Anyone know anything about employee stock options?

[1979dreamer]

Hi all,

I work for a pre-IPO tech company that is making good strides toward a liquidity event (likely an IPO). I recently exercised some vested stock options, and as part of that process spent some time reading the plan documents more thoroughly than I had in the past.

One thing caught my eye that seemed odd, and I'm wondering if anyone out there has some expertise and could shed light. In the document there is a call option definition (I've heard this referred to as a "callback"). It states that:

- In the event that the employee is terminated with cause, the company has the right to call all vested shares at the lower of purchase price or fair market value -- effectively erasing the benefit of these options.

- In the event that the employee voluntarily resigns, the company has the right to call 1/2 of all vested shares at fair market value and the other 1/2 at the lower of purchase price [strike price] or fair market value.

Okay -- pretty crappy if you ask me. But what I found the most odd is the definition of a date that this was all effective through. If I'm reading it right, the document states that this call option remains in effect until (1) a change in control (buyout of the company) or (2) 3 years after an IPO, whichever comes first.

So say we IPO later this year, and some number of months go by until a time where a lockup period ends and I can sell my shares. By that point I've exercised everything I've got vested and sold. Then I choose to leave -- prior to the 3 year post-IPO mark. How can the company buy back half of my shares at my cost? Can they force me to buy back the shares I sold, then sell them back to the company at a loss?

 

[clifp]

I have heard of a callback provision before (but never seen it),but the second provision is something I've never heard of it. They both sound extraordinarily harsh..

In lieu of consulting with attorney, I'd post your question on Fairmark they have a lot of experts on stock option on their forum (mostly in the tax aspect.)

 

[MRG]

I'm not an expert.

I'd check into it further. Not sure how they could force you to buyback shares you had exercised. Is it possible that this portion of the agreement refers only to options that haven't been exercised?
When Megacorp IPOed and I first got options, the compensation department was very helpful.
Best wishes,
MRG

 

[Animorph]

We had to sell our shares back to the company if we separated for any reason pre-IPO, though I think it was a "fair value" price. They wanted to keep the shares within the company. We had no restrictions beyond the lockout period after our company was sold (no IPO). I can see where they would want you to stick around for three years after an IPO, but I don't see how they could claim shares you've already sold.

 

[Socal Tom]

How do,you exercise options before an IPO? If they have done an initial public offering, then you must be buying private shares. I think if you read closely, they call back will moly apply to shares you own, not shares you've sold. All of this is probably part of a poison pill to help prevent A hostile takeover. It unlikely that they would call back shares from a normal employee, they would be more concerned about the large block of shares held by execs. If your CFO embezzled a bunch of money, or left with a hunch of shares and screwed the rest of you, then he shouldn't become a millionaire from that. So his gives them a way to protect from that.

Tom

 

[growing_older]

These various clawback and buy back provisions have been getting harsher and harsher. This is the first I've heard of that requires continued employment for three years AFTER a liquidity event, but I guess I'm not surprised that they are going there now. Employee stock options are now crafted to keep maximum value for the insiders and give minimum actual value to employees. Giving options on "shares" which can be pulled back are just another step in that long progression.

I understand your idea that this is targeted at execs with big blocks of shares, but I know of several rank and file engineers who were terminated and had shares clawed back in anticipation of an IPO. Sometimes the money guys involved are quite ruthless.

 

[clifp]

These various clawback and buy back provisions have been getting harsher and harsher. This is the first I've heard of that requires continued employment for three years AFTER a liquidity event, but I guess I'm not surprised that they are going there now. Employee stock options are now crafted to keep maximum value for the insiders and give minimum actual value to employees. Giving options on "shares" which can be pulled back are just another step in that long progression.

I understand your idea that this is targeted at execs with big blocks of shares, but I know of several rank and file engineers who were terminated and had shares clawed back in anticipation of an IPO. Sometimes the money guys involved are quite ruthless.

It is true, I know Zynga was infamous for clawing back stock options of employee who they thought had more stock options then they were worth.
Basically they told them gives X percentage of your options back or we will fire you,and then take them all.

I think the lesson for engineer and others with highly sought out skills, is to read the fine print on the options before accepting employment not after. Given the options conditions, I think I would have demand twice the options or $X more dollars in salary.

 

[MRG]

I know all my option grants, including IPO, had a vesting period. Wouldn't that accomplish the same goal?

I understand the claw back for termination for cause. It's zeroed out for outstanding grants. If the grantor had a vesting period seems like it covers the I quit side.

What an I missing?
MRG

 

[growing_older]

I understand the claw back for termination for cause. It's zeroed out for outstanding grants. If the grantor had a vesting period seems like it covers the I quit side.

Those were common terms for many years. Before that, the clawbacks were much less common and once vested, and exercised, those shares were out of reach of the company regardless of employment. The latest grant I have includes a clawback at the original grant price for any SHARES awarded through the grant (ie exercised or not) on termination for any reason before a liquidation event or 10 years, whichever comes first. On top of that the clawback is written as a right of first refusal for the company, so they have the choice to exercise it or not. So far they have 100% exercised it for everyone who left, voluntarily or otherwise.

 

[Texas Proud]

Those were common terms for many years. The latest grant I have includes a clawback at the original grant price for any SHARES awarded through the grant (ie exercised or not) on termination for any reason before a liquidation event or 10 years, whichever comes first. On top of that the clawback is written as a right of first refusal for the company, so they have the choice to exercise it or not. So far they have 100% exercised it for everyone who left, voluntarily or otherwise.

These terms sound pretty crappy to me.... talk about golden handcuffs....


Who is to say that after working 9.75 years they just up and fire you for no cause and claw them back.....


Don't laugh... this happened to my dad back in the 60s on a pension... it was a 10 year cliff and his boss fired everybody just before they reached 10 years.... (but, they had put down his date wrong and he was fired just after 10 years.... took it to court and he won, so my mom had been getting a very small pension for many years)...

 

[Texas Proud]

I think the 'for cause' part is to be able to claw back bonus money that some high level execs have received if it is shown they were not doing the right thing for the company....

Think of all the bad things we have heard with mortgages and other bank/investment companies... under the old rules, they got away with their bonus and were just fired.... now the company can claw back these bonuses... that is if the person still has money...

 

[1979dreamer]

How do,you exercise options before an IPO? If they have done an initial public offering, then you must be buying private shares. I think if you read closely, they call back will moly apply to shares you own, not shares you've sold. All of this is probably part of a poison pill to help prevent A hostile takeover. It unlikely that they would call back shares from a normal employee, they would be more concerned about the large block of shares held by execs. If your CFO embezzled a bunch of money, or left with a hunch of shares and screwed the rest of you, then he shouldn't become a millionaire from that. So his gives them a way to protect from that.

Tom

I exercised the vested portion and simply own stock I can't sell (yet). This way I'll be eligible for LT capital gains once I am able to sell.

It seems unreasonable that they'd make me sell back shares that I already sold, but that's the reason for this thread... the paperwork defines a lapse date that these terms are valid through, and that lapse date is 3 years after IPO.

 

[1979dreamer]

I know all my option grants, including IPO, had a vesting period. Wouldn't that accomplish the same goal?

I understand the claw back for termination for cause. It's zeroed out for outstanding grants. If the grantor had a vesting period seems like it covers the I quit side.

What an I missing?
MRG

There is a 5 year vesting period. The shares that are not vested go away if I were to leave the company, and that's reasonable. The part that confuses me is about losing half/all of my vested shares were I to quit/get fired for cause.

 

[1979dreamer]

I think the 'for cause' part is to be able to claw back bonus money that some high level execs have received if it is shown they were not doing the right thing for the company....

Think of all the bad things we have heard with mortgages and other bank/investment companies... under the old rules, they got away with their bonus and were just fired.... now the company can claw back these bonuses... that is if the person still has money...

I agree. I'm not too worried about being fired for cause, as I don't think I'm in a position where that kind of thing could happen. The issue is losing half if I want to quit after the IPO.

 

[growing_older]

I agree. I'm not too worried about being fired for cause, as I don't think I'm in a position where that kind of thing could happen. The issue is losing half if I want to quit after the IPO.

All I can say is there's nothing you can do about it. The agreements are drafted by the lawyers of the investors and insiders, not the employees. You can either accept the terms or look for work elsewhere. That's probably one of the major reasons these increasingly harsh clawback/buyback provisions have been being inserted into deals. Because they can be. You have next to no leverage unless you are such a key employee that you can negotiate your own deal as an insider/founder.