Stock or stock options can represent a significant part of an employee’s compensation with an employer. Employers often grant employees stock or the option to purchase stock in the company at a discounted price. It is common for these rights to vest over a specified period of employment, which is called a vesting period.
Unvested shares that are contingent upon the employee’s continued employment are considered “wages” under California law. However, depending on the terms of the compensation plan, the termination of employment before the end of the vesting period may forfeit the stock or stock options.
When the employment relationship is terminated, depending on the terms of the compensation plan, the employee may have additional time, such as 30 to 90 days, to exercise any options that have vested as of the date of termination. The employee’s right to exercise vested options after the termination date may depend on whether he or she was terminated with or without cause. For example, if the employment relationship was terminated without cause (e.g., a layoff), then the employee may still be able to exercise her vested shares for a specified period after the employment ends, whereas if the termination is for cause (e.g., misconduct by the employee), then the employee may be prevented from doing so.
When an employer terminates an individual’s employment and offers a severance agreement, the employee should review its terms to see if it addresses how the employee’s stock or stock options will be affected. Employees who have been wrongfully terminated often suffer the loss of valuable stock options as a result and therefore should seek legal advice before signing a severance agreement.
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