As the COVID-19 coronavirus spreads, so do workers’ fears about their jobs, compensation, and health insurance coverage. For many employees, losing a job also places their stock options in jeopardy. In our continuing series of FAQs, we talk about stock options – what you need to know, how and when to exercise them, and how you can approach an employer to preserve your rights.
What Are Qualified and Non-Qualified Stock Options?
A stock option is an opportunity to purchase stock at a future date at the price of the stock on the day it was granted. For example, an employee working for a startup may be awarded 100 stock options when the stock is worth $1.00. Once the employee’s options “vest” and they can exercise the options, they can purchase 100 units of stock for $1.00 each, even if the value is then $10.00. But if the company performs poorly, the stock may still be valued at $1.00 or even less.
In general, there are two categories of options for employees: Incentive Stock Options (ISOs), which are considered “qualified,” and Non-Qualified Stock Options (NSOs). ISOs qualify for favorable tax treatment but must meet a host of requirements to receive that treatment and remain as ISOs.
One such requirement is that vested ISOs must be exercised within 90 days following the termination of the employee’s employment, but never later than the ISO expiration date (a maximum of ten years under IRS regulations, although it can be less). If an ISO fails to meet one of the requirements, it loses its “qualified” tax status and is treated as an NSO.
While NSOs are not subject to the requirements of ISOs, many stock option plans include the same requirement that an employee exercise the NSOs within 90 days of employment termination.
Can I Have More Time to Exercise My Stock Options?
As the economy reacts to the COVID-19 pandemic, many terminated employees might face a short window of time to exercise their previously-awarded and vested stock options. Depending on the market, however, those options may be underwater or on par.
If you encounter this situation, negotiating an extension of the exercise period can give you time to see if the stock will recover, without costing your former employer any additional money in the short-term.
Can I Change the Deadline for Exercising?
Whether the deadline to exercise your vested stock options can be changed depends on several factors, such as whether you have ISOs or NSOs, the expiration date of your options, and how the relevant plan is drafted. Sometimes, the deadline can be extended by asking the employer to provide working notice instead of severance, by entering into a contractor arrangement with the company, or by simply extending the exercise period.
Whether any of these options is possible depends on the specific facts and governing documents, so it is important to have these reviewed by an attorney experienced in reviewing and negotiating equity-based compensation arrangements.
Outten & Golden Remains Ready to Advise Employees on Their Rights During the Pandemic
By the minute, the COVID-19 outbreak affects the employment of thousands of people across the U.S. Although the crisis will continue, employees and employers should work together to ease the financial hardships the pandemic will place on the workforce.
If you have questions about your job and your compensation, we’re here to help. Contact us today to discuss your situation.