An employee stock option agreement (sometimes known as a share option agreement) is a contract between an employer and employee that guarantees the employee’s right to purchase stock in the employer’s company at a specified price after a certain period of continuous employment. The employment lawyers at San Francisco’s Minnis & Smallets help executives and other employees recover the value of stock options when they are wrongfully discharged from their jobs.
Stock option agreements are a form of compensation. Since the employee receives ownership of shares in the company, stock options are often referred to as equity compensation. Stock options are often a valuable component of an employee’s overall compensation.
From an employer’s perspective, the option to purchase shares in the company through a stock option agreement is a way of making an employee feel invested in the company. Employees have a stronger incentive to stay with the employer and to make the company successful when success translates into an increase in the value of the shares they own. However, when an employee is fired for an unlawful reason before having an opportunity to vest or exercise their options, the employee may suffer a significant economic loss that cannot easily be mitigated by finding new employment.
If the company is doing well, the market price of shares will usually be higher than the purchase price specified in the stock option agreement. The greater the difference between purchase price and market price, the more compensation the employee receives.
The value of a stock option agreement to an employee depends on several factors. An employee of a publicly traded company can sell some or all of the stock at its market price soon after purchasing it, realizing a quick (and sometimes substantial) return on that investment. If the employee believes the stock value will continue to rise, the employee might instead choose to hold the stock in anticipation of making an even greater profit by selling the stock at a later date. Either way, an employee who has a stock option agreement will probably receive significant extra compensation if the company is doing well. An employee of a privately held company also may stand to realize a significant economic benefit from the sale of the employee’s shares if the employer goes public.
The terms of the stock option agreement determine the rights of an employee if the employment relationship is terminated. As a general rule, if the employee has not yet gained the right to make any stock purchases pursuant to the option agreement, the option to do so ends with the end of employment. If the employee has gained but not exercised the right to purchase stock (in other words, if the right to purchase shares has “vested”) as of the time when the employment relationship is terminated, then sometimes the stock option agreement permits the employee additional time after the separation date to exercise the vested options, assuming the employment relationship terminates “without cause.”
Employees who have been terminated may need to seek legal advice to make sure they understand their rights, and also should consult with a tax adviser to understand the tax consequences of exercising the option to purchase company stock.
An employee whose employment ends may have the opportunity to exercise vested rights to purchase stock, but usually cannot purchase stock if the right to do so has not yet vested. As a result, the employee may suffer an economically significant loss if the exercise price of the lost stock is less than the market price.
The economic loss caused by the loss of stock options is part of the economic damages that an employee can seek to recover if the employee can show that the termination decision was unlawful.
Additionally, if an employer terminates an employee or falsely claims that it is terminating the employee for cause in order to deprive the employee of rights under the stock agreement, then the employee may seek to recover any resulting damages.
The California employment lawyers at Minnis & Smallets have advised many executives, professionals, and employees regarding the loss of their stock or stock options as the result of a wrongful discharge. To learn about the compensation you might receive for a wrongful discharge, including the present value of your stock or stock options, call us at 1-415-551-0885 or submit our online contact form.