Author Topic: Anyone know anything about employee stock options?  (Read 2781 times)

phxguy23

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Anyone know anything about employee stock options?
« on: March 15, 2014, 05:50:18 PM »
Hi all,

I work for a pre-IPO tech company that is making good strides toward a liquidity event (likely an IPO). I recently exercised some vested stock options, and as part of that process spent some time reading the plan documents more thoroughly than I had in the past.

One thing caught my eye that seemed odd, and I'm wondering if anyone out there has some expertise and could shed light. In the document there is a call option definition (I've heard this referred to as a "callback"). It states that:

- In the event that the employee is terminated with cause, the company has the right to call all vested shares at the lower of purchase price or fair market value -- effectively erasing the benefit of these options.

- In the event that the employee voluntarily resigns, the company has the right to call 1/2 of all vested shares at fair market value and the other 1/2 at the lower of purchase price [strike price] or fair market value.

Okay -- pretty crappy if you ask me. But what I found the most odd is the definition of a date that this was all effective through. If I'm reading it right, the document states that this call option remains in effect until (1) a change in control (buyout of the company) or (2) 3 years after an IPO, whichever comes first.

So say we IPO later this year, and some number of months go by until a time where a lockup period ends and I can sell my shares. By that point I've exercised everything I've got vested and sold. Then I choose to leave -- prior to the 3 year post-IPO mark. How can the company buy back half of my shares at my cost? Can they force me to buy back the shares I sold, then sell them back to the company at a loss?

Capsu78

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Re: Anyone know anything about employee stock options?
« Reply #1 on: March 15, 2014, 08:48:28 PM »
My only "expertise" beyond having recently stayed at a Holiday Inn Express is having seen various stock options from 3 different large Fortune 1000 companies.  In the first, some of the options had matured, some had not... but a RIF occured and even though we were blind sided by the RIF, and we had no documentation accounting for the mechanics of "What if..." part of the exit package was "... we have aged all your options strike points" meaning the only caveat was we had to execute within 90 days of termination.  So while faced with severance, we still had to fund a five figure expense to aquire a six figure cash out.  Fortunately had access to the means to do so, and another "unknown unknown" application for an well funded emergency fund.
After relanding at another F1000, another 5 years go by with a number of both matured and "seven year cliffed" RSU's are aquired when the RIF grim reeper taps us on the shoulder to tell us "the music stopped, you don't have a chair".  This time, a 60 page severence agreement, including "you can not work for X,Y or Z competitors" was carrotted on a very fair severence agreement.  However, the most lucrative "7 year" RSU's that today would have been worth mid to upper 6 figures were not going to be grandfathered. 
We went to our attorney to review the severence and his $1800 worth of advice was ... "Wow, I have reviewed a bunch of these exit packages and and this one is unbelievably well written... If you want to sue them... you are going to need a bigger boat".  HOWEVER, he suggested asking them if they would consider reducing your monthly severence amount and extending the period until your official end date, allowing you to extend your benefits window and achieve at least your next batch of options.   Since we were very careful to "exit" professionally, they allowed us to do that, in effect being on the employee count for an additional 4 months until the next level of options aged.  We signed on that, even though it cut our monthly severence to about 65%.
What did suprise us, and was totally NOT in our calculations was that by being an "employee" on a certain date also triggered a entire annual profit share even though separation was in Q1.
So, my "Dad thinks..." advice for you is don't sweat the "onerous legal wording" of your current options as there is not much you can do about them.  If you  get IPOed, chances are the rules in play will be established by the buyers, and their HR department rules, and the regulations they play by...and unless you are talking about a 6 figure bump, up front analysis is over analysis.
Hope this helps.       

kkbmustang

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Re: Anyone know anything about employee stock options?
« Reply #2 on: March 15, 2014, 10:10:37 PM »
The shares will probably have a restriction on your ability to sell them. Look in the plan doc or grant agreement. So even if they vest and you exercise, they'd be subject to the restriction for that additional period.

RobertBirnie

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Re: Anyone know anything about employee stock options?
« Reply #3 on: March 16, 2014, 12:08:05 AM »
This is a bit of a guess, as although I do have shares in a couple private companies neither have reached a liquidity event and both are just sitting in some drawer somewhere.

I'm guessing though that you have nothing to worry about as those clauses were probably not written for you. Those were written for someone VP/SVP/C-level person who has a serious stake in the company.  Imagine you were in the companies shoes and you hire a CEO for 5-10% of the company and he walks with the stock options. You're out the stock and the CEO, major negative! And sadly I've heard this happens a lot with co-founders, some joe with 5%.

I'd bring it down to how much you trust the company. If they seem fair they will probably treat you that way. If you get terminated with cause, I wouldn't be surprised if they take the options, you should never get terminated with cause. For voluntarily resigns though, I bet they'd only go through the bother of calling if you had a substantial stake.

pac_NW

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Re: Anyone know anything about employee stock options?
« Reply #4 on: March 16, 2014, 06:33:34 AM »
Talk to an expert. Kaye Thomas is mine for options questions.

http://fairmark.com/books-fairmark-press/consider-your-options/

mm1970

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Re: Anyone know anything about employee stock options?
« Reply #5 on: March 16, 2014, 11:48:51 AM »
Um, you should probably contact an expert.  My guess (I've worked for two start-ups, one currently).

Of course you don't have to buy back your shares after IPO.  At that point, they aren't "options" anymore, they are "shares".

Where I expect it would take effect is if you resigned and still had unexercised options.

For example - we have 90 days after termination or quitting to exercise our options at my current company.  Let's say you go IPO and sell all but 1000 options.  Then you quit.  You would have 90 days to exercise these options.  That is when they could call half at current market value and half at strike price.