In today’s job market, changing jobs to find the right fit of a nice company environment and good salary has become commonplace. And if you find a company that offers you stock or options in your employment package, remember to fully understand what rights you have before you enter the company. Keep reading to know … Continued
In today’s job market, changing jobs to find the right fit of a nice company environment and good salary has become commonplace. And if you find a company that offers you stock or options in your employment package, remember to fully understand what rights you have before you enter the company.
Keep reading to know what might happen to your stock if you leave the company and the restrictions that might come your way.
What happens to my stock if I leave my company?
One of the main reasons why employees lose their equity compensation boils down to unvested shares when they leave the company. Let us assume that your plan only needs time-based vesting, so you will have to stay with the company long enough to earn your shares. Normally, a portion of the grant would begin to vest after one year, but the vesting schedule may have other conditions as well.
There are usually a lot of things that you still need to consider. Also its important to keep in mind that vesting ends on the day you leave the company. To explain this better, read on to the next sections.
Vested stock options
If you have vested stock options (ISOs or NQSOs) that haven’t been exercised, then you might have time to do so before you leave the company or within a specific time period after you leave the company. And with incentive stock options, you will normally be able to exercise the shares for up to 90 days after you have left the company. These equity plans might also permit for a longer period, depending on the terms of the options.
And although this happens, they will lose their “qualified” status and potentially favorable tax treatment. On the other hand, non-qualified stock options may be more flexible, although you’ll need to review the terms as outlined in your company’s equity plan.
Can I keep my stock if I change jobs?
As shared above, the answer to this depends on the equity compensation agreement that you have with the company. There is a huge range of possible outcomes for your stock options after you leave the company with varying factors, including:
- What (if any) specific terms you negotiated with the company
- Why you are leaving the company (terminated with/without cause, laid off, a new job, retirement)
- Whether your employer is public or private
- What type of equity compensation you have (phantom stock, stock appreciation rights, employee stock purchase plan, restricted stock units, stock options)
- Whether your shares are vested and whether or not you’ve exercised them
Due to the individualized and company-specific nature of employee agreements and equity incentive plans, consider taking the help of a professional. Also, ensure that you read the agreement in depth.
To help you out, below are some situations to give you an idea if you can keep the shares with you when you leave the company or not.
Should you exercise?
Keep in mind that if you are allowed to exercise and keep your options, it does not necessarily mean that you should. Based on the exercise price and the current value of the stock, your shares might be underwater. Let us take each kind of share that you can be given and discuss the situations below:
- Employee stock purchase plans: If you are a part of an ESPP program, the moment you leave the company you cannot purchase the shares in the program. Obviously, cash would be withheld from your paycheck during your time in the company, from where you might get a few shares of ownership. And if there is any amount not used for the shares, it would be returned to you.
- Vested RSUs, restricted stock, phantom stock, stock appreciation rights: For these cases, the employee normally gets shares or cash in the settlement once all the shares are vested. So, no one needs to hold on to these types of vested equity as they would have already turned into cash or shares. But if you are planning to leave the job, ensure that you check your vesting schedule and see that all has been vested so that you are not leaving anything behind.
If you have vested stock options, you might be thinking of either exercising or forfeiting them. But since there are strict time limitations set in an equity agreement, you will need to consider the following to make your decision:
- Do you have the cash to buy the shares? This is an obvious one. If you do not have cash, find out if there is a cashless exercise possible for the plan. This plan allows employees to give back enough of their shares to cover the cost of purchasing the remaining shares, tax withholding and brokerage fees (if any). If you do not have much savings, it is better to avoid purchasing the shares.
- Is your grant underwater? You need to consider if your exercise price is higher than the latest valuation of the stock. If the price is lower than what it was on the grant date, you should not buy the shares as you will lose by paying more than what the shares are worth.
- For incentive stock option holders, taxes are a critical concern. There isn’t any tax consequence for exercising ISOs, but holding the shares at the end of the year can trigger the AMT (alternative minimum tax). If in a private company, the shares would be a very illiquid investment, as there is usually no established market for stockholders to sell their shares for cash. And for a public company, the stock can be worthless at the time of sale as compared to when you paid for it on exercise. In short, you will need to have sufficient savings to cover any potential tax due without the need to sell shares and this will be a critical concern.
Clawback provisions & repurchase rights
If you are working for a startup, the greatest value of your stock would follow an exit event such as an IPO, an acquisition or a merger. Nonetheless, if you leave the company before such an event, you will lose on the upside of it even though you have exercised your options. The moment you sign an offer letter, you are most likely to get more information about your option grant, but you rarely get the entire equity plan agreement or related documents unless requested.
These documents contain all the details of the repurchase and clawback rights and are important to have. The clawback and repurchase rights mean that when a triggering event takes place, the company has the right to repurchase the vested shares regardless of if you have exercised them or not. This repurchase is normally made at the market value of the stock or at your exercise price.
Why do companies do this? Well, offering shares to employees is mainly done for retaining them. But by permitting old employees to keep their shares isn’t as beneficial as keeping them. In fact, it also causes further dilution in the ownership as the company might need to continue offering shares to new employees. There might also be restrictions on the number of shareholders in the company due to some laws, so keeping yourself safe from such things is important before you sign the employment agreement or offer letter.
What’s the reason for your departure?
The next thing that you need to consider is the reason for your departure and your plans afterward. Let us take every case into consideration:
- If you’re fired: It is common for employees to get terminated with or without a cause in companies. And based on the reason you are no more a part of the company, the treatment of your options would differ. Normally, termination for cause results in the cancellation of any unvested or vested shares that have not been exercised. And if it is not a termination for a cause like when the company is downsizing, you will have some time to exercise the vested options. The equity agreement would explain the details better. Also, if you have phantom stock, SARs, or RSUs, you will very likely get nothing from any unvested shares that have not been earned and paid out.
- If you leave to work for a competitor: If you leave the company to work for a competitor, your company has the right to clawback your vested options and/or cancel all the unvested options. Some additional factors also come in place for this along with your state laws. An attorney can help you with this.
- If you retire: If you retire from your job, then you are likely to have much more favorable terms for exercising your vested options. Moreover, if you have phantom stock, SARs, RSAs, or RSUs and if there are still many awards waiting to vest, it is better to delay your retirement for a few months to have them all vested before retiring. Also, consider how the equity compensation fits your financial plan when retiring. As holding single stocks carries more risk than a diversified fund, consider the pros and cons of exercising and holding stock options versus liquidating and diversifying the proceeds into other investments.
- Death or Disability: When a person becomes disabled, their family/legal representatives are allowed a period of time to exercise the vested options. It is almost the same for the person who passes away. All the rules are noted down in the equity agreement. So, if you are a person who has equity compensation, it is better to have it mentioned in your will claiming who will be authorized to exercise and own it.
What are Restrictive Covenants?
A Restrictive Covenant is a term used to describe the provision in an agreement that indicates to restrict an employee from doing certain things after the employee leaves the company. The two most common forms of Restrictive Covenants are non-competes and non-solicits. Both are explained below:
- A non-compete is a provision that precludes the employee from working for a competitor for a period of time after leaving the company.
- A non-solicit is a provision that precludes the employee from soliciting, or recruiting, and in some cases hiring company employees for a period of time after the employee leaves the company. Non-solicits can also preclude the employee from trying to get business from the company’s customers for a period of time after the employee leaves the company.
Companies always add restrictive covenants into equity agreements that are offered to the employees. Hence, it is always a good idea to read the agreement carefully to see what restrictions you have and what happens to your shares when you leave the company in any situation. To learn more about exercising shares and the laws that govern it, check out the other knowledge articles here!