March 21. 2024

Laying off employees – what happens to their option program?

The fate of a laid off employee's existing stock options will depend on the terms of their employment contract and the company's stock option plan.

Written by Kristian Piippo

 

Employee stock options are a type of compensation that allows employees to purchase company stock at a set price in the future, usually known as the "grant" or "strike" price. These options are typically granted to employees as part of their employment contract, and become exercisable over a period.

 

When an employee is laid off, their employment contract is terminated, and they are no longer eligible to receive new grants of stock options. However, the fate of the employee's existing stock options will depend on the terms of their employment contract and the company's stock option plan.

 

Good Leaver and Bad Leaver Clauses

Many employment contracts and stock option plans include provisions that distinguish between "good leavers" and "bad leavers." Good leavers are often employees who leave the company under favorable circumstances, such as being laid off, while bad leavers are those who leave the company under less favorable circumstances, such as being terminated for cause.

 

The treatment of stock options for good leavers is generally more favorable than for bad leavers. Good leavers may be allowed to keep their unvested options and have them vest on the same schedule as if they had remained employed. They may also be allowed to exercise their vested options for a period after their employment ends. Bad leavers, on the other hand, may lose their unvested options and may be required to immediately exercise any vested options. Alternatively, the company may allow bad leavers to keep their unvested options but accelerate their vesting, meaning that they vest all at once instead of over a period.

 

Companies have widely different definitions of good and bad leavers, but make sure you are aware of your company’s use of these terms, whether you are an employee participating in a program or the person administrating the option program.

 

Pro Rata Vesting

In some cases, the treatment of stock options upon termination may be governed by a pro rata vesting provision. This means that the employee's options vest on a prorated basis, based on the number of months or years they were employed.

For example, if an employee has a grant of 1,000 options that vest over a period of four years, and they are laid off after two years, they would be entitled to exercise 500 options (1,000 options x 50% vesting).

 

Tips

 

For Employees
  • Review the terms of your employment contract and stock option plan to understand your rights and obligations in the event of a layoff.
  • If you are a good leaver, consider exercising your vested options if you can afford to do so. You will often have a restricted period in which you can exercise your options before they lapse, so make sure you are aware of these conditions.
  • If you are a bad leaver, consider seeking legal advice to understand your rights and options.

 

For Administrators
  • Communicate the termination of option agreements to employees in a clear and concise manner, explaining the terms and conditions that apply.
  • Provide employees with any necessary documents and information they will need to exercise their options, if applicable.
  • Consider offering outplacement services or other resources to assist employees in their transition to new employment.

 

Navigating the world of employee stock options can be challenging, especially during times of transition. That's why we're here to support you every step of the way.

 

Contact us today to schedule a consultation and take control of your stock options!

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