What happens if:
I leave the company?
Your equity will stop vesting if and when you leave your current employer.
Some companies determine a window of time in which the employee has to exercise the vested options, the others may require the employee to wait with the exercise until the exit event. Many companies allow employees to exercise up to 10 years after the vesting start date, which leaves more than enough time to exercise, even after you have left the company.
The company decides how to treat employees who leave. Leaver provisions are clauses that define what will happen to founders’ and employees’ equity when they leave the business. They are usually set out in people's employment contracts or share option agreements.
To put it simply, good leavers generally keep hold of their vested share options after they leave, while bad leavers lose their right to keep any equity, even the options that have vested. If an employee is deemed a bad leaver for example, due to a misconduct, certain provisions apply, such as forfeiture of options, vested and unvested.
If you leave the company and you are a virtual shareholder, the company may in some cases buy back vested virtual shares for the fair market value (e.g. last financing round valuation). This gives the company the chance to re-purchase the virtual shares. This redemption right clause is common, but the company is not required to exercise the right, and most do not.
It’s best to turn to the person in charge of your company’s equity plans and ask for the policy of your company. Ask about any clauses in place that determine what happens to leavers’ equity.
Useful materials to deepen your knowledge:
I move countries?
You should explore specific terms and conditions for your equity allocation and taxation rules before moving to a new country. In general two parameters will depend on the country you move to:
- The tax system for employee equity in your new country, which would determine specific tax rates during equity exercising or selling stages
- Equity pools that your company holds in a specific country. Your equity might be recalculated into the grant type that is more common for the given market: for example, if you move to the UK your company may find it beneficial to turn your share options into EMI options, which are designed for the UK and carry favourable tax treatment for you. However, there are costs associated with setting up new share option plans and you should check with your company what they plan to do before you move.
Additionally, tax treaties between countries may affect the taxation of cross-border stock options. It's crucial for employees and companies to consult with tax professionals who specialise in each respective country to ensure compliance with local tax laws and to optimise the tax impact of your equity.
I get promoted?
Often when employees are promoted to a new role or position within a company, a refresher grant is issued to the employee as part of equity compensation. This grant is used to incentivise and reward employees for taking on additional responsibilities and contributing to the company's growth in their new role.
The additional allocation of equity typically comes in the same form as the equity received in your initial grant. This grant is in addition to any existing equity employees may already hold.
Typically refresher grants are calculated at the time of promotion as:
Value of refresher grant = initial grant at a new level - initial grant at the previous level
Just like with the initial grant, refresher grants would have:
Vesting schedule: The refresher grant often comes with a vesting schedule, which determines when the newly awarded equity becomes fully owned by the employee. The vesting schedule may be based on time (e.g. vesting over four years) or performance milestones.
Exercise price (for options): If the grant includes stock options, there will be an exercise price (also known as the strike price) at which the employee can purchase company shares when they choose to exercise their options.
If the valuation hasn’t changed since the initial grant, this will increase the grant to exactly the same level as if they joined at the new level. If the valuation increased since the first grant, it will take the difference at the new valuation. This will lead to a benefit for the employee, as the initial grant will be higher than if they joined at the time of promotion. This is fair, as joining an earlier company stage at a lower valuation comes with higher risk, and the size of the grants reflects this risk profile. It’s the same with investors, the earlier you join the more you get for the same price.
Refresher grants during promotions are a valuable tool for companies to recognise and reward employee contributions while ensuring that employees are motivated and engaged in their new roles. The specific terms and conditions of these grants may vary from company to company, so it's important for employees to fully understand the details of their promotion equity grant and seek clarification if needed.
I don’t exercise my options?
It is not compulsory to exercise your options. You should only exercise your options if you are confident that the shares you own will increase in value, and as long as you are happy that the pros and cons of exercising have been clearly communicated to you by your company.
In most countries, allocation of options is not subjected to taxation, i.e. you will have tax implications only if options are exercised. Therefore, there are no financial risks involved in deciding to not action on your options. You miss out on the opportunity to actively participate in company growth benefits, but as mentioned in the definition of options, an options grant gives the holder the right – but not the obligation – to buy company stock.
I take a temporary leave (parental or sabbatical, for example)?
Typically if employees:
- reduce their work to less than 100%, or take unpaid leave, the vesting is extended by the equivalent time amount. For example if someone goes to 80% after their second year, their remaining grant vests over a time prolonged by 6 months [(1/0.8 - 1) * 2 years * 12 months/year]. In other words the unvested part of the grant will vest over 2 and a half years, instead of 2 years. The number of months will be rounded to the nearest integer number of months in case the remaining time is not an integer number.
- take unpaid leave, vesting is paused until the return date
- take parental leave, vesting is typically either not affected or paused, depending on the terms and conditions for employees’ stock.
My company is acquired by another company?
When your company is acquired by another company, the treatment of employee equity can vary depending on several factors, including the terms of the acquisition, the type of equity you hold, and any agreements or contracts in place. Here are some common scenarios for what can happen to employee equity in the event of an acquisition:
- Cash payment: In some acquisitions, employees may receive a cash payment for their equity holdings. This can include stock options, restricted stock units (RSUs), or any other forms of equity. The cash payment is typically based on the acquisition price per share or the negotiated terms of the acquisition.
- Conversion to acquirer's stock: In some cases, your equity may be converted into shares or equity in the acquiring company. For example, if you hold stock options, they may be converted into options to purchase the acquiring company's stock. The terms and conversion ratios are usually specified in the acquisition agreement.
- Vesting acceleration: Depending on the terms of the acquisition, your equity may become fully vested upon the closing of the deal. This means that any unvested equity you hold may immediately vest, giving you the right to exercise options or receive shares without waiting for the original vesting schedule.
- Rolling over equity: Some acquisitions allow employees to roll over their equity into the acquiring company's equity. This means you maintain your ownership stake in the new entity and can participate in its future growth.
- Cash and stock combination: It's possible that employees receive a combination of cash and equity in the acquiring company. This allows you to capture some of the immediate value of the acquisition while also benefiting from potential future growth.
- Retaining original equity: In certain situations, employees may be allowed to keep their original equity holdings, and the equity remains tied to the original company, which becomes a subsidiary or division of the acquiring company.
- Termination or cancellation: In some acquisitions, especially in the case of a merger or when the acquiring company has no interest in continuing the equity plan, your equity may be terminated or canceled. In such cases, you might not receive any direct benefits related to your original equity holdings.
It's crucial for your employer and the acquiring company to communicate with employees about the impact of the acquisition on their equity holdings. Clear and timely communication helps employees understand their options and make informed decisions.
The specific treatment of employee equity in an acquisition is outlined in the acquisition agreement and may vary from one acquisition to another. It's essential to carefully review the documentation related to your equity grants, participate in any discussions or decisions related to the acquisition, and seek professional advice when necessary to make informed choices regarding your equity holdings, as the treatment of employee equity during an acquisition can have legal and tax implications.