How to Hold onto Stocks and Equity After a Layoff
Pictured: Person checking stocks on phone/Courtesy CC0/MaxPixel
For many biopharma companies, stock options are a great way to find and retain loyal talent, and for employees, stock options are attractive because they signal a potential long-term reward.
What many employees don't know is that they may lose those stocks if they’re fired or laid off.
What happens to your stocks after you’ve been laid off depends on their status. In many cases, if they’re unvested, you are likely to lose them. That’s why it’s important to know your options before signing any stock agreements.
With some proactive measures, you can make it more likely your stocks will remain yours in the event of a layoff.
Vested VS Unvested Stocks: What’s The Difference?
In nearly all cases, employee stocks will start off as unvested. This means they’re in a maturation period until they become available to the name holder, or in this case, the employee. The maturation periods can differ and are often used by companies as an incentive to employees to stay for the long term.
Once the stock matures, employees may be able to purchase their stock back, depending on the terms of their employee stock agreement.
It's common for employers to follow a vesting schedule, or a time frame in which an employee earns their shares over time. For example, one of the most common forms of vesting occurs over four years with a one-year cliff. Under this model, employees can access 1/48 of the shares permitted to them over 48 months.
Unfortunately, in most cases, if you’re laid off and your stocks are still unvested, you’ll likely lose them. They will revert to the company, and you’ll receive no benefit from them.
Know Your Options Before You Sign
Adriana Herrera, founder and CEO of PayDestiny, told BioSpace the best way to maintain access to your employee stock options is to be proactive. Before you sign an employment contract, make sure you know exactly what your stock options are. More importantly, make sure you know what will happen to them if you’re ever laid off.
“Prior to accepting employee stock options, it’s important to review stock option agreement details and negotiate them," Herrera said. “Doing so can prevent working for a company and walking away with no employee stock options or diminished stock options if laid off.”
Above all, make sure you have all your information correct. Don’t be afraid to ask for clarification on anything you find confusing or unclear. Remember, you’re looking out for your financial future.
If you did your homework before signing on, you’ll have a much clearer idea of what will happen to your stocks if your company makes the decision to let you go.
Things To Watch Out For
Herrera said there are three primary things to look out for in a stock option agreement. The first is the maturation period, or the amount of time that company stocks will be unvested.
Buy-back clauses are another important element.
"A buy-back clause is a clause a startup may include in their employee stock option agreement that facilitates the sale of stock options an employee has gained the right to purchase back [from] the company if certain terms and conditions are met," Herrera said.
A company may also include a post-termination option exercise window, which primarily benefits the company itself.
“Commonly referred to as a PTE window, this is a period of time in which an employee has the right to purchase stock options,” Hererra explained. However, the PTE Window is only available for 90 days, so laid-off employees should look into this immediately.
"The short window can also result in newly laid-off individuals to not exercise their stock options because they are concerned about finances, causing them to lose their stocks," she added. "Companies like Equity Bee have emerged to address this problem."
Don’t Be Afraid to Negotiate
Even if your stocks were unvested, there’s no harm in asking leadership if you can make a deal to acquire them again. If you were a valued employee and the company was reluctant to lay you off, they may be open to the idea.
Consider making a proposal for your unvested stocks. The worst your employer can do is say no.
The best way to keep access to company stock options is to know your rights before you sign on. Learn how long it takes for stocks to become vested, if there are any exceptions and if the company is exercising any buy back clauses.
Do your research as soon as you can and you’ll stand a greater chance of keeping your stocks and equity for the long-term, even in the event of a layoff.