If you were granted employee stock option rights but your employment is terminating, these 5 considerations will help you understand your rights with regard to your stock options.
– by Renée Sauer
Stock option rights, or stock appreciation rights?
To get started, you need to determine whether you have employee stock options, or if what you have is actually stock appreciation rights?
If you have stock appreciation rights then you do not receive the right to buy shares in the company, but you can benefit from future increases in the stock price.
If you have employee stock option rights, then you as an employee can purchase shares in a company yourself. In this scenario, your employer gives you the right to buy a certain amount of company shares for a previously agreed price during a previously agreed period of time. Normally a certain period of time will expire and/or certain conditions need to be met, the so-called vesting period, before you can exercise this right to buy these shares. Although you are given the opportunity to buy shares (stock option), you are not obliged to do so.
This post deals exclusively with employee stock options.
Stock option rights and termination
If you have been granted employee stock option rights and are now facing termination of your employment, what should you take into account?
The answer to this question will depend on the exact wording of the agreement between your employer and yourself, so you’ll need to check the stock option plan in your contract.
Here are 5 tips for what you should look for in order to understand what action you can take:
1 – Check for an expiry clause
In your contract, the stock option plan will generally contain an option expiry clause. Check which date or time period is stated in this clause.
Your stock option rights may lapse when your employment agreement is terminated, either immediately on the date of termination or a certain period of time thereafter. In the first scenario, you will immediately lose your entitlement to exercise your stock option rights when your employment ends. In the second scenario, there will still be some time to exercise your right to buy shares, should you wish to do so.
2 – Check the vesting date
The vesting date should be outlined in your stock option plan. This is the date from which you can exercise your right to buy stock. If the vesting date is prior to the date on which your employment will be terminated, then you can exercise your stock options while you are still an employee.
If the vesting date is after the date on which your employment will be terminated, then you may not be able to exercise your stock option rights, due to the termination. (In other words, you may suffer potential damages due to the termination.)
3 – Check who is initiating termination
Either your employer or you must initiate the termination of your employment. Check to see if the consequences to your stock options are the same regardless of who takes the initiative to terminate the employment.
Also check if the stock option agreement stipulates different consequences depending on the reason for termination. If so, the stock option agreement may predetermine how a possible loss of stock option rights will be dealt with.
4 – Check if you could get compensation
If you still have the opportunity to exercise your stock options prior to termination, it is less likely that you will be able to negotiate upon a compensation for a possible loss of stock option rights.
If you cannot exercise your right to buy shares prior to termination of your employment, then in principle you could either choose to negotiate an extended term in order to exercise your rights, or you could negotiate a compensation instead. Check your stock option agreement for details about possible compensation.
5 – Check which company offered their shares
This is not necessarily your employer. It could be your employer’s company, or a parent company, an affiliated company, or even a third party company which granted you the right to a stock option.
If a company other than your employer has granted you the stock option rights, it is advisable to have that (third party) company undersign the termination agreement as well.
No arrangements made? Get help you can trust
Have you just read this and realised that no arrangements were ever made about your stock option rights? Or does your termination agreement mention a “final discharge”?
Don’t panic – but do contact a lawyer as soon as possible. A legal expert can check the wording in your contract and advise if a final discharge will affect your stock options, or help you to claim compensation for damages.
If you are facing termination of employment and need assistance understanding your employee stock option rights, please contact GMW lawyers. Our legal experts will be glad to help you.