Though the purpose of ESOPs is to help retain and incentivize employees, employees usually face the question about what happens to their ESOPs if they eventually decide to leave the company.
If an employee leaves a company, they typically have several options for their ESOPs (Employee Stock Ownership Plan). These options may include:
- Selling the shares back to the company at their current fair market value
- Holding onto the shares and receiving any distributions or dividends from the company
- Transferring the shares to a tax-qualified retirement plan, such as an IRA or 401(k)
- Selling the shares on the open market to another investor.
The specific options and details will vary depending on the company's ESOP plan and the employee's individual situation. It is important for employees to carefully review their options and consult with a financial advisor before making any decisions about their ESOPs.
Usually there are three situations when an employee leaves the company.
- When you don’t have the exercise right
This usually happens when an employee leaves the company within 1 year of their joining date. In such a situation the company forfeits all your stock options, and you don’t have any rights after leaving.
- When you have partial rights to exercise your ESOPs
Usually, companies grant partial exercise rights to employees annually. For example, companies can offer you say, 20% exercise rights annually.
In such a case, if you leave the company before gaining full rights, you are eligible to only sell the portion for which you have gained exercise right.
- When you have full rights to exercise your ESOPs
This happens when the vesting period is over before you leave the company. In such a situation, you can easily buy the stock and gain profits. Usually, vested stocks can be cashed in two ways, Nom-Qualifies Stock Option (NQSO) and Incentive Stock Option (ISO). Under NQSO you must exercise your selling rights as per the company’s policy. Under ISO, you must exercise selling right before leaving the company.
To understand your ESOP plan in detail, ask your finance officer or HR the relevant questions. Understand your policy and make sure you know what vesting period is, exercise price and other terms and conditions applied. Make sure you evaluate your profit/ loss before making your decision about leaving the company.
If you are fired from the company for a cause, your ESOPs are forfeited. If you are laid off, you get rights to the vested portions and the rest lapse.
