Stock options can be the most valuable component of an executive's employment contract. A stock option allows the option holder to buy stock in the future at a pre-determined price, or strike price. For example, if an executive is granted stock options with a strike price of $10, the executive has the right to buy a number of shares in their company for $10 each. If the stock is publically trading for $30, the executive can immediately turn around and sell the shares he or she has acquired through the options at $20-a-share profit. However, in order to exercise these options, the holder must wait for them to vest over a certain period. Stock options generally vest over a period of 3-5 years. The theory behind the awarding of options is to provide employees with an incentive to increase the company's stock price, resulting in a larger profit for the employee over time. However, because stock options do not vest until a specified period of time has lapsed, executives run the risk of losing options if they are terminated, or choose to leave, prior to vesting. Stock options can be a deciding factor in accepting a job offer; which is why I am consistently surprised by how often we see executives fail to protect the options that they negotiated. Most Options Agreements include a term whereby the executive forfeits all unvested options immediately upon termination of employment. This applies even if you are fired just one day before vesting. While there is little that can be done to protect yourself if you are terminated for "cause" (which typically involves some form of gross misconduct), your employment agreement can offer at least some protection for most other circumstances. This means negotiating full vesting upon a Change in Control or for "Good Reason," or partial acceleration upon termination without cause. However, even when you get these terms included, it's important to remember that contracts all come down to language. Confirming that all terms are appropriately defined is the best way to protect yourself.
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