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How Long Should Former Employees Have to Exercise Stock Options?

Posted by Paul D. Woodard | Jun 08, 2017 | 0 Comments

Stockoptions

Offering employees stock options can be a valuable incentive to attract employees and reward loyalty. A typical stock option grant provides that a certain employee has an option to acquire X number of shares in the company at Y price per share. The options are generally vested over a specified period of time with the company. Once the options are vested, the employee has the right to “exercise” their options, purchasing X shares at Y price per share. Ideally, the shares have increased in value over that period of time, giving the employee a valuable benefit.

Stock option plans are especially popular with tech companies and startups that may have limited cash on hand to compensate employees. Start-ups and companies looking to offer stock options to employees have a number of factors to consider. This includes how the stock option plan is set up, whether to provide tax benefits to the company or employee, the price of the stock options and how long to allow former employees to exercise their options. These factors could have a considerable impact on employee incentive and the company's bottom line.

The timing of when to allow employees to exercise stock options may be a complicated decision. As Uber has recently discovered, having an exercise window that is too brief can leave former employees unable to purchase stock and disincentivize current employees. For Uber, options are available for workers who have been with the company for at least three years, which represent about 10% of the company's more than 12,000 employees. However, under its prior policy, ex-employees had 30 days to exercise their stock options, which is much shorter than many other tech companies. Most start-ups provide around 90 days for ex-employees to exercise their options.

According to a spokesperson for Uber, it is costly to exercise stock options after people have recently left their job. If a former employee does not have enough money set aside to exercise their stock options within 30 days, they may lose the chance to buy shares in the company. As a result, many former employees forgo their options because they are unable to front the large amounts of money required to exercise their options.

The ride-sharing company has recently changed their option windows for workers who leave the company. “I'm happy to share we're taking positive action and extending the post-termination exercise period,” said the Uber spokesperson,” from 30 days up to 7 years for Uber employees with at least three years of tenure. This is a significant change that ensures employees who leave Uber can benefit from their stock options and be rewarded for their contributions to the company. We believe this flexibility gives people a fair opportunity to retain their vested and earned equity."Incentives like employee stock options are an important tool to motivate employees and keep long-term valuable employees with the company. If you have any questions about structuring an employee stock option plan or other employee benefits plans, Butterfield Schechter LLP is here to help. We will answer all your questions and make sure your company offers compelling benefits to help you attract and retain top executives and employees. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Paul D. Woodard

Paul Woodard practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Estate Planning.

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