount of its share capital, which can be done by making payments to shareholders out of its capital equal to the amount of money paid by a shareholder to acquire the company's shares or by a share buyback.
You Lose Future Earnings: When you give up equity in your startup, you are also giving up any future profits or earnings that the company might generate. This means that any money you would have made off of the success of your business is now going to someone else.
Introduction: My name is Aracelis Kilback, I am a nice, gentle, agreeable, joyous, attractive, combative, gifted person who loves writing and wants to share my knowledge and understanding with you.
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