Stock Options Lost In Job Termination: How One Fired Employee Won Big

Job termination is a major event not only for you but for any stock options you have. It's important to know your post-termination exercise period (PTEP), which is specified in your grant agreement. The PTEP dictates how much time you have to exercise vested stock options after job loss. Typically, you have just three months to exercise vested options, and you forfeit any unexercised options.

However, all bets are off if you’re fired “for cause,” i.e. the company ends your employment due to your bad behavior. In that case, usually your stock options, included vested options, expire immediately on your termination date. That can cause you to miss out on a big stock option payday.

Stock options are potentially very valuable, especially when they are granted in a startup company that later undergoes an initial public offering (IPO). Inevitably, with great potential wealth comes great litigation. Case law abounds with disputes between former employees and companies over valuable stock options. While companies often prevail in such litigation, a recent lawsuit over startup company stock options in California, Shah v. Skillz Inc., resulted in a lucrative win for the plaintiff (a fired employee) and a notable ruling about how damages involving options can be calculated.

Gaming Company Employee Does Not Play Games After Firing

Gautam Shah, the plaintiff, worked at Skillz Inc., a company that makes games for mobile phones. He joined Skillz in 2015, when it was a private company in San Francisco, and received a grant of stock options. Like many startup companies, which may have little cash, Skillz relied heavily on stock options and other equity awards to reward employees in lieu of cash compensation. As a private company’s stock lacks liquidity, a startup company’s employees with stock options hope that their options will become valuable after the company goes public or is acquired.

In 2018, Mr. Shah told the two founders of Skillz that unless he received a promotion and a raise, he would consider leaving the company. In the circumstances, the founders suspected he might have done something to undermine the company’s interests. A company forensic analysis revealed that Mr. Shah had forwarded a highly confidential business report to his personal email address, apparently for no legitimate business reason. He was fired “for cause” on the grounds of a breach of his employment contract via a purported violation of company policy about confidential information and theft.

Not surprisingly, at the time of his firing Mr. Shah tried to exercise some of his stock options. However, he was told the options were immediately void because of his “for cause” termination, as provided under his stock option agreement. Mr. Shah claimed he had forwarded the document to himself purely for convenience and was not in breach of contract, to no avail.

In late 2020, Skillz went public via an IPO. Several Skillz employees, both current and former, profited handsomely from shares they held in the company. In 2021, Mr. Shah sued Skillz for breach of contract, wrongful termination, and retaliation. He claimed that Skillz did not have cause to fire him and had therefore wrongfully prevented him from exercising the stock options he had earned as a Skillz employee.

In the trial, the jury awarded Mr. Shah more than $11.5 million in damages for his lost options, finding by implication that he had not been legitimately fired for cause. The jury was evidently unpersuaded that Mr. Shah’s forwarding of the email to his personal address was done in bad faith. In other words, it decided that the basis of the firing arrived at by the company was an unfounded miscalculation.

Company Miscalculation Leads To Big Calculation Of Damages

Crucially, the jury calculated the monetary value of Mr. Shah’s damages according to what his shares would have been worth after the IPO had he been allowed to exercise his options then. The figure they arrived at, over $11.5 million, made a fine payday for Mr. Shah. If the damages had been calculated on his options’ value at the time of his firing, they would have amounted to a paltry $41,032.

Skillz appealed, arguing that the monetary value of the damages should be assessed according to the option value at the time when Mr. Shah was fired. However, the California Court of Appeal held that, under both California and Delaware law, damages for lost stock options in a breach-of-contract action can in certain circumstances be assessed from a date other than the date of the breach.

Those circumstances include the availability of a market for the stock at the time of the contract breach. When Mr. Shah was fired in 2018, Skillz was still private, so its stock had no liquidity. On that reasoning, the court upheld the decision to calculate the damages for lost stock options using the shares’ value after the IPO, though it did reduce the damages to $6.7 million.

The court also ruled that stock options are not “wages” under the California Labor Code. This meant that, while his breach-of-contract claim was successful, Mr. Shah’s claims for retaliation and wrongful termination were dismissed. He therefore lost any right to pursue tort damages, which could have included punitive damages and attorney’s fees. Interestingly, the court noted that restricted stock would be considered “wages” because, unlike options, they have an “ascertainable value.”

Lessons For Companies And Employees

To avoid costly lawsuits, companies often consider future vesting dates when terminating employees. The actions they take may delay the termination date, extend it by using “paid time off” days, or accelerate the upcoming vesting to avoid appearing to terminate an employee merely to forfeit soon-to-be vested equity grants. If a company plans to terminate your employment for what you believe are unjustifiable reasons, you can also negotiate with it to take actions such as those so that you avoid losing valuable stock options or restricted stock units (RSUs).

Attorneys at the law firm Squire Patton Boggs cover additional employer implications of Shah v. Skillz in a commentary for the firm’s blog Employment Law Worldview. The attorneys conclude that in similar situations companies should “proceed with caution” when firing employees for cause.

Additional Resources

For more on job termination when you have stock options and RSUs, see a related blogpost, Job Loss: How To Protect Your Stock Options And RSUs. See also the Job Events section on myStockOptions.com, including a fun interactive quiz.

myStockOptions Webinars

See the myStockOptions Webinar Channel for upcoming webinars and past webinars on demand. Each webinar offers CE credits for CFP, CPWA/CIMA, CEP, EA (live webinars only), and CPE (live webinars only), plus CFA self-determined credits. Featured experts present real-world case studies. On-demand webinars are listed below. Click on the links to register now!

FUNDAMENTALS

• Equity Comp Masterclass (Part 1): Stock Options

• Equity Comp Masterclass (Part 2): Restricted Stock/RSUs & ESPPs

• Stock Compensation Bootcamp For Financial Advisors

• Stock Comp Tax Essentials: Crash Course

ADVANCED

• Equity Comp Masterclass (Part 3): Best Ideas From Top Advisors

• Restricted Stock & RSU Financial Planning: Insights From Leading Advisors

• Stock Option Exercise Strategies: Managing Risk & Building Wealth

• Year-End Financial & Tax Planning For Equity Comp

• Preventing Tax-Return Mistakes With Stock Comp & Stock Sales

SPECIALIZED

• Stock Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition

• 10b5-1 Trading Plans And Other SEC Rules Advisors Must Know

• Strategies For Concentrated Positions In Company Stock

• Negotiating Equity Comp At Hire & Protecting It In Job Termination

Federal Noncompete Ban: 7 Key Points For Employees And Executives

The Federal Trade Commission (FTC) has issued a final rule banning noncompetes for employees, independent contractors, and executives. This federal ban on noncompete arrangements is currently scheduled to become effective in early September.

The noncompete ban may affect stock compensation, as equity awards sometimes include noncompete covenants that may no longer be enforceable under the new rule. However, the federal noncompete ban is far from settled. Legal challenges have already been lodged against it, and many experts predict it will not survive.

Below we summarize the key points for employees and executives.

1. How The FTC Defines Noncompetes

The final rule defines a noncompete as a “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker” from either taking a different job or operating a business after the end of employment.

An analysis of the final rule from the law firm Morgan Lewis asserts that the scope of the noncompete ban “will include standalone noncompete agreements, but will also pick up many executive agreements, including noncompete covenants in equity grants, employment agreements, and severance agreements.” 

Since the rule voids post-employment noncompete covenants, the ban may extend beyond basic noncompete clauses. For example, with stock options and restricted stock units (RSUs), it may prohibit any provision that stops vesting if you leave to work for a competitor. In an analysis of the final rule, the law firm Seyfarth Shaw explains that “this will depend on the terms of the equity compensation plan and agreements and the scope of the applicable restrictive covenants.”

2. Exceptions To The Noncompete Ban

While the ban is fairly sweeping, it does contain some exceptions.

Not All Noncompetes Go Away For Executives

While no new noncompetes are allowed, existing noncompetes for senior executives can remain. The FTC’s final rule defines “senior executive” as a worker who earns more than $151,164 per year and is in a “policy-making position.”

Notably, this is different than the broader definition of a senior executive used by the Securities & Exchange Commission for securities disclosure regulation and reporting by executives. The requirement of “policy-making” considerably narrows the FTC’s definition of a senior executive. According to a commentary from the law firm Trucker Huss, “this narrow definition excludes many highly paid employees such as sales and investment professionals or executives without policy-making authority.”

Certain Industries Excluded

The noncompete ban does not apply to nonprofit organizations. It also carves out industries not covered by the Federal Trade Commission Act: banks, savings-and-loan institutions, federal credit unions, common transportation carriers, air carriers, and any individual or business subject to the Packers and Stockyards Act.

M&A Noncompetes Still Allowed

The rule does not apply to noncompetes that are part of a corporate acquisition or sale of business interests. The final rule defines such transactions as “a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.”

3. Your State Laws May Still Apply

The federal noncompete ban overrides any state rules on noncompetes that are weaker or at odds with it. This is explained by an analysis of the noncompete ban from Wagner Law Group: “The final rule supersedes state laws to the extent, but only to the extent, that such state laws conflict with the final rule or would otherwise permit or authorize conduct prohibited under the final rule.”

State bans against noncompetes that are even tougher than the federal ban, such as the strict anti-noncompete rules of California, remain in force.

4. Nondisclosure Agreements May Be Restricted Too

Law firms believe the noncompete ban may apply to similar worker arrangements, such as nondisclosure agreements (NDAs), if they, in the final rule’s words, “function to prevent” a worker from taking a new job or starting a new business. According to a memo on the final rule from the law firm Jackson Lewis, “nondisclosure agreements, training repayment agreement provisions, and nonsolicitation agreements that are overbroad…could be barred by the final rule.”

In their commentary, attorneys at the law firm Seyfarth Shaw agree. They observe that, under the noncompete ban, NDAs could be deemed to operate as noncompetes if they “span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their job.”

5. Lawsuits Enforcing Prior Noncompetes Do Not Go Away

Is your former company going to court to enforce a noncompete against you? The federal noncompete ban does not stop the lawsuit. The FTC’s final rule states that if the alleged breach of the noncompete happened prior to the effective date of the new rule, the litigation can start or continue.

6. What Your Company Must Tell You

If you have a noncompete, whether with a current or former employer, the company must inform you that the noncompete is no longer enforceable. The final rule says the company must give you a “clear and conspicuous notice” that the noncompete clause will not be and cannot be legally enforced.

7. Legal Challenges Will Severely Test The Noncompete Ban

Legal challenges to the noncompete ban are already under way from a variety of plaintiffs. One high-profile litigant is no less than the United States Chamber of Commerce. It filed a lawsuit seeking injunctive relief that would stop the ban from coming into force, or at the very least would postpone its effective date.

A more aggressive challenge is coming from Ryan LLC, a provider of tax services and software. It filed a lawsuit seeking to vacate and set aside the noncompete ban. The lawsuit claims that the FTC lacks the authority to issue the rule and that the rule itself is unconstitutional.

In its commentary, the law firm Seyfarth Shaw predicts that some of the lawsuits against the noncompete ban will prevail. “We expect at least some of the challenges to be successful,” write the attorneys, “because any final rule in which the FTC claims authority to ban restrictive covenants is not likely to withstand constitutional scrutiny” under various legal doctrines. They note, however, that even after successful challenges, the appeals process may take 12 to 18 months to play out before any Supreme Court decision.

Equity Comp Masterclass: Special Three-Part Webinar Series

Join us for our three-part Equity Comp Masterclass webinar series and earn a certificate showing you are "myStockOptions Educated"!

You can register for the whole series of three webinars at a special package price or any individual webinar in the series. Watch either live or on demand.

Part 1: Stock Options
May 2 (1pm to 2pm ET, 10am to 11am PT)
1.0 CE credit for CFP, CPE, EA, CPWA/CIMA, and CEP/ECA

Part 2: Restricted Stock/RSUs & ESPPs 
May 22 (1pm to 2pm ET, 10am to 11am PT)
1.0 CE credit for CFP, CPE, EA, CPWA/CIMA, and CEP/ECA

Part 3: Best Ideas From Top Advisors 
June 12 (1pm to 2:40pm ET, 10am to 11:40am PT)
2.0 CE credits for CFP, CPE, EA, CPWA/CIMA, and CEP/ECA

Details and registration are available at the webinar homepage.

RSU And Stock Option Negotiations: Key Points

Are stock option and restricted stock/RSU grants negotiable? What terms are negotiable at hire? Depending on how much the company needs you, especially if it's competing for you with other companies, you may be able to negotiate your equity compensation when you are hired or get promoted.

A recent myStockOptions webinar on negotiating equity comp, now available on demand, featured three advisors with experience in helping clients negotiate compensation (including a compensation attorney). While everyone’s situation is unique and requires personal advice, the general guidance these experts provided offers some helpful knowledge going into the discussions.

1. Be Realistic And Informed Before Attempting Negotiations

The ability to negotiate compensation depends on your importance to the hiring company, observed webinar panelist Art Meyers, an employment and executive compensation lawyer and the founder of Meyers Law Firm in Naples, Florida. “It doesn’t mean you have to be in the C-suite,” he added. “You can be a very talented engineer in an area in high demand. It depends.”

However, unless you are a C-level executive, “most of the time there is not a ton that is negotiable in the actual grant offer,” cautioned financial advisor AJ Ayers, co-founder of Brooklyn FI in New York City. “You can ask for more shares, but a lot of time these grant documents are ‘take it or leave it.’ If the company makes a change for one person, it has to make the change for everyone else, go through a board review, it’s messy. So don’t waste your time in trying to ask for things that are not going to be granted.”

AJ’s view was echoed by webinar panelist Beata Dragovics, a financial advisor and the founder of Freedom Trail Financial in Boston. “You have to be VP-level, in my opinion, and C-level to really start negotiating,” she explained. For clients with that degree of clout, she suggests going directly to HR, especially in a public company, to find out what they can negotiate in the hiring offer. “HR is expecting you to negotiate. I coach clients to ask HR what’s negotiable.”

Having that realistic and informed perspective is vital, the webinar panelists agreed. If you overplay your hand and ask for too much, your approach may backfire. Both Beata and AJ said they have seen employment offers actually rescinded after negotiating ploys that were too aggressive, leading the hirers to reconsider whether the person was the right fit for the company.

2. Understand Compensation Trends In Your Industry

What are the factors and features to focus on in negotiations? First, research the trends in your industry, suggested Beata Dragovics. “I find for us that trends are significant,” she said. This is one area, in fact, where consulting with an advisor can offer a key advantage. Over the years, her firm has amassed significant knowledge of compensation practices among the biotech and pharma industries in which most of her firm’s clients work.

“You learn from clients, you learn from recruiters, you learn from attorneys. You learn every time you negotiate. Companies want to stay competitive, so they will pretty much offer the same kind of equity compensation. The trends are very consistent.”

Art Meyers observed that with a public company it’s easier to research trends. You can review corporate SEC filings, which are public, to see what they do with executives and key employees. He said he finds information on the company’s grant guidelines in that way or from consulting or recruiting firms. “With a good stock comp calculator,” he added, “you can see what those equity awards may realize.”

3. Evaluate Equity Grants You Are Leaving Behind

When considering negotiation leverage, Art advises clients to factor in equity awards granted by their current employer that they would forfeit by leaving to work for the hiring company. “I would ask for make-whole awards if you’re leaving something on the table. You can ask for, and often you will receive, an additional award, typically RSUs, in which you have a short vesting schedule: six months, a year, something that mirrors the remaining vesting schedule at the other company.”

4. Know The Best Times To Negotiate

What are the best times to try to negotiate equity compensation? “I would say before hire and before promotions,” said Art. “Those are leverage points.”

For annual stock grants or special off-cycle grants that happen later, it all depends on your performance at the company, he explained. “What’s the value to the company? Can you be easily replaced? What’s the history or culture at the company or in the industry? All of these things play into whether you can get annual grants or off-cycle grants.” With public companies, Art recommends making your case 60 days in advance of the normal grant cycle.

5. Choose What To Focus On In Negotiation

Whether or not to negotiate compensation often comes down to whether the initial offer is adequate, observed AJ Ayers. “Does this offer match your financial needs?” she asks clients. “If someone is a solo breadwinner supporting a family of three, maybe taking a pay cut and some incentive stock options (ISOs) in a startup company is too much risk, in my opinion. As their advisor, I’m going to advise them to look at a more steady salary with RSUs instead, where we can see the historical stock price and get a sense of what that compensation is going to look like.”

One method that AJ likes to use with clients is to make a list of all the things that are important to them: “401(k)s. Salary. Is there a nice up-front bonus? If you’re cash-poor right now, that might be really helpful.”

She noted that some tech companies now offer exceptional benefits. “Is there fertility support? If you have a client who is having trouble getting pregnant, a $50,000 fertility support could be way more valuable than an additional RSU grant. What’s right for the client, what do they need to support their family: that’s how we come to the offer table and start evaluating these different offers.”

Similarly, Beata picks just a few attributes that are most important to her clients and negotiates on them. She emphasized that the current market environment in an industry will determine the extent of potential negotiations.

6. Seek Protections At Termination

Protecting equity awards in the event of job termination triggered by various reasons is a crucial point to consider in negotiations and in any severance provisions. AJ suggests that her clients have an attorney review the employment agreement. “There’s this nasty clause we see in some of these agreements involving at-will firing, in which a company can fire someone at any point for any reason,” she warned. “The vesting stops and you forfeit stock options. It is a good idea to have these employment agreements reviewed by an attorney.” Any clause deemed problematic can be addressed in negotiations, she explained.

For more guidance on your equity compensation in layoffs, see another Forbes.com article that I wrote: Protect Your Stock Options And RSUs In Job Loss: 3 Key Actions.

7. Know How Private Companies Differ

With a private company, noted Art Meyers, getting insights into trends and expectations for negotiating compensation is more difficult. “What you really want to do is to convert the number of shares at grant to a percentage of ownership on a fully diluted basis and ask for either a transaction value, a current accounting value, or the current Section 409A valuation they presently have to get for some sense of what that’s worth.”

A Section 409A valuation is an appraisal of private company stock to determine its fair market value using various methods allowed by IRS regulations under Section 409A of the Internal Revenue Code. Importantly for stock options, the 409A fair market value “should be the exercise price that you’re offered,” said AJ Ayers. “But they may not tell you that when you’re looking at job offers. So you need to go find the 409A on your own.”

The 409A valuation is a very useful piece of information to track down, along with any information on preferred stock sold to investors, AJ asserted. She warned that you’ll want to ignore any spreadsheet illustrations boasting that the startup will be “the next Amazon” and keep your expectations realistic.

Early-stage startups tend to offer stock options rather than the double-trigger RSUs that have become popular for later-stage pre-IPO companies. That means you need to ponder the option exercise price. With stock options in a startup, AJ Ayers urges clients to consider whether the exercise price is affordable enough for the options to make sense as compensation.

“If the price is less than a dollar, that’s probably doable for a family who’s got some savings or who could sell some investments to do that,” she explained. “But if we’re talking about ISOs or even nonqualified stock options (NQSOs) with a $5 or $10 exercise price, we start to lose any tax arbitrage that’s possible with exercising and then holding those shares. I’m not going to ever advise you to exercise and hold those. That’s too much risk.”

Further Resources

The webinar in which these experts spoke, Negotiating Equity Comp At Hire & Protecting It In Job Termination, is available on demand at the myStockOptions Webinar Channel. In addition, myStockOptions has a website section with resources on negotiating equity compensation at hire or promotion.

Equity Comp Masterclass: Special Three-Part Webinar Series

Join us for our three-part Equity Comp Masterclass webinar series and earn a certificate showing you are "myStockOptions Educated"!

You can register for the whole series of three webinars at a special package price or any individual webinar in the series. Watch either live or on demand.

Part 1: Stock Options
May 2 (1pm to 2pm ET, 10am to 11am PT)
1.0 CE credit for CFP, CPE, EA, CPWA/CIMA, and CEP/ECA

Part 2: Restricted Stock/RSUs & ESPPs 
May 22 (1pm to 2pm ET, 10am to 11am PT)
1.0 CE credit for CFP, CPE, EA, CPWA/CIMA, and CEP/ECA

Part 3: Best Ideas From Top Advisors 
June 12 (1pm to 2:40pm ET, 10am to 11:40am PT)
2.0 CE credits for CFP, CPE, EA, CPWA/CIMA, and CEP/ECA

Details and registration are available at the webinar homepage.

Job Loss: How To Protect Your Stock Options And RSUs

Laid off? Worried about layoffs? Remember your stock options or RSUs. In a myStockOptions webinar a panel of financial, tax, and legal advisors came together to discuss various topics on negotiating equity comp in hiring offers, protecting it at employment termination, and avoiding big mistakes when leaving a job with outstanding stock grants (Negotiating Equity Compensation: How Advisors Can Help Clients).

The danger is real. Sudden layoffs have recently erupted at many companies, even corporate giants such as Amazon, Google, Meta, and Microsoft. You want to be sure you take as much extra compensation for the road as you can. After all, you earned it during your time at the company.

Below are highlights of what the webinar panelists had to say about equity comp in job termination.

1. Keep All Documents Related To Equity Comp And Employment

The first and most important point in job loss is to know what equity awards you have, what their vesting status is, and your company’s policies and rules that apply when you’re laid off.

For that, you need to have all of the documents related to your equity awards and your employment in general. Be sure you keep all of these during your employment. If you don’t have them, contact the person or department in charge of stock plan administration at your company. You want to avoid getting caught without them in a sudden job loss.

“You need to obtain all the documents before employment termination occurs,” asserted webinar panelist Arthur Meyers, the founding attorney of Meyers Law Firm in Naples, Florida. “You have to understand how many awards you hold, what the terms are, whether there are any restrictive covenants such as noncompete clauses, and so on.”

Arthur listed some of the key items to keep in your possession, ideally before job termination:

• employment agreement
• grant agreements and any separate grant notice for each award
• the stock plan itself
• information about all your grants from the company’s online stock plan portals: both your company’s intranet and the website of a designated brokerage firm or transfer agent

Alert: Confirm you can continue to access these website(s) to view your outstanding stock grants, and the procedures for making exercises and stock trades, after you leave the company.

Don’t count on your company to provide this information after you’ve left. “It is often surprising to find out how little information you can actually get from your employer,” cautioned panelist AJ Ayers (CFP®, EA, CEP), a co-founder of Brooklyn FI in New York City. “Sometimes more mature public companies will have robust finance departments and equity ‘ninja squads.’ But recently public companies or private companies typically don’t have those departments.” Unfortunately, as a result you may end up having “to beg them for this information,” she warned.

2. Understand Your Post-Termination Rules

With your documents, check what equity awards you have, what the vesting status is for each grant, and any special treatment for involuntary layoff. “Confirm not only the award type but also the terms of the exit,” said AJ.

In general, you have rights only to stock options and restricted stock/RSUs that have already vested by your termination date. While the typical timeframe for exercising options after job loss is 90 days from your official end date, your period for exercise will be dictated by the company’s plan and your grant agreement. Make sure you know the date from which the post-termination exercise period (PTEP) is calculated.

Alert: Companies strictly follow PTEP rules, do not give you a grace period for missing the deadline, and have no legal obligation to notify you of upcoming expiration dates.

Usually, to get a different treatment, you’d have to negotiate at hire for the continuation or acceleration of vesting (or have enough clout or justification to do so in any separation agreement). The PTEP can also vary according to the reason for the job termination, AJ continued. “Sometimes if it is a ‘for cause’ firing, we’ve seen all equity being forfeited. But if it is an amicable separation, there is often room for moving the termination date back or forward, depending on when a particular grant may vest.”

These rules can also vary by industry and your level in the company, along with your ability to negotiate them at hire, observed panelist Beata Dragovics (MSFP, CFP, CEP), who advises many clients in the biotech industry with Freedom Trail Financial in Boston.

A few companies, such as Square, Pinterest, and Quora, have extended PTEPs for vested stock options as a feature to make their grants more attractive in recruiting and retaining talented employees.

In a large layoff, some companies will extend the post-termination exercise period beyond what was in the initial grant, perhaps to the full term of the option. Employees are then not rushed into exercising their stock options. In a private company, this extension of the exercise window is an especially beneficial feature, as a private company’s shares have no liquidity to provide the funding for the exercise. Should the company go public or be acquired in the future, the options could become very valuable.

With restricted stock and restricted stock units (RSUs), you almost always forfeit whatever stock has not vested at the time of your termination, unless your grant specifies another treatment or the company decides to continue or accelerate vesting. Therefore, if you are planning to leave your job, you may want to stick around long enough to get any valuable chunk of restricted stock/RSUs that may vest in the near future.

Sometimes the end of your time as an employee does not trigger forfeiture/termination provisions if you will continue to perform services for the company in some way, whether working part-time or as a consultant. “If you’re not going to a new position immediately,” suggested Arthur Meyers, “you may want to explore the opportunity to be a consultant for the company and continue vesting in your existing awards.”

Alert: While this article is focused on the standard job-loss situation, for various life and company events the rules that apply may be different, e.g. in retirement, early retirement, disability, death, or an acquisition of the company (“change of control”). Check your grant agreement and stock plan.

3. Understand The Tax Impact

You also need to understand the tax impact that leaving the company has on your equity compensation. Even for terminated employees, companies withhold taxes upon exercises of nonqualified stock options (NQSOs) and the vesting of restricted stock/RSUs. The income and withholding are typically still reported to you on Form W-2, even if the option exercise occurred after your employment ended—but not always.

“We have seen cases in which a client departs a public company where typically an exercise of nonqualified stock options would show up in their paycheck,” noted AJ Ayers. “Welp, the client does not work there any more, so there is no longer a paycheck. Where is that stuff getting reported?” She urges clients to keep a contact at the employer in the accounting or HR department so that there is someone to reach out to. “Often with tax-return deadlines approaching, we still have issues with getting W-2s from the company.”

AJ went on to note that sometimes companies do not withhold taxes on NQSO exercises by former employees, raising another set of concerns. “It can depend on the staffing in their accounting departments.” If taxes are not withheld and you instead receive a 1099-NEC, which can happen for grants that vest only after you terminated, you need to decide whether to: pay estimated taxes for that quarter or wait until your tax return for the year to pay what you owe.

Be Extra Careful With Incentive Stock Options

Special tax issues arise with incentive stock options (ISOs). Under the federal tax code, you have only 90 days to exercise ISOs after a standard job termination and still retain the special tax treatment that ISOs offer (12 months with disability and no limit with death). However, if your company’s post-termination exercise period is shorter than 90 days, that is the specified period you have until expiration and forfeiture.

After 90 days from termination, ISOs become nonqualified stock options, which have a different tax treatment.

Alert: If your company allows more than 90 days to exercise ISOs after your termination date, you need to be aware that your type of option—and thus your tax treatment—will change if you wait beyond the 90-day point to exercise.

“Be sure you are well versed on those tax consequences,” AJ urged. “We have seen in many cases where a client will log into their equity portal and it will actually still say that the options are ISOs when we know that they are not because the client left the company years ago. Watch out for that and be sure you understand the rules.”

Further Resources

The myStockOptions webinar in which these panelists spoke, which also extensively covers ways to negotiate equity compensation at hire, is available on demand. Our website section Job Events has abundant educational resources on equity comp in job search, negotiation, hire, termination, and consultant/contractor status.

Equity Comp Pandemic Planning: Leading Financial Advisors Headline myStockOptions Webinar

Like all storms, both literal and figurative, the pandemic of 2020 will pass, but at the moment it's a wild ride. Like everything else, company approaches to equity compensation and the financial-planning strategies advisors must consider for clients are being heavily impacted by Covid-19 and its ripple effects.

After wild waves in the stock markets, financial planning for stock compensation continues to be tested by volatility, economic uncertainty, corporate layoffs, and indefinite employment furloughs. It is more important than ever for financial advisors to re-evaluate approaches in this planning niche. Client strategies that may have been ideal for the economic boom years may need adjustment or revision in the unprecedented circumstances of the novel coronavirus.

Webinar: Financial Planning For Stock Compensation During The Pandemic

This is the subject of a special one-hour webinar from myStockOptions on July 22. Bruce Brumberg, the editor-in-chief of myStockOptions, will moderate a panel discussion among three leading financial advisors and a top compensation consultant:

In this online event, leading financial advisors and equity comp experts will discuss how to reconsider planning for stock compensation and company shares amid Covid-19 and its fallout. Registration is open at the webinar homepage.

The webinar discussion panelists are:

• Meg Bartelt, CFP® (Flow Financial Planning)
• Tim Kochis, CFP® (Kochis Global, former CEO and Chairman of Aspiriant)
• C.J. Van Ostenbridge, CEP (Infinite Equity)
• Jane Yoo, CFP® (Jane Financial)
• Bruce Brumberg, discussion moderator (myStockOptions)

After explaining how companies are changing their stock grants, including trends in approaches to underwater stock options, the discussion will turn to what the pandemic and its impacts mean for financial planning. Key topics:

• what to do with vested stock options
• strategies for nonqualified stock options and incentive stock options
• whether to immediately sell restricted stock or restricted stock units when the grant vests
• whether to participate in an employee stock purchase plan, and ESPP benefits even in down markets
• special strategies for grants in private companies
• helping stock comp clients through layoffs, furloughs, and new job opportunities

The webinar offers 1.0 CE credit hour for:

• Certified Financial Planners (CFPs)
• Certified Equity Professionals (CEPs)
• CIMA and CPWA

Webinar Joins Related New Financial-Planning Articles

Many employees with stock compensation are facing tough choices with their equity grants and holdings of company shares.

• You may need to sell company stock for cash to meet living expenses.
• Your company's stock price has probably steeply declined and rebounded, going through volatility that makes you wonder about your equity comp and financial planning.
• You may have lost your job or been furloughed, or you may have changed jobs.

New articles at myStockOptions address these and other timely topics:

7 Things To Know When You Sell Company Stock To Raise Cash
For reasons beyond your control, you may find yourself in a position where you suddenly need to sell stock for cash to meet urgent living expenses. When selling stock you must always proceed with caution. Review this checklist of topics to understand on tax, company, brokerage firm, and SEC rules.

ESPPs Offer Special Benefits In Down And Volatile Markets
ESPPs cannot be "underwater" like stock options, but a declining stock price can have an impact on your plan participation and the tax consequences. This article explains what you need to know for participating in your company's ESPP with a falling or volatile stock price.

What To Do With Your Just-Vested Shares After Your Company's Stock Price Drops
Market volatility can rattle anyone's financial plan for stock compensation and company shares. What should you do with shares acquired from equity awards now? Sell them immediately? Hold them in the hope that the stock price will recover? Should you change the strategy you've been following? This article provides a financial planner's insights on how to consider these questions.

These articles join our longstanding expertise on equity comp and company stock during down markets in our sections on volatility and job loss.

Equity Comp Survival Guide For Pandemic Times

The COVID-19 pandemic has affected everyone, including employees with equity compensation.

• You may need to sell company stock for cash to meet living expenses.
• Your company's stock price has probably declined, leaving you wondering about your equity comp and financial planning.
• You may be considering the best use of your stimulus payment from the IRS.
• If you work for a small business that's seeking a forgivable loan from the Paycheck Protection Program, you need to understand the legal risks in the application and the use of the funds.

Here we present recent articles from the myStockOptions editorial team on these and other timely topics.

See also a full list of new and recently updated content at myStockOptions. Because Tax Season 2020 has been extended to July 15, it includes the fully updated tax-return content in our Tax Center.

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7 Things To Know When You Sell Company Stock To Raise Cash

You may find yourself in a position where you suddenly need to come up with cash to meet living expenses or other urgent financial demands. One source of these funds can be proceeds from selling shares of your company's stock, whether acquired via the open market or equity compensation (e.g. stock options, RSUs, ESPPs). Before you sell your company shares, review this article's checklist of topics to understand on tax, company, brokerage firm, and SEC rules: 7 Things To Know When You Sell Company Stock To Raise Cash.

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Insider Trading: How To Stay Out Of Trouble

If you do sell company stock quickly to raise cash, be careful. Depending on your access to confidential company information, trading company stock can actually get you into serious legal trouble, including criminal liability for insider trading. A new article at myStockOptions explains what you need to know: Insider Trading: How To Stay Out Of Trouble.

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Market Volatility: A Survival Guide For Equity Comp

When stock markets become a rollercoaster and the economy is in a downturn, you need to hang in there and remember equity comp and company shares are best viewed as a long-term deal. Several articles at myStockOptions provide useful advice on coping with stock-price volatility, down markets, and job termination (whether layoffs or other types). These include:

• Stockbrokers' Secrets: Equity Compensation Strategies For Volatile Markets
• Stomach Volatility In Your Company's Stock Without Losing Your Mind
• Job Loss And Your Stock Grants (Parts 1 and 2)
• Preventing Irrational Decisions About Selling Company Stock Or Exercising Options
• Manage Your Expectations To Avoid The Option Blues
• Reframing Your Stock Option Exercise Strategy In Volatile Markets
• Equity Compensation Strategies For Down And Rising Markets

You can find these articles and extensive related content in the sections Basics: Volatility and Job Events: Termination.

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Donating Your Stimulus Check: 4 Key Tax Rules To Know

If you don't need the extra cash, one possible use of your stimulus payment from the IRS is to donate the money to a worthy cause. For this beneficence, you may get a tax deduction. Before you seek the deduction, learn the IRS rules that apply in an article at the Forbes.com blog of our editor-in-chief Bruce Brumberg.

For guidance on the tax deduction for donations of stock instead of cash, see the related FAQ at myStockOptions.

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How To Avoid Legal Problems With Your Paycheck Protection Program Loan

Potentially forgivable loans to small businesses are available via the Paycheck Protection Program (PPP).

• In an article at Forbes.com, we present advice from former federal prosecutors on avoiding legal problems with PPP loans.
• In a separate Forbes.com article, we share insights from small-business attorneys about how to meet the conditions that make the loan forgivable, and how to use PPP loan funds in a way that avoids abusing the loan program.

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Learning Center Offers CE Credits

Keep up your continuing professional education! In our Learning Center, myStockOptions has six courses and exams offering CE credits for several professional designations:

• 30 continuing-education credits for Certified Equity Professionals (CEPs): 100% of the total requirement
• 15 continuing-education credits for Certified Financial Planners (CFPs): 50% of the total requirement
• 15 continuing-education credits for Certified Private Wealth Advisors (CPWAs) and Certified Investment Management Analysts (CIMAs): 37.5% of the total requirement
• Chartered Financial Analysts (CFAs) and Certified Public Accountants (CPAs) are encouraged to take our courses and exams and include them, if possible, when they self-document their continuing professional education

Each course of study features podcasts, articles, and FAQs from myStockOptions. They are woven into a dynamic, interactive learning tool that teaches the topics in a memorable way. The answer key for each exam also links to relevant content on the site for further reading and learning.

Stock Sales: 7 Topics To Understand When You Sell Shares To Raise Cash Quickly

These are challenging times for everyone. For reasons beyond your control, you may find yourself in a position where you suddenly need to come up with cash to meet living expenses or other urgent financial demands. The proceeds from selling shares of your company's stock, whether acquired via equity compensation or open-market purchases, can be a source of these needed funds.

However, when making stock sales you must always proceed with caution. Before you sell your company shares, review this checklist of topics to understand on tax, company, brokerage firm, and SEC rules.

1. Understand Capital Gains Tax Basics To Generate Capital Losses

When you sell shares, assuming they’re not in a retirement plan account (e.g. a 401(k) or IRA), you generate a capital gain or a capital loss. The calculation is the amount of the sale proceeds over or under your cost basis, i.e. what the shares cost to acquire plus any W-2 income you recognized for the equity compensation. For stock held over one year after a stock option exercise, vesting of restricted stock units (RSUs), or a purchase in an employee stock purchase plan (ESPP), the gain or loss is long-term, meaning a lower tax rate applies. Shares held for less than one year are taxed at short-term capital gains rates, similar to that of your salary income.

If you have a choice of company shares to sell, you want to first sell stock that generates a capital loss which you can harvest against capital gains. What that means is that you can net the capital losses against any current capital gains, with unused losses deducted against $3,000 of your ordinary income. The remainder of the loss is carried forward to future tax years. When you do not have shares to sell at a loss, your next choice is stock that has the smallest long-term capital gain.

2. Clearly Identify The Lot Of Shares You Want To Sell

When you hold company shares that you’ve received at various times, such as yearly RSU vesting or twice-yearly ESPP purchases, you want to identify at the time of sale which share lot is being sold. The default rule is “first in, first out” (FIFO), but you can choose. Any shares you received at a recent market high are the ones you want to sell for a loss. Make sure you get clarification on how to indicate specific lots to sell through your brokerage firm’s website.

3. Watch Out For Wash Sales

A “wash sale” is deemed to occur if you sell company stock at a loss but you have also separately purchased the same stock within 30 days before or after the sale. That triggers the special rules for wash sales. Under those rules, the loss and holding period are carried over to the replacement shares.

According to most experts, any restricted stock or RSU vesting 30 days before or after the loss sale would be considered a wash sale and trigger the related rules. Similar treatment applies to an option exercise, ESPP purchase, or dividend reinvestment plan on company stock. Those are all considered purchases.

4. Job Loss? Carefully Follow Your Company’s Post-Termination Stock Option Exercise Rules

You may intend to exercise stock options and immediately sell the shares to generate needed cash.  However, if you lose your job, vesting usually stops on all types of stock compensation. In that case, you must quickly exercise any outstanding vested stock options, typically within 90 days or less of your employment termination. As explained in the section Job Events at myStockOptions.com, if you do not exercise vested in-the-money stock options in time you will forfeit their value.

Alert: Check your stock grant agreement and your stock plan for the rules and exercise deadlines that apply to each option grant upon job loss. If anything is unclear, ask your company’s stock plan administrator.

5. Know Your Company’s Rules For ESPP Contributions

In an employee stock purchase plan, you can usually withdraw any accumulated funds that are waiting for the next purchase date. You need to check your company’s ESPP rules for how you do this. While an ESPP with a lookback and a 15% purchase discount can be an attractive investment in down markets, withdrawn ESPP funds can be another source of emergency funds. Furthermore, you can reduce or stop future ESPP contributions from your salary.

6. Be Mindful Of Holding Periods For ESPPs And ISOs

With stock from a purchase in a tax-qualified ESPP or an exercise of incentive stock options (ISOs), holding the shares for more than one year from enrollment/grant or two years from purchase/exercise gives you special tax treatment on the sale. Remember that the tax treatment is affected by selling those shares early. That’s called a disqualifying disposition, with different ramifications for ESPPs and ISOs. This is another reason to carefully choose and specify the lot of shares you want to sell, as explained in #2 above.

7. Beware Of Insider Trading

Understand that sometimes stock trades can actually get you into trouble. If you buy or sell shares of your company’s stock while you know material nonpublic information (MNPI), you are committing insider trading, which is illegal. Material nonpublic information refers to company secrets that, when made public, would move the company’s stock price up or down. This prohibition against trading on confidential inside information applies even if you are no longer employed by the company.

The type of information that could be considered MNPI is not always clear. However, common sense is a good guide. MNPI is any confidential company information that, once publicly known, could affect your company’s stock price in a positive or negative way. Examples include undisclosed financial results, a merger or acquisition that has not been announced, or a new product that has not been publicized. This prohibition also applies to confidential information you learn in your job about a corporate client, supplier, or other organization that you work with.

Alert: The SEC and the US Department of Justice are watching closely for insider trading related to the stock-market impacts of the COVID-19 pandemic and expect to pursue enforcement activities.

In addition to the securities laws about insider trading, your company may also have its own stock-trading pre-clearance rules, along with mandated blackout periods and window periods for stock trading.

More Lawsuits Involving Stock Compensation

Back in January, this blog looked at some recent lawsuits of interest involving stock compensation. In recent months, a few additional court decisions involving equity comp have caught our attention.

Online Grant Acceptance

Electronic distribution and acceptance have become common procedures for stock grants. Occasionally lawsuits challenge these, often when the agreement has a provision that restricts an employee who later contends that he or she did not see it or agree to it (e.g. a covenant not to compete). That's what happened in ADP v. Lynch, in which the US Court of Appeals for the Third Circuit upheld a lower court's decision enforcing restrictive covenants in electronically delivered grant agreements. In the company's online procedure, employees needed to check boxes confirming that they had reviewed the documents, which included the plan, the award agreement, and the noncompete. The first page of the grant agreement also specifically told employees that acceptance of the award depended on their agreeing to the noncompete. The court found that by checking the box affirming their reading of these documents, employees agreed to the provisions. It rejected as irrelevant the contention that the employee did not recall doing so and was not adequately informed about the consequences of accepting the grants.

This case is a clear warning that you need to read and understand the provisions in your grants agreement and stock plan. Plus, don't assume that the provisions in new grants you receive are identical to the provisions of prior grants. For more on restrictive covenants in stock grants, including this case and others, see the myStockOptions article Watch For Noncompetes And Other Restrictive Covenants In Stock Grant Agreements.

Divorce

Like other assets and forms of compensation, stock comp sometimes gets dragged into divorce property settlements and alimony payments, though the issues can be more complex. In the case Ludwig v. Lamee-Ludwig, the Massachusetts Court of Appeals looked at the question of whether unvested shares are considered assets for the property settlement and/or income for child care/alimony. The court confirmed a lower court's decision that the calculation of an employee spouse's alimony obligation may include income received from unvested employee stock options that were not subject to equitable division as assets, under application of the "time rule" in Baccanti v. Morton (434 Mass. 787, 2001), for dividing unvested grants. This would not constitute "double counting" if the income were included in determining the husband's alimony or child support. At his blog, divorce attorney Jason Owens discusses the importance of this case, which in his view offers "precision" for treating unvested options not divided under the property settlement (Treating Stock Options And RSUs As Assets Vs. Income In A Divorce).

For more details on the treatment of restricted stock and stock options in an divorces, see the articles and FAQs in the Life Events: Divorce sections of myStockOptions.com.

Game-Changing Court Decision Shows Why You Must Watch For Noncompetes And Other Restrictive Covenants In Stock Grant Agreements

Your stock grant agreement can have a provision that will not only claw back your gains if you leave to work for a competitor but also restrain you from taking a job at that company. These types of provisions, called restrictive covenants, can lurk in grant agreements for stock options, restricted stock, and performance shares. They are separate from your employment agreement.

Until recently, courts have been treating restrictive covenants in a predictable pattern, according to attorney Michael Melbinger, head of the Employee Benefits and Compensation practice at Winston & Strawn and a contributor to both myStockOptions.com and myNQDC.com. Courts have been more likely to enforce a restrictive covenant, especially a noncompete, if the remedy for breach is merely loss of compensation. Courts have been less likely to enforce a provision that prevents you from earning a living in your profession. When the provision gives you a choice of (a) working for a competitor and forfeiting equity or (b) keeping the compensation but not competing, most courts will enforce the provision. This is called the employee-choice doctrine.

Game-Changing Court Case

However, in Newell Rubbermaid v. Storm (Del. Ch. March 27, 2014), the respected Delaware Court of Chancery went beyond the employee-choice doctrine and, in doing so, changed experts' views on these provisions. The court granted the plaintiff company a temporary restraining order against the defendant, a former employee, for actions that appeared to violate the noncompete, nonsolicitation, and confidentiality covenants of the company's RSU agreement with the employee. The RSU agreement, to which the defendant assented and which the company sought to enforce, was a so-called "clickwrap" agreement. This is an online agreement that requires webpage visitors to affirmatively assent to the terms of a contract by clicking an "accept" button to proceed, along with a checkbox for confirming the statement "I have read and agree to the terms of the grant agreement." (Compare this to the "browse-wrap" concept, by which the use of the website implies assent to an agreement.)

The Delaware court agreed with the plaintiff that the defendant had assented to the restriction under the agreement by accepting the award through a third-party website. It reached this conclusion even though she merely clicked to indicate acceptance of the agreement as a whole and did not acknowledge/click on any specific provision confirming that she had read or agreed to the restrictive covenant.

How Common Are These Provisions?

Towers Watson's 2013 LTI Policies and Practices Survey shows that restrictive covenants in equity award agreements are more common than many people may realize. In a blog commentary at his firm's website, Mr. Melbinger reports the following from the Towers Watson survey:

• About one third of the surveyed companies have put restrictive covenants in recent stock grants, and usage is not related to company size.
• Noncompetition, nonsolicitation, and nondisparagement are the most common restrictions.
• These restrictions apply to everyone getting an award, not just to certain executives.
• A clawback of realized gains is the most common consequence of a violation.

The NASPP's 2013 Domestic Stock Plan Design Survey found that stock plans at 60% of the responding companies have clawback provisions. At 45% of these companies, clawbacks are triggered by the violation of a noncompete. At 35%, clawbacks are imposed after the inappropriate use of trade secrets.

Lessons

Your stock grants come with strings attached, as explained in an article on myStockOptions.com that discusses court cases involving noncompetition clauses and other restrictive covenants. Courts may enforce all remedies in a stock grant agreement. This includes remedies that go beyond simply the forfeiture of the stock award, such as a restraining order preventing you from working for a competitor.

Newell Rubbermaid v. Storm presents many lessons for employees. You must read your whole grant agreement and understand all of its terms, even if you have little ability to negotiate changes. In addition, do not ignore new grant agreements on the assumption that these are always going to be the same. For the employee in Newell Rubbermaid v. Storm, the noncompete provision appeared suddenly in the most recent grant agreement. By clicking "accept" in an online agreement, you may be agreeing not only to terms related to your stock grant but also to terms that affect your post-employment obligations to your company. For more details on the related lessons for employees, see Mike Melbinger's blog commentary on this topic.

Noncompetes, Clawbacks, And Courts

In a stock option grant, a noncompete forfeiture provision can prevent you from exercising your options if you leave the company to work for a competitor. Over the past several years, federal courts have tended to rule in favor of noncompetes, following a trend begun in litigation won by IBM during 1999 (in particular, see IBM v. Bajorek, United States 9th Circuit Court of Appeals). States, by contrast, have not always been so supportive. In particular, California courts have repeatedly rejected corporate noncompete provisions challenged by former employees trying to keep their stock options. In a decision later upheld by the California Supreme Court, the California 2nd District Court of Appeal even castigated the federal decision in IBM v. Bajorek as a "misapplication of California law."

However, some states do favor noncompetes. The Texas Supreme Court recently upheld the use of stock options as adequate consideration in exchange for a noncompete provision, reversing a previous decision in a lower court (see Marsh USA Inc. v. Cook, 2010). It decided that stock options are reasonably related to the company's interest in protecting its goodwill and are therefore sufficient to support a noncompete. (The case is discussed in detail by an article in The Texas Lawyer.)

At myStockOptions.com, we follow these developments with great interest. An article on the website charts the history of noncompete forfeiture provisions with stock options, and a few FAQs explain the basics of stock option noncompete agreements and their often close companions clawback provisions. You can even find out whether restricted stock grants ever carry noncompetes and clawbacks.

For those of you who deal in nonqualified deferred compensation, an FAQ at our sister website myNQDC.com discusses whether noncompete provisions are enforceable with NQDC distributions.

Restricted Stock & RSUs In The Media Spotlight

While restricted stock and restricted stock units typically don't attract as much media attention as stock options, they do when the grants involve chief executives, such as the incoming CEO at J.C. Penney. The company's new head, Ron Johnson, is giving up valuable restricted stock grants from his prior company (Apple) that would have had substantial value at vesting. The grants from J.C. Penney are intended to offset this loss. As many news reports have pointed out, Mr. Johnson is planning to invest a roughly equivalent amount in J.C. Penney.

Media attention is one thing; media ire is another. As anybody who reads the business headlines will know, journalists routinely react with cynicism or even outrage when unequal stock grant practices are applied to executives and employees. The author of a recent article at BNET (CBS business news) laments what he calls the "lousy corporate governance" that led to a harsh disparity between executives and laid-off employees at one recently acquired company. (See At Genzyme, Laid Off Workers Lose Stock Bonus...But The CEO Keeps His.) Let go to reduce costs and make the company run more efficiently, terminated employees lost all of their unvested grants in the months before the M&A deal was announced. Meanwhile, the unvested grants of executives still with the company at the closing were fully accelerated and converted into the merger consideration (see page 8 of the company's Schedule 14D-9).

Unfortunately, the treatment of RSUs and other equity awards at termination may not always be to your liking, even in an acquisition (see the M&A FAQs at myStockOptions.com). However, it can be favorable: the employees of an acquired company can just as easily receive new grants. This happened at Salesforce.com upon a recent acquisition, according to a press release.