Stock options can be a good way to provide the opportunity to an employee to share in the potential success of the company thereby providing the employee additional incentive to build the company’s value. If an employee is offered stock options in a publicly-held company, generally those options will be provided at a certain price for which the employee can purchase the stock. The employee may exercise those stock options at a specified time in the future assuming continued employment through which they become vested. For example, an employee may be offered stock options in 12,000 shares at the same grant price vested for three years with 4,000 shares vested on the first anniversary of employment; 4,000 vested the second anniversary of employment and 4,000 vested on the third anniversary of employment.
With a publicly-held company, once those stock options are vested, the employee can make a decision to exercise and sell the options at the same time taking the profit if the stock is above the grant price. There can be what is called a “blackout period” wherein the employee who has had some access to sensitive information may not sell the stock and there might be other restrictions, including getting various levels of approval by the company before selling stock. Furthermore, even without such a blackout period a person cannot buy or sell stock based upon insider information. If an employee has insider information that is not available to the general public, the sale of stock would be prohibited.
As to closely-held companies, while the stock options are similarly granted and vested over a period of time thereby becoming exercisable, the major difference is that there is no market in which to sell the stock. Therefore, you may have been given stock options for 12,000 shares. You would in all likelihood have to pay for those shares and hold onto them and hope that the company will eventually be sold. Additionally, closely held companies may have stockholder agreements that you are required to sign which restrict your ability to sell to third parties who are not already shareholders. As a result, not only will the exercise of the stock options affect your personal cash flow, but the ability to sell those shares later may be restricted, even if you could find a buyer of a minority share of stock in a closely-held corporation, which can be difficult. Often these agreements also will have a provision requiring you to sell back your shares at some formula upon termination of your employment.
If you are considering two job offers and one provides more salary, yet the other provides stock options in a closely-held corporation, you should seek legal counsel to review the specific stock option plan and agreement to determine what are the conditions in the stock option plan. A competent business attorney will help you determine if it is worth taking the stock option deal over the one with the higher salary.
J. Daniel Marr is a Director and Shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and individuals on a variety of legal issues and advocating on their behalf. Attorney Marr is licensed and practices in both New Hampshire and Massachusetts. Attorney Marr can be reached at [email protected].