Negotiating Unvested Stock Options

When considering a career transition, one question that inevitably arises is: Can the terms of unvested stock options be negotiated? The answer is often yes, but it takes finesse.

At Gardner Employment Law, we understand how to navigate the complex world of unvested stock options. If you want assistance developing a strategy to negotiate unvested stock options, contact us today.

Can You Negotiate Unvested Stock Options Before Resigning?

Yes, you can negotiate unvested stock options before leaving. However, you must consider several factors during negotiations.  First, as stated in Forbes, “Keep All Documents Related To Equity Comp And Employment,” the first and most important point is to know what equity awards you have, what their vesting status is, and the company policies and rules that apply to your equity interests.  Study your employment agreement to be sure you understand the intricacies.  Most executive employment agreements contain the basic terms regarding equity awards.  Often, these contracts contain specific clauses that outline conditions under which vesting can be accelerated or stock options can be transferred. For example, some agreements include “double-trigger” acceleration clauses, which would accelerate your vesting if both a change of company control occurs and you are terminated. Understanding these nuances can give you a solid foundation for negotiation.

If you have been a long-time employee or have a specialized skill set that is particularly valuable to the company, your employment contract might already include favorable terms that you can leverage when negotiating unvested stock options.  Emphasize those terms in your discussions

Secondly, your individual value to the company usually determines your negotiating power. High-level executives or key technical contributors often have more leverage when it comes to renegotiating the terms of stock options and equity positions.  They know the company does not want to lose them.  In such cases, the company stands to lose not just an employee but also institutional knowledge, leadership, and, potentially, morale among the remaining staff.

If you have been instrumental in major projects or initiatives or if your role is hard to fill, these points can bolster your case for a more favorable arrangement, such as expedited vesting or a buyout option at a favorable rate.  Remind your employer of your contributions to the company.

Another factor to consider is how the company treated past executives who left the company.  If you know those executives, contact them to learn more details about how they negotiated their exit package   Do your homework ahead of the negotiations.

Lastly, consider the company’s existing policies on stock options as well as industry standards when negotiating unvested stock options. Some companies have strict policies that they are unwilling to bend, regardless of an individual’s contributions or role. Being well-informed about your company’s specific stock option plan can offer insights into how flexible the decision makers might be. Even within the same industry, companies can have different approaches to stock options. Comparing your company’s policies with broader industry standards might offer additional leverage points.

By understanding these dimensions—contractual obligations, individual value, historical treatment, and company and industry standards—you can better prepare for a successful negotiation on your unvested stock options.

Why Do Unvested Stock Options Matter?

Unvested options can represent an employee’s primary plan for retirement.  Therefore, the employee must either remain employed until the options vest or find a way to negotiate for early vesting.  In the competitive world of executive talent, stock options often serve as a compelling incentive to join and stay with a company. As we explained in “How Do Employee Stock Options Work?” companies frequently offer stock options to incentivize high performers to stay with the company. The true value of these options often lies in their vesting schedule, meaning the executive cannot exercise the options until certain milestones occur.  Until the date of vesting, the company, not the executive, continues to control the stock options.  So what happens to your unvested stock options when you’re considering a career change or retirement?

For high-level executives, these unvested stock options can represent a substantial part of your financial portfolio.  You are counting on the options and the value they represent for your eventual retirement.  The stakes are high: make the wrong move, and you could leave behind a great deal of money. Conversely, learning how to persuade the decision makers to allow you early vesting can result in a favorable financial outcome.

Unvested stock options act as “golden handcuffs” by encouraging high-level talent to remain with the company long enough for the options to vest. For organizations, this serves as a talent retention strategy.  For you, the executive, it represents an ongoing commitment to enhance the company’s performance and stock value.  Any career move requires a highly strategic decision.

The complexity surrounding unvested stock options means that you must be continually thinking of how you can maximize your leverage.  If you decide to leave or if you are terminated, whether you can include your unvested options in your exit package will make a considerable difference in your overall compensation package. And let’s face it: In the realm of executive-level decisions, understanding how to optimize financial gains while mitigating risks is not just smart—it’s imperative.

Strategies for Negotiating Unvested Stock Options

The question remains:  How can you maximize the value of your unvested stock options? Here are a few strategies tailored for c-suite executives and high-level employees:

Accelerated Vesting: For executives, having a rapid vesting schedule can be highly advantageous when negotiating unvested stock options. In standard vesting schedules, options may take several years to fully vest, but acceleration clauses can shorten this timeframe. This is particularly valuable if you’re planning to leave the company soon or if the company is on the verge of a significant milestone like an IPO. It’s a win-win if you’ve contributed significantly to the company; you get liquidity faster, and the company retains your motivated involvement in crucial phases.  Hopefully, you were able to include this valuable benefit in your employment agreement.

Clawback Provisions: Many stock option agreements include “clawback” provisions, which allow the company to reclaim even exercised options under specific conditions. However, executives often have the leverage to negotiate these terms in their favor. For instance, you may be able to overcome the clawback provision, and even obtain rights to the unvested awards, if you leave for reasons like a change in job role, reporting structure, or if the company’s strategy pivots in a direction that makes your original role obsolete.  These points often are including in the “Good Reason” clause of an executive’s employment contract.  Knowing the ins and outs of any clawback clauses and how to overcome them can prepare you for more effective negotiations.

Tax Planning: Tax implications for stock options can be substantial, especially for high-income individuals like c-suite executives.  While tax laws are complex and are beyond the scope of this article, you should contact your CPA immediately to learn what tax liabilities may be facing you regarding your unvested options. Given the complexities involved, consultation with tax professionals or financial advisors who specialize in executive compensation is crucial. They can help devise strategies not only around the timing but also concerning other assets to provide a holistic financial solution.  The timing of when you exercise your options can have a massive impact on your tax liability. Strategies like “tax-loss harvesting” or utilizing specific accounting methods can help optimize the tax hit.  You can avoid tax liabilities by proper planning.

Buyout Negotiations: During a company acquisition or merger, stock options can become a complicated issue. In such scenarios, the acquiring company might offer a “cash-out” of your unvested options, sometimes at a premium. As an executive, you may be privy to the acquisition talks and could have a say in your stock options’ treatment. A favorable negotiation here can ensure that your unvested options are bought at a rate that reflects both the present and potential future value of your shares.

There are many other strategical approaches which will be dependent upon the specific circumstances. Know that it is possible to maximize the benefits you receive by negotiating unvested stock options. Always consider consulting with legal experts who specialize in  Executive Compensation to ensure that you are making the most informed decisions possible.

Consult an Expert Before Negotiating Unvested Options

Managing the complexities of unvested stock options can be daunting, especially when you’re considering a career change. Whether you’re a c-suite executive or at the start of your career ladder, understanding your stock options’ legal and financial nuances is a must. An expert specializing in this area can help you avoid pitfalls that could impact your financial future.

At Gardner Employment Law, we have a track record of advising clients on optimizing their unvested stock options. We are here to help you make the most of your equity awards before your next career move.