by Achaessa James, CEP/PMC
Now that we’ve covered the basics on stock option grants and vesting in this series, what happens when an award recipient leaves?
Leave Taking or Taking Leave?
There are many ways a person can leave your company and each path out that door can have a different impact on outstanding equity compensation awards. This is where you’ll have to get to know the terms of your governing stock option plan document. And, as when awards are granted, if the award is a tax-qualified Incentive Stock Option, the Internal Revenue Code (IRC) sets forth regulations for what happens to an award when an ISO recipient is no longer an employee. For the majority of awards, options and stock that are unvested will be immediately forfeit, and vested awards will be available for exercise for a defined period of time after the award-holder’s departure called the post-termination exercise period (the PTEP). For non-tax qualified awards (NSOs) the PTEP can be as long as the contractual life of the award, but most plans make it the same as ISOs for ease of administration.
A Graceful Departure
Let’s look at some common post-termination exercise periods for tax-qualified awards:
- Voluntary or Involuntary (not for Cause). The maximum PTEP is 3 months. If longer than 3 months, the award is treated as a non-qualified award (NSO) after 3 months end.
- Death. The IRC allows ISOs to be exercised up until the full contractual term of the award. Most plans limit the PTEP to 12 months after death, and sometimes they also apply this PTEP if the person dies within 3 months after terminating employment with the company.
- Disability. The statutory PTEP is 12 months after the date of disability. Some plans limit it to 6 months for disability.
- Cause. There is no specific PTEP for termination for cause, but many plans say that all rights (vested and unvested) terminate immediately upon termination. Some plans allow for exercise of vested awards on the day of termination only.
Going, Going, Not Gone.
But what happens if it’s only a leave of absence? Again, for NSOs, the company can set its own policy. For ISOs, the employee has 3 months LOA during which the award will retain its ISO status. After that 3 months, the 3 month PTEP begins to run, as in #1, above. UNLESS, the employee has a written contract with the company that allows a return to work later than the 3 months, or if the leave is a statutorily protected type of leave like leave under the Family Medical Leave Act or leave for military service (in some states), both of which protect the status of the ISO as long as the leave lasts.
What do I do if the employee wants to buy the stock? What happens to the award if it doesn’t get exercised? Next month we’ll look at award exercise and forfeiture in Admin Super Powers
Achaessa James has worked in equity compensation since 1999 in the legal, venture capital, and equity administration outsourcing fields. She is a senior Equity Compensation Consultant with Stock & Option Solutions where she supports clients with system implementations, data migrations, corporate governance audits, corporate transaction preparation, and special project design and implementation. She is also the consulting Equity Compensation Product Manager for the National Center for Employee Ownership where she manages the highly regarded twice-yearly CEP Exam Prep Course, and serves as the NCEO’s subject matter expert on equity compensation.
Achaessa’s focus on privately held companies has earned her a deep expertise in pre-IPO and M&A equity planning and audits, and best practices in administration and technology. She speaks on these topics at industry conferences and in webcasts, and is a published author with books including “If I’d Only Known That!”, and “The Private Company Equity Compensation Administration Toolkit” as well as many newsletter articles in industry publications. You can connect with Achaessa on LinkedIn.