Introduction

When employees join a company, they often receive stock options as part of their compensation package. These options come with the promise of future rewards if the company performs well. However, what happens to these stock options when an employee is fired before they vest? This guide explores this complex and often misunderstood issue, providing clarity on the rights and consequences of different scenarios.

Vesting and Stock Options

Stock options are incentives granted to employees that give them the right to purchase a specific number of company shares at a pre-determined price. These options typically vest over a period of 3-4 years, meaning the employee can only exercise them after meeting certain conditions. Vesting usually follows a one-year cliff, after which options vest monthly. This means that if an employee is fired before their options vest, the options are terminated with them. They will have no fair market value and thus, no financial gain.

Termination and Stock Options

The way stock options are handled upon termination or firing of an employee depends on the circumstances. Whether the termination is with or without cause can significantly impact the employee's rights to their stock options. For instance, if an employee is found guilty of embezzlement, their stock options and other potential severance packages are likely to be canceled.

Severance Packages and Stock Options

Upon termination, employees typically have a limited time window to exercise their vested stock options. This period can range from 30 to 60 days after leaving the company. Failure to exercise the options within this window will result in the options forfeiting back to the company. Severance packages may also include further terms for the vesting and exercise of stock options. For example, the employee may have an additional 90 days post-termination to exercise their vested options before they expire.

Stock Option Grants and Exercise

Stock option grants are structured so that the recipient has the right to purchase shares at a specific price (often referred to as the exercise price) only after the options vest. Even if options have vested, the actual issuance of company stocks usually occurs when the options are exercised. Most companies provide a 90-day period post-termination to exercise vested options. Unvested options revert to the company's pool, ensuring they do not go to an employee who has left the company.

Conclusion

The impact of an employee's termination on their stock options can vary greatly depending on the specific circumstances and relevant contracts. Understanding these nuances can be crucial for both employees and employers in managing expectations and rights effectively. Whether an employee is with or without cause, with time limits on exercising options, and the impact of severance packages, clear communication and adherence to company policies are essential.