Employee stock options (ESOs) are like golden tickets that companies hand out to their employees. These nifty options let employees snag company stock at a bargain price, often way below market value, within a certain time frame. It’s a pretty sweet deal—kind of like buying a designer outfit during a clearance sale.
Employees get a chance to cash in on the company’s success and might just find themselves sitting on a goldmine.But what if an employee decides to exit stage left before cashing in their ESOs? Can a business take back ESOs from an employee?
The Basics Of ESO Vesting
Before we dive into whether a business can yank back ESOs, let’s get cozy with the concept of vesting. When an employee scores ESOs, they can’t just cash in right away. Nope, these options are tied to a vesting schedule, which basically decides when the employee gets the golden ticket to exercise their options.Typically, ESOs come with a 4-year vesting schedule and a one-year cliff—because who doesn’t love a good cliffhanger?
Employees have to stick it out for a year before they can start exercising their options. Once that milestone’s crossed, the options vest gradually over the remaining three years, either monthly or quarterly. It’s like a carrot on a string, encouraging employees to stay for the long haul to fully cash in on their ESOs. This is why you need something like https://astrella.com/ to manage employee stock options.
ESOs And Termination Of Employment
Now, let’s consider what happens if an employee decides to leave the company before their ESOs are fully vested. Usually, ESOs follow a “last day rule.” Translation: If you leave before the vesting date, kiss your unvested options goodbye.
For instance, if an employee bids adieu after 2 years and 6 months, their options will be as useful as a chocolate teapot—non vested yet. But if they part ways after 3 years and 6 months, they’ll be able to exercise 75% of their options (assuming monthly vesting), like finding a generous stash of treasure.
The Clauses That Allow Businesses To Take Back ESOs
Now that we’ve covered the ABCs of ESO vesting and employment termination, let’s tackle the big question: can a business snatch back ESOs from an employee? Well, it all boils down to the fine print in the stock option agreement.
Some companies sneak clauses into their agreements that let them snatch back or cancel ESOs when the stars align. These sneaky “clawback” or “repurchase” provisions can be as varied as an all-you-can-eat buffet in their language and conditions.
For example, a clawback provision might demand an employee return any gains from their options if they spill company secrets or decide to moonlight with the competition. Meanwhile, a repurchase provision lets the company snag unvested options at a bargain if the employee takes off before fully vesting.