Lately, our labor lawyers have been receiving a large number of calls from C-suite employees (CEOs, COOs, CFOs, CMOs) who are being taken advantage of by their California employers. We have provided ten different scenarios here, and there are hundreds more in which an employer-employee relationship can be strained as a result of the employer changing the rules on stock options or equity grants. This is an area teeming with problems, and one that seems never-ending. An employer is happy to offer you stock when they cannot pay you what you are worth, but when you help grow their company and they prosper, rather than reward you, some want to take advantage of you some more and we can help. Sometimes a demand letter resolves it, but more times than not, litigation is what gets them to the negotiating table; we operate on a contingency: no recovery, no fee.

A simple one we come across frequently is when you have an employee who comes on board with a small company and is offered an interest of 5-25%. The employee works hard with the employer and helps grow the company, a private company (ie not one listed on the stock exchanges). After many years of service, the employee is terminated, resigns, or retires. What the employer does now is obtain a very low valuation of the company using a number of tricks of accounting in terms of classification and what is entered, in order to offer the employee less than he or she deserves. Often, in a case like this the only way out is to contact an employment lawyer and litigate the case as this is they type of fact scenario that will lead to non-stop games. You always have to understand your opponent. If you have millions of dollars at stake, hardball is often the order of the day. Please document all of the promises as they come along; a simple written confirmation can go a long way, but signed documents are good. Remember a golden rule: If it’s not documented, it didn’t happen!

Keep in mind that if an employer offers you stock as an incentive, then it may be considered a wage, especially if it is an RSU (Restricted Stock Unit). The key is that the stock has to be both ascertainable and part of the agreed-upon renumeration for your services. Naranjo v Spectrum Security Services Inc. 40 Cal. App. 5th 444. Call one of our employment lawyers at 619-793-4827 if you want to understand whether you are in this position or whether your stock grants are not considered wages. Please note that stock options are not considered wages; they are a contractual relationship and have their own rules for you to abide by.

Under U.S. Federal and California law, several statutes and case precedents provide protections to employees in the context of stock options and equity compensation. These laws address various employer actions that could unfairly deprive employees of their stock rights. Below is an analysis of the relevant protections for each of the listed actions:

1. Terminating the employee right before stock vests: Employers may not terminate employees in bad faith to deprive them of compensation or benefits they have earned. In Cochran v. Quest Software, Inc., 328 F.3d 1. the court emphasized that unvested stock options are not considered earned compensation for past services but are contingent on continued employment. However, if termination is shown to be in bad faith to avoid vesting, it could violate the implied covenant of good faith and fair dealing. Often, what we find is that wrongful termination occurs and in that case we can ask that the unvested stocks, options, or other equities be vested as well.
2. Using fake or exaggerated “cause” to cancel stock: California law protects employees from arbitrary forfeiture of stock options. In , Shah v. Skillz Inc., 101 Cal. App. 5th 285. the court found that an employer’s breach of the stock option agreement rendered futile any attempt by the employee to exercise options, and damages were calculated based on the assumption that the employee would have exercised the options. We have found employers that set up certain timeframes for exercise of stock options but then move the needle, or worse, do not provide their teams with any information on to how they can exercise their stock options.
3. Setting extremely short post-termination exercise deadlines: Federal and California laws do not explicitly prohibit short exercise deadlines, but courts may consider whether such deadlines are reasonable and consistent with the terms of the stock option agreement. In Rauser v. LTV Electrosystems, Inc., 437 F.2d 800, the court upheld damages for an employee who exercised options within a reasonable time after termination, even though the employer attempted to deny the exercise. In any event, as a California employee, you want to be very clear as to when you can exercise the stock options and do your best to follow the timelines. If they are unreasonably short, you may have an action if your employer is conducting activities to deter you from exercising the stock options.
4. Refusing to provide the stock option agreement or equity plan: Employers are generally required to provide employees with the terms of their stock option agreements. California law, under Cal Corp Code § 408 allows corporations to adopt stock option plans that specify the terms, including the effect of termination of employment, and employees must be informed of these terms. We dealt with exactly this situation with a very large employer. In that case, a simple plan was written, but in another country, as they wanted to save on legal fees. The agreement made little sense in the United States and they did not rewrite it but stated they did. A new one was required as many notice requirements were missing. The employer did not do well in litigation.
5. Raising the valuation to make exercising options too expensive: While there is no specific prohibition against raising valuations, such actions could be challenged if they are conducted in bad faith or violate the terms of the stock option agreement. Federal securities laws, such as Rule 10b-5, prohibit manipulative or deceptive practices in connection with the sale of securities, which could include artificially inflating valuations. There has to be a basis for the valuation. In the last large case we conducted we simply hired an expert witness who was able to value the company based on the Black Scholes formula/model and it was all resolved.
6. Diluting the employee’s shares without proper notice: California law under Cal. Corp. Code § 25400 prohibits actions that create a false or misleading appearance of active trading or manipulate the market for securities. This could apply to improper dilution of shares if it is conducted to mislead or harm employees.
7. Canceling or reducing stock during a merger or acquisition: Employees may be protected under the terms of their stock option agreements or equity plans. In Shah v. Skillz Inc., the court held that damages could be awarded for the loss of stock options due to the employer’s breach, even in the context of corporate changes. What the court looks for in this type of a case is whether the actions are conducted in good faith.
8. Changing vesting schedules after the employee is hired: Under 29 USCS § 1053 plan amendments that alter vesting schedules must allow employees with at least three years of service to elect to retain the original vesting schedule. This ensures that employees are not unfairly disadvantaged by changes to the plan. You agreed to one set of terms. They cannot be unfairly changed to something else without your input when you worked based on what you were promised.
9. Repricing or replacing equity grants with worse terms: Employers must comply with the terms of the stock option agreement and applicable laws. If repricing or replacement is conducted in bad faith or without proper notice, it could be challenged under contract law or securities regulations. Cal. Corp. Code § 408 allows for specific terms to be included in stock option plans, and any changes must align with those terms, not change them to the employer’s liking or favor.
10. Claiming the stock was never properly granted or approved: Employers cannot retroactively deny the validity of stock options if they were granted in accordance with the terms of the plan. In Newberger v. Rifkind, 28 Cal. App. 3d 1070, the court held that stock options granted to employees were supported by consideration and could not be revoked arbitrarily, even after the death of the grantor.