What Happens to an Employee's Vested Shares if They Leave Before the Vesting Period Ends?

Employees who receive vested shares often have specific conditions they must meet to maintain ownership of those shares. But what happens if an employee leaves the company before they can meet those conditions? This article explores the various scenarios, provides guidance on what to do, and highlights the importance of understanding the stock purchase agreement.

Understanding Vested Shares

Vested shares are not yet owned outright until the vesting period ends or the conditions are met. An employee has the right to the shares only after they 'vest'—the ownership is automatically granted through the passage of time or the achievement of certain performance milestones.

The What-If Scenarios

There are several scenarios that could occur if an employee leaves the company before the vesting period ends:

Scenarios:

Scenario 1: Shares Go Back to the Company

In this case, all the shares the employee was entitled to vest prior to leaving the company will be returned to the company. The employee will lose all ownership to those shares. This option is usually found in stock purchase agreements where the terms are explicitly stated.

Scenario 2: Company Buys Vested Shares at a Pre-Determined Price

The company may have the option to buy back the vested shares at a predetermined price, typically associated with Restricted Stock Units (RSUs). This is another clause often specified in stock purchase agreements.

Scenario 3: Partial Vesting on a Pro-Rata Basis

The employee may be eligible for partial vesting, meaning they vest a portion of their shares based on the time they worked for the company. This pro-rata basis is determined by the vesting schedule outlined in the agreement.

Scenario 4: Time Before Expiry to Buy Shares at Grant Price

The employee will typically have a certain period after leaving to purchase the vested shares at the grant price, allowing them to keep them. This timeframe can vary but is often specified in the agreement.

Key Considerations When Leaving Before Vesting

It’s crucial for employees to understand their vesting conditions before they decide to leave. They should:

Review the stock purchase agreement carefully. Know the vesting schedule and conditions. Understand that shares acquired through stock options need to be exercised before ownership can be claimed.

Employees should also be aware that failing to exercise their options can result in the loss of their shares. It means that while vested shares could be valuable, the risk of forfeiture is high if the employee doesn’t meet the required conditions.

Legal and Financial Advice

The information provided in this article is meant to help start-ups navigate their legal journey, but it is not considered professional financial or legal advice. Always consult with a qualified financial advisor or legal professional when making significant decisions related to stock ownership.

Conclusion

Whether an employee's vested shares will be lost or retained upon leaving a company depends heavily on the specific conditions outlined in their stock purchase agreement. It’s important for employees to understand their options and the terms of their agreement to make informed decisions. Given the potential financial impact, it is highly recommended to seek professional guidance to navigate these situations effectively.