Q.I was awarded 25,000 options at my last job. Recently, the company laid off 100 employees, including me. I was not vested at this time and the company took away all of my shares. Is this standard practice?
A.Yes. It is customary for a company to take back unvested options when an employee leaves the company for any reason. In fact, this is probably included in the stock option agreement you received when you were granted the options.
Sometimes, however, companies have a severance policy that provides special benefits (e.g., accelerated option vesting) for situations like layoffs. Be sure to find out whether your company has such a plan.
Companies use stock options to attract and retain talent, and to encourage employees to think like owners. Vesting schedules ensure that each employee has a financial incentive to stay with the company at least until the vesting period is over. But if, as in your case, the employer has an initial waiting period, you could forfeit this noncash incentive if the company falls on hard times before vesting begins. If the company failed, of course, those options or shares would be worthless anyway.
There's not much you could have done to prevent your employer from rescinding your options. It is sometimes possible to negotiate for a faster vesting schedule when you sign on with a new company. If you are being laid off close to an important vesting milestone, you can sometimes negotiate for a later end date. One tactic that occasionally works is to offer to take an unpaid leave of absence that ends the day you reach the next vesting milestone, then return to work for a short period before being officially terminated. Another approach is to negotiate to continue as a consultant or part-time employee so that your vesting can continue.
Note the distinction between taking back your options and taking back shares, as you wrote. If you are not yet vested in your options, or have not yet exercised your vested options, you do not own any shares. Once you own shares, they're yours. So although you may have lost the opportunity to buy shares subject to your option, you didn't lose any money out of your pocket.
Good luck.
- Erisa Ojimba, Certified Compensation Professional
Published: January 2007
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benefitsEmploymentstock optionunvested options
Stock options are a powerful tool companies use to attract and retain talent while aligning employee interests with the company's success. They offer employees the right to buy company shares at a predetermined price within a specified period. Vesting schedules ensure that these options don't become immediately exercisable; instead, they're earned gradually over time, usually tied to the employee's tenure.
Regarding the article you provided, it covers various aspects of stock options and employment practices related to unvested options. Here's a breakdown of the concepts:
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Stock Options: These are the rights granted to employees to buy a certain number of company shares at a set price (the strike price) within a specified period (the exercise period).
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Vesting Schedules: These schedules determine when an employee can exercise their options. It's common for options to vest gradually over a period, often based on the employee's tenure, to incentivize them to stay with the company.
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Unvested Options: Options that haven't yet met the criteria for exercising, usually due to not completing the vesting schedule. If an employee leaves the company before the options are vested, they typically forfeit these unvested options.
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Employment Termination and Options: When an employee is laid off or leaves the company for any reason before the options are vested, it's common practice for the company to reclaim those unvested options.
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Negotiating Vesting: Sometimes, negotiations can occur regarding the vesting schedule, especially if an employee is close to a significant milestone. Approaches like negotiating a delayed termination date or transitioning to a part-time role might enable an employee to reach that milestone and retain more options.
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Stock Option Agreements: These documents outline the terms and conditions of the stock options, including vesting schedules, exercise periods, and what happens to options upon termination.
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Shares vs. Options: Until options are vested and exercised, an employee doesn't own actual shares. If options are not vested, the company can rescind them, meaning the employee doesn't lose money but loses the opportunity to purchase shares at the specified price.
Understanding these concepts is crucial when dealing with stock options and employment situations involving layoffs or termination before options are vested. Employers usually outline these details in the stock option agreement provided when granting the options. Additionally, negotiating terms during employment transitions might sometimes provide avenues to retain more options.
