Do Stock Options Terminate With Employment?
- ISOs have become a prime tool for employers to attract and retain highly regarded employees, who in turn must be aware of rules governing their exercise. They must do so within 12 months after the termination of employment because of disability, or the estate can exercise them when termination is due to death after a period of time determined by the company, typically up to two years. Beyond disability or death, the period can be up to three months after termination provided that all conditions of the employer's ISO have been met.
- Employers have a well-defined right to terminate employees for "just cause." These circumstances can include selling or divulging trade secrets or confidential aspects of the business, theft, incompetence or demonstrably poor job performance. For those employees that fall into this category, companies can categorically terminate their stock options. Unless employees can prove otherwise, they have no recourse and lose all associated rights.
- Employees generally have three months after termination to exercise their options under an ISO plan, provided they are not terminated for just cause. If, however, they wait longer than a calendar quarter, their options do not expire, but they no longer qualify for ISO benefits, unless disability or death intervenes. The gains from exercise of the options and subsequent sale are taxed at the lower capital gains rate rather than as ordinary income.
- Employees have considerably more flexibility and rights once their options vest, which represents the period during which the options become theirs regardless of whether they leave the job or are terminated. Except for just-cause termination, they are permitted to continue holding or can exercise these options at their discretion with no penalty. Companies do, however, insert certain clauses within these options contracts, which employees should note and understand from the beginning.
