The Basics of Equity Compensation

Option Expiration

The life of an option usually lasts about 10, 7, or 5 years. Since expiration rules vary, it is important to know the details of a stock option plan. A company is not under any obligation to tell an employee when an option is about to expire. If the market price of the stock falls below the exercise price, there is no point in exercising. These options are termed “underwater.”

Inactive Status

An inactive status (during the stock option term) can subject options to different rules, which typically entail an earlier expiration depending on the triggering event. Inactive status can be brought on by:

• Retirement
• Disablement or death
• Resignation
• Working for the competition
• Termination

Retirement. Employee tenure at any given company is generally between three and five years. So, employees who work for a company for a substantial amount of time (and who retire with that company) are recognized for their performance and retention. The reward might come in the form of:

• Vesting acceleration
• OR
• More time in which to exercise options

Disability or death. Stock options are usually vested right away and exercisable within a year of disability. An employee should notify their family of the stock option plan rules and regulations. This could prevent options from expiring without being exercised.

Resignation. Anytime an employee leaves a company (except due to disability or death), it is most likely that they will only be allowed to exercise vested options for a limited time (typically 90 days). Depending on the plan, vested options could expire on the day the employee leaves the company. Options that have not vested expire immediately upon termination of employment, regardless of cause.

Working for the competition. This can be a sticky situation. Non-compete or non-disclosure agreements that most companies have employees sign may have options expire just 24 hours after an employee walks out the door.

Termination. Depending on the reason for termination, the impact on vested and unvested options vary. For example, termination “for cause” will probably cancel all options completely including vested options.

Clawbacks. Some plans may include a "clawback" provision for employees who go to work for the competition or who are terminated for cause. The clawback provision allows the company to recover any option profits from employees who jump ship or whose negligent work performance resulted in losses to the company triggering the termination for cause. The enforcement of such clauses will need to comply with state and federal regulations.