Does quitting your job also mean giving up your ESOPs?

Employee stock ownership plans, or ESOPs as they are commonly known, are an important part of employee compensation in many organisations. ESOPs are used to attract and retain talent and to align the company’s objectives with the employees’ performance. With an employee share in the company's stock, employees might be motivated to drive the company to maximum profitability. 

For employees, ESOPs are lucrative because of the possibility of owning the company’s stock at a specified price (usually lower than the market price). After that, when the employees sell their exercised ESOPs at the actual market value, they stand to make a gain. So, if your employer has also granted ESOPs, you can enjoy profits from buying the company’s stock at a lower value.

(Watch this video to find out how ESOPs work in the start-up ecosystem)

However, if you leave your organisation, there will be an impact on your ESOPs. Let’s elaborate on the effects.

ESOPs v/s Leaving the Job

There can be three instances when you leave your job –

1. During the vesting period, when you have not been granted any exercise rights.
2. During the vesting period, when you have been granted partial exercise rights.
3. After the vesting period is over.

Before we understand these situations, there are two terms that you should understand:

• Exercise

Exercise means applying to buy the stock granted under ESOPs. It means using the rights that the company granted to you to buy its stock at a specified rate.

• Vesting period

This is when you are not allowed to purchase the company’s stock. You can exercise your ESOPs only after the vesting period is over. The vesting period in India usually ranges between three and four years.

Now let’s understand how your ESOPs would be affected in each of the three scenarios –

• When you have no exercise rights

If you have recently joined a company and then leave within the first year, you might not earn any exercise rights on your ESOPs. In such a case, when you leave the job, your ESOPs are forfeited, and you don’t get any benefit.

Even with Restricted Stock Units (RSUs) or Stock Appreciation Rights (SARs), you would get nothing if you left before the vesting period is over.

• When you have partial exercise rights

Most companies in India grant partial exercise rights to employees annually. For instance, say your company allows you the exercise right to 25% of the stock for each completed year of service. In this case, after every year, you earn partial exercise rights.

If you have partial exercise rights and leave the company before the full rights have been granted, you get partial benefits. You can buy that portion of stocks on which you have partial rights.

• When you leave after the vesting period

Once the vesting period is over, you get the full exercise rights. You can, then, buy the stock easily if you plan to leave. In this case, there are two options – Non-Qualified Stock Options (NQSO) and Incentive Stock Options (ISO). Under NQSO, you can exercise your ESOP according to your company’s policy. Under the ISO, however, you might have to exercise your ESOP within 90 days of leaving the company.

Your organisation might also buy back your stock at a Fair Market Value (FMV). The FMV is usually higher than the exercise price to enjoy profits on the buyback.  

ESOPS v/s Getting Fired and Lay-offs

If an employee gets fired with cause, they will lose their ESOPs. You can, however, exercise your ESOPs on the vested stocks if you are laid off. Unfortunately, the unvested portion would become invalid.

(Check out this video to understand the taxation of ESOPs)

What Should You Do?

If you have ESOPs, know the vesting period and the proportion in which you have earned exercise rights if you decide to leave the company. If you have exercise rights, exercise them and get the stocks. After that, you can sell off the stock immediately or later on (if you expect the stock prices to rise in future) and book profits. Know the clawback and other options, and be careful with exercising your ESOPs.