Employees should weigh stock options
Published 11/11/05

Offering stock options to employees can be a good way to retain them and give them a vested interest in the company's future creating a "win/win" situation for both the employee and the company.

A candidate considering an employment offer should carefully consider the terms of any stock option offered to analyze it in conjunction with all terms of the proposed employment compensation package.

Stock options are basically a right to buy the company's stock at a set price, with that right commencing at some future date, at which time the option vests, with that right continuing for as long as the vested option is exercisable.

For the employee to eventually profit by exercising this option, he must be able to sell the stock at a higher price than the option price. While the value of exercising stock options in publicly-held companies is easy to determine since those options have a published daily market price, in contrast, a closely-held company's stock is more difficult to value due to lack of public market, and in most cases, the existence of internal restrictions on the ability to sell the shares to third parties.

For example, if the shares contain a restriction that each stockholder must give the company a right of first refusal to purchase the shares for ninety days from when the stockholder obtains an acceptable offer for the shares, such restriction may prevent the employee from exercising a stock option to thereby purchase the stock upon the terms of the stock option and selling the newly acquired shares simultaneously to avoid expending actual cash in the transaction.

This assumes that the employee could actually find a potential purchaser who would make an offer to buy a minority stock interest in a closely held company whose other stockholders did not invite to become a stockholder and then also be willing to await the ninety-day right of first refusal period.

The terms of vesting and exercisability are further considerations in determining the value of the offered stock option as part of a comprehensive employment compensation package.

For example, a stock option might contain the right to purchase up to 9000 shares of the company's stock at a $1.00 per share vesting equally in 3000 share options on the first, second, and third anniversary of employment.

Unless the holder of the option has an employment agreement restricting the causes for which the employment can be terminated, the holder would probably be considered an employee-at-will, and while the expectation might be to remain employed with the company for over three years, one would need to assess the risk of the company or the employee terminating the employment prior to the stock option vesting.

Furthermore, most stock options, once vested, have a substantially shortened time period for them to be exercised by terminated employees and some vested options are only exercisable while the holder is still employed by the company.

Lastly, insider trading rules as to publicly-traded stock and tax rules should be analyzed as a factor in determining the value of stock options offered. The employee with the stock options may have black-out periods during which she cannot sell the stock.

If the stock options are an important part of the overall employment compensation package being offered, it may be prudent to seek legal and tax advice prior to deciding whether to accept that employment package in lieu of receiving a higher salary from that employer.

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.