Options must be weighed when stocks are a part of job package
Published 04/22/05

An employment offer which includes an opportunity to obtain stock as part of the job candidate's overall employment compensation package, whether through stock options, restricted stock, or otherwise from a closely held company, should be weighed in part on the limitation on selling that stock and thereby reaping the benefit of that asset.

Is there is a trade off of less salary or other benefits for the stock, and if so, is it worth it in that particular situation? While receiving stock of a closely held company can result in a substantial benefit to the worker since it gives the worker an opportunity to share in the success of the company, there is no open market for the sale of the stock such as there is for stock of a publicly held company.

Furthermore, since the worker would generally be receiving less than a controlling share of the stock, it is often difficult to find an investor interested in those stock shares. Many investors would be reluctant to become a minority shareholder in a company where the majority shareholders have not chosen that investor. In addition, closely held companies often restrict who the worker can sell the stock to, often obtaining a contractual right to buy the stock back at the same terms that the worker has an offer to sell to another individual and/or having the right to buy back the stock at some reduced value upon the occurrence of certain events such as the termination of the employment of the worker, whether she quits or is fired.

Without such restrictions the employer might be faced with a transfer of the worker's stock to an individual it would not prefer to deal with such as the worker's ex-spouse or a competitor.

If an employer offers stock to a worker in consideration of earned but unpaid salary, the worker should certainly speak with her tax advisor. That stock payment in lieu of unpaid salary is income of which the worker must pay federal income tax and there must be withholdings made by the company, even though the worker's cash flow has not increased.

Another consideration of such a trade off of stock for salary is that stockholders get paid after all the creditors of the company. The value of the stock of a company which cannot meet its payroll should be seriously questioned by the worker, who would be changing her relationship from someone who is owed wages from the company for which she may obtain a judgment through the Courts or the New Hampshire Department of Labor with possible: (a) liquidated damages; (b) an award of attorney's fees; and (c) personal liability of the officers, to someone who has an equity interest in a company which cannot even pay its workers.

J. Daniel Marr is a director and shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and business persons on a variety of legal issues, including employment, and advocating on their behalf. You can reach Attorney Marr by e-mail at: dmarr@hamker.com

This information is general information and may not reflect the most current legal developments, verdicts or settlements. The information provided should not be relied upon as an indication of the actual state of the law or of future developments. The information contained on the Hamblett & Kerrigan website is for informational purposes only and does not constitute legal advice. If the information referenced may be of legal importance to you, you should consult with an attorney to provide you with legal guidance and opinion as the the effect of the current law upon your situation.