To incentivise and hold in senior executives employers often award senior executives options to purchase shares in the company at a fixed price, or at a discounted rate set by the employer.
This allows the employee to purchase shares at discounted price, and to share in the success of the company if the value of the company and its shares increases.
Vesting means the time when you can actually ‘exercise’ the share options by buying them at the agreed price.
Usually such share options only start to ‘vest’ after you have been employed for a certain period and usually in tranches every set period after that.
If the value of the company has increased since you were granted your options and when they vest then the price at which you can buy them will be lower than their market value. This means that you can sell them and make a tidy profit.
Share options can often be the single most financially important aspect of a senior executive exit package as granted options have become a more popular incentive for employers to use with their senior employees than cash-based bonuses.
The rolling nature of vesting of option in tranches can lock senior executives into their jobs for years, waiting for their share options to vest, so that they can cash in on any increased value.
Often whether or not you retain your share options when you leave your employment will depend on whether your share options are vested or unvested.
Vested – means those option that you already have the right to exercise (purchase the shares).
Unvested – means options that you have been granted with a right to exercise at some future event, condition being met or at a future date/s.
If you are classed as a good leave when you leave your employment often you can exercise your vested options but any unvested options are lost.
When you leave your employment under a settlement agreement it is important to understand how this will the impact your share options. Also as part of any negotiation the agreement needs to detail how your options will be treated after you leave and ideally state that that you will be treated as a good leaver (or better)
These are the rules which govern how share options and shares are treated.
Often options may be given in parent companies in other legal jurisdictions which may mean that share scheme rules are governed the laws of that other jurisdictions.
Post termination restrictions can be included in such scheme rules and can apply to share options and can apply for a period even after you leave your employment and even if you end up getting no value/payment under your options.
The scheme rules will often set out what happens to your share options when your employment ends.
The rules will set out various conditions which you need to meet to be eligible to take advantage of any unvested shares either at the date of termination or at a future date or event happening.
How your employment ends will be important under the scheme rules in determining whether you will be classified as a ‘good leaver’ or a ‘bad leaver’.
Usually being a good leaver under a share scheme will mean that you get treated better than if you were to be classed as a bad leaver.
Good leaver: examples often include termination due to ill health, retirement and redundancy.
Bad leaver: often include capability dismissal, misconduct dismissal and resignation
Those classified as bad leavers will often lose any unvested options. If you have been unlawfully sacked as part of any settlement agreement negotiation we can try and seek better treatment of your options than would otherwise be the case under the scheme rules and have you classed as a good leaver.
When you leave under a settlement agreement it is important to include wording that clearly sets out how your share options will be treated. The reason for the termination of your employment will be important.
Depending on the circumstances including whether you have potential claims against you employer which you would be waiving under a settlement agreement, it is sometimes possible to agree pro-rating vesting (where you are part way through a vesting tranche period) or even accelerated vesting. It is also sometimes possible to agree an extension of the period have to exercise any vested options.
Scheme rules will often include post termination restrictions which apply to the senior executive from when they were granted their share options. Often such restrictions will apply after options are lost even where no value is gained by the employee under the options.
These type of restrictions are often more enforceable for longer periods than those which appear in employment contracts/service agreements.
If you have share options and you are being forced out, or if you have been offered a settlement agreement or you would like to position yourself to get one, please contact David Greenhalgh on 0203 603 2177 or Make An Online Enquiry.
For expert employee legal advice, please contact David Greenhalgh. Advice can be given by phone, by online conference call or in person at 110 Bishopsgate.
David Greenhalgh is a specialist settlement agreement lawyer based in London. David works with senior-level executives in securing them the best possible exit terms.
