What happens when an employee exercises a stock option?

Exercising a stock option means purchasing the issuer’s common stock at the price set by the option (grant price), regardless of the stock’s price at the time you exercise the option.

Can a company take back stock options?

It may be couched in language such as “company repurchase rights,” “redemption” or “forfeiture.” But what it means is that the company can “claw back” your vested stock options before they become valuable.

What happens to your stock options if you leave your employer?

When you leave, your stock options will often expire within 90 days of leaving the company. If you don’t exercise your options, you could lose them.

Can RSUs be taken away?

Generally, leaving the company before the vesting date of restricted stock or RSUs causes the forfeiture of shares that have not vested. Additionally, with certain types of termination (e.g. disability or retirement), your stock plan may continue the vesting and even accelerate it.

How do you claw back shares?

A clawback provision can appear in your employment agreement, stock grant agreement, or stock plan. If it is triggered, you must surrender to the company any gains from option exercises or restricted stock vesting, or any type of bonus or incentive compensation, within a certain period.

Why is ESOP bad?

ESOPs are too risky for employees: ESOPs are not diversified, at least in their early years. But having an ESOP does not preclude the company from having a 401(k) plan or any other kind of retirement plan. Companies have to keep repurchasing their own shares: That is true in closely held companies.

What happens to stock options when you are terminated from employment?

… A major concern of high-level employees terminated from their employment is the fate of their stock options. The amount at stake is often several times the employee’s salary, and may dwarf the amount of severance the company may offer.

Can a closely held company give stock to its employees?

Owners of closely-held corporations often consider making stock or stock options part of their employees’ compensation packages. Because of the struggle many closely held companies face with attracting and retaining key personnel, granting or selling stock to employees seems like a good way to accomplish both of these goals.

Should you negotiate stock options when signing severance agreements?

But executives who shrewdly negotiate stock options when their careers are on the rise may sell themselves short when they are shown the door and asked to sign a severance agreement. Even in a tight labor market, high-level corporate executives risk finding a pink slip on their desk.

Why do companies give stock options to key employees?

For many start-ups not able to pay as well as more mature companies, stock options (or other grants of stock) are often a very necessary part of attracting key employees. For more established closely-held companies, many view granting equity as a key component in the retention of certain employees.