Losing an executive position because your employer wrongfully terminated you carries many concerns about your future. You must protect your reputation and demand appropriate financial measures in your severance package. Yet, some assets, especially stock options, can be difficult to value appropriately, requiring experienced guidance so you don’t lose the right to exercise them.
Here, an executive level wrongful termination attorney describes what happens to your stock options when you’re wrongfully terminated as an executive in California.
Stock Options Are Not the Same as Shares
In California, many employees negotiate company shares for future IPOs as part of their contracts. They may also include stock options, which are the right to buy stock in the future at a predetermined price (the exercise price). When resigning or after termination, you may seek to negotiate your severance agreement to maintain your current share holdings, but how do you manage stock options?
Because they effectively don’t exist yet, stock options can’t be counted as shares, meaning they have no discernible value. Yet, you can’t simply let them go, as their potential worth could be quite high. A recent California court ruling (Shah v. Skillz 2024) determined that stock options also cannot count as wages since the value could change so dramatically.
Another complication arises from the Internal Revenue Service (IRS) tax rules on exercising stock options. Generally, you must exercise the right to purchase within 30 to 90 days after termination, although the company may extend this period in the stock option plan due to events such as massive layoffs. You must exercise your right to buy within the window, or you could run into multiple tax implications and legal concerns.
Your Stock Options Depend on Your Employment Contract and Severance Package
It’s vital that you work with an experienced law firm to review your employment contract before signing your severance. Depending on your time with the company, a portion of your stock option plan may be vested, allowing you to exercise your right to purchase that portion. You can buy at the exercise price and realize any profit, but any unvested portion expires.
If you are considering a wrongful termination case, you must act quickly to preserve your right to exercise your stock option purchase or negotiate it to another method of compensation. Because stock options can’t be accurately valued, you may struggle to secure adequate compensation for them at trial.
Tax and Reporting Obligations for Stock Options
Your severance package or wrongful termination settlement agreement may list your stock options as non-qualified deferred compensation. This allows you to defer part of your compensation to later tax years to spread out your tax obligations. However, under 26 U.S. Code § 409A, you could still suffer punitive excise taxes unless you word the agreement correctly.
Also, any changes to company leadership within 12 months of your separation could trigger any “golden parachute” clauses under 26 U.S. Code § 280G and § 4999. Your compensation package could also become public record as part of Securities and Exchange Commission (SEC) disclosure if the company becomes publicly traded.
Work With an Attorney to Prepare Your Wrongful Termination Lawsuit
When you’re an executive who’s been wrongfully terminated, you have the right to seek justice from your employer. Even at the C-Suite level, federal laws, such as Title VII of the Civil Rights Act and the Americans with Disabilities Act (ADA), protect you from illegal termination. The California Labor Code also allows you to take legal action against unethical employer actions.
However, the legal and tax challenges of wrongful termination cases are extremely complicated. To successfully hold your employer accountable, you must collect records of your contract, performance reviews, incidents contributing to your termination, and other evidence. Even then, the outcome may only result in negotiating a fair settlement rather than having your day in court.
At Armstrong Law Firm, we are ready to guide you through the process with the experience, skill, and diligence required to reach a satisfactory outcome. Learn more about why you should trust our team when you contact us for a free consultation today.