What Happens When Equity Compensation is Not Vested Upon Leaving a Company?
Equity compensation is a common form of compensation offered by startups and established companies alike. However, the terms and conditions under which this equity is vested can vary widely. If you decide to leave a company, how does the unvested equity compensation fare? Let's explore the scenarios and provide some guidance on this matter.
Understanding Vesting
Vesting refers to the process that grants employees ownership of equity over time as they work for the company. The vesting schedule typically includes time-based vesting and performance-based vesting, which can impact how equity is allocated and retained.
Scenarios upon Leaving a Company
When an employee leaves a company before their equity compensation becomes fully vested, several outcomes are possible:
Situation 1: Shares Go Back to the Company
In this scenario, the unvested shares are returned to the company, and the employee loses all rights to those shares. This is a common outcome in many stock purchase agreements.
Situation 2: Pre-Determined Price Buyout
When the equity compensation includes restricted stock units (RSUs), the company may have the right to buy back vested shares at a predetermined price. This is typically seen in agreements involving RSUs.
Situation 3: Partial Vesting
Depending on the vesting schedule and the time an employee has already worked, some employees may be able to vest a portion of their shares proportionally. For instance, if an employee has worked for 6 months out of a 12-month vesting period, they may vest 50% of their shares.
Situation 4: Expiration Option
Shares may have an expiration date, and employees have a certain period (e.g., 90 days) to buy them at the original grant price. Failure to do so results in the forfeiture of those shares.
Review Your Stock Purchase Agreement
It is crucial for employees to understand their specific agreement terms, as these can vary greatly between different companies. Always review the stock purchase agreement to determine the exact terms and conditions.
Key Takeaways
1. **Shares Return to the Company**: Unvested shares can revert to the company, and the employee loses all rights.
2. **Pre-Determined Price Buy-Back**: Vested shares can be bought back by the company at a fixed price.
3. **Partial Vesting**: Some shares can vest based on the proportionate completion of the vesting period.
4. **Expiration Options**: Shares must be purchased within a given timeframe; otherwise, they are forfeited.
Conclusion
The fate of unvested equity compensation when leaving a company depends on the specific terms of your stock purchase agreement. It is essential to understand these terms and act within the time constraints to maximize your equity stake.
For detailed information, it is recommended to consult with a legal professional or an equity compensation specialist. Additionally, leveraging specific tools like the ESO Fund can help employees overcome financial barriers during the exercise process.