What happens when employees who own stock leave the company?
Jeff
3 Comments
Danita writes:
If an employee was terminated and had stock in the company and if the company was bought out, do the terminated employee receive any dividends from the buyout?
In just about any circumstance I can think of, the answer is yes. If someone owns stock in a company, there is no requirement that they have to be an employee of the company in order to receive benefit from a dividend or buyout. Certainly you do not need to work for IBM in order to own IBM stock, for example.
Generally, when you give stock to employees, you give that stock in the form of a stock option which vests over a period of time. The employee can't actually buy the stock until the shares vest, which creates an incentive for the employee to stay, and protects the company from handing out a big piece of the action to someone who doesn't work out. When the employee is terminated or quits, the vesting ends, and eny unvested stock options are void.
When an employee quits the company (or is fired), there is usually a window in which the employee much choose to exercise the stock option in order to receive the stock. By "exercise" that just means to actually buy the stock. So lets say you have 1,000 vested stock options when you quit working for Big Joe's Startup, and there was a 6 month window in which you had to exercise the option. Those 1,000 options would have a price associated with them, lets say $1/share. So, if you want to own the stock, you would need to write a check to Big Joe's Startup for $1,000 within that 6-month window, and then you would own 1,000 shares of stock.
From then on, you own 1,000 shares just as you might with IBM or Toyota or Cisco. If the company is purchased for $10/share, you get $10,000 from that transaction and your shares are bought by the acquiring company just like anyone else's. If a 10-cent/share dividend is paid out, you'll receive $100 in dividends just like any other shareholder.
This is why it's important to make sure you have good advice and legal assistance when setting up your employee stock compensation plans. You don't want to just hand out shares, only to have someone quit 3-days later and still get all the benefit from a buyout or dividend. However, if they've earned it and own the shares, they will get the upside benefits even if they no longer work at the company.
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