I was awarded 25,000 options at my last job. Recently, the company laid off 100 employees, including me. I was not vested at this time and the company took away all of my shares. Is this standard practice?
Yes. It is customary for a company to take back unvested options when an employee leaves the company for any reason. In fact, this is probably included in the stock option agreement you received when you were granted the options.
Sometimes, however, companies have a severance policy that provides special benefits (e.g., accelerated option vesting) for situations like layoffs. Be sure to find out whether your company has such a plan.
Companies use stock options to attract and retain talent, and to encourage employees to think like owners. Vesting schedules ensure that each employee has a financial incentive to stay with the company at least until the vesting period is over. But if, as in your case, the employer has an initial waiting period, you could forfeit this noncash incentive if the company falls on hard times before vesting begins. If the company failed, of course, those options or shares would be worthless anyway.
There's not much you could have done to prevent your employer from rescinding your options. It is sometimes possible to negotiate for a faster vesting schedule when you sign on with a new company. If you are being laid off close to an important vesting milestone, you can sometimes negotiate for a later end date. One tactic that occasionally works is to offer to take an unpaid leave of absence that ends the day you reach the next vesting milestone, then return to work for a short period before being officially terminated. Another approach is to negotiate to continue as a consultant or part-time employee so that your vesting can continue.
Note the distinction between taking back your options and taking back shares, as you wrote. If you are not yet vested in your options, or have not yet exercised your vested options, you do not own any shares. Once you own shares, they're yours. So although you may have lost the opportunity to buy shares subject to your option, you didn't lose any money out of your pocket.
- Erisa Ojimba, Certified Compensation Professional