Employee disputes regarding stock options and equity agreements are on the rise. In one example, an employee recently sued his employer alleging that they lured him from his prior, higher-paying job with the promise of a stock grant based on a non-existent stock program. For example, in March 2022, approximately 80 employees of Buzzfeed sued alleging that the company put up informational barriers to allowing them to exercise their options or trade shares following the company’s IPO.
Whether you are an entry-level employee, or a highly paid executive, the spread of stock options and other equity grants as long-term performance-based compensation means you need to be on the lookout for any games your employer might be playing with this potentially very valuable benefit.
Vested Equity = Wages
As far back as 1955, California courts considered with how to deal with incentive compensation, such as employee stock awards. Since then, courts consistently hold that agreements to provide stock options, restricted stock units (RSUs), or other ownership rights count as wages under the California Labor Code.
This means, that once equity vests, an employee’s shares cannot be taken away without compensation under California law. This includes situations where the employer:
- Fails to transfer ownership
- Refuses to allow an employee to exercise options
- Attempts to claw back ownership
In each of these situations, the employer’s conduct is illegal just the same as if the employer failed to pay cash wages due. It is also illegal to fire an employee to avoid granting them equity or to prevent them from exercising their stock options.
What is “Vested” Equity?
However, these rights only apply to vested stock and equity grants. “Vesting” means that the employee has met any preconditions to earning shares or options. Vesting is critical because the company sometimes can take away unvested stock, but cannot do the same to vested equity.
An employee’s right to equity in the company vests—i.e., becomes the employee’s property—according to the applicable agreement between the company and the employee. Often, stock awards vest on a “schedule,” with a portion vesting every month or year. Typically, a stock agreement also allows for the acceleration of vesting, where all the remaining shares or options immediately vest upon major events. Examples include an IPO or change in control of the company.
Many agreements limit the time an employee has to exercise options, which allow the employee to purchase shares of the company at a pre-determined “strike price.” Frequently, an employee has only 90 days from the date of termination or separation to exercise their options and pay the strike price. Otherwise, they could legally lose the options.
Stock option agreements vary dramatically, so you should immediately consult an attorney if you have any questions about how yours works. Often, they are written in a way to prevent easy understanding by the employee and trap the unwary.
Talk to an Experienced Stock Disputes Attorney
Every worker in California is entitled to receive all compensation benefits they were promised when they started working, including their right to stock or equity. If you have an employee stock agreement or were promised equity to join your company, make sure you’re protected and understand your rights about how to get your shares. We provide free consultations for all clients with questions about incentive compensation issues and represent clients in both litigation and arbitration to ensure they get their promised equity. Contact our experienced employment lawyers today.