The myStockOptions Blog

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.