Your Questions, Answered

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If your employer is offering you stock options, restricted stock units, or equity participation units, there are two key legal documents to look for.

One of them is the "award agreement," which can sometimes also be called a "grant" or "conveyance agreement." That's the legal document that states how many options or units you're getting, and when those options or units "vest," meaning how and when you receive them. Sometimes the award agreement will be accompanied by a "certificate" that formalizes the transfer of options or units to you.

The other is a "plan" document. That's the legal document that controls how and when your employer can issue options or units to you and other employees. While most larger employers will call this document a "plan" document, that's not always the case. Depending on the structure of your employer's business, these plan-type terms may be put into other types of corporate documents.

No matter what type of options or equity incentive units you're getting, you should typically see a document that grants your options or units, like an award agreement; and a document that governs the issuance and handling of those options or units, like a plan document. 

If you aren't seeing those types of documentation, or if you're not sure that you have the right documentation, then you may not have received options or units from your employer. A qualified attorney can help you understand the documentation you have and guide you on your legal rights.

An offer letter or employment agreement is rarely enough to establish your right to stock options, restricted stock units, or equity participation units. As the prior answer shows, there usually needs to be much more formalized documentation of your options or units. If you're not sure about what you're getting, or if you think your employer isn't honoring its promises about options or units, you should contact a qualified attorney for more guidance.

In its most basic form, a stock option gives you the right to purchase a company's stock in the future at a specified price. When that future point comes to pass and the option "vests," you can then "exercise" the option and acquire the stock. If you exercise the option at a time when the stock is worth more than its exercise price, you potentially benefit.

When employers issue stock options to their employees, they often place additional restrictions on them. Under most circumstances, you lose the right to exercise stock options when your employment ends (or soon afterwards), with limited exceptions. Some employers use "performance-based" vesting, where you only receive the options when you or the company reach certain performance goals.

Depending on the types of restrictions, employers will sometimes offer "restricted stock units" (RSUs), which are similar to stock options. When you receive RSUs, you may not need to pay an exercise price, but instead automatically receive stock when the RSUs vest. You may have the choice to redeem for the difference between the exercise price and the current market value. Or your employer may reserve the choice to award you stock or cash.

Equity participation units can sometimes be legally structured like stock options or RSUs. But most often, equity participation units are "profit interests." 

When equity participation units are structured like "profit interests," you receive a payment that's based on company performance. For instance, that payment can be based on how much profit the company makes in a specified time period, or how much the value of the company increases over a specified time period.

Like stock options, equity participation units are typically subject to vesting requirements, which can be time-based or performance-based. Depending on the terms of the governing equity participation plan, you may have the ability to redeem units when they vest, or your employer may reserve that choice.

Because equity participation units can be structured in many different ways, there can be lots of differences in how they work. If you're not sure about your rights, or how and when you receive compensation for your units, a qualified attorney can help.

In most circumstances, if you received options or units from your employer, you can't keep them after your employment ends. But depending on what it says in the governing plan, there can be some additional concerns that come into play.

Your rights often depend on how your employment ended. For some options and units, if you're terminated for cause or for misconduct, you may automatically forfeit options or units. If you're terminated without cause, some plans will provide a limited time period for you to exercise vested options or redeem vested units, but that's not always the case. There can also be specific terms for what happens to your options or units when you retire.

Never assume that you can keep your options or units after your employment ends. If you anticipate that your employment will be ending, and you're not sure what will happen to your options or units, you may want to consult a qualified attorney about your rights first. 

Depending on what it says in your legal documentation, a sale or change in control can affect your options or units. 

In some circumstances, a sale or change in control will "accelerate" vesting, meaning that all your options or units become vested. But when that happens, there can be other restrictions on how and when you exercise your options or redeem your units, or your employer may have authority to act for you.

Not all options or units provide for accelerated vesting. In these circumstances, a sale or change of control may not matter, and your options or units are instead taken over by the buyer or successor company.

Depending on how a company is structured, it may have different classes of stock or ownership units. Many companies designate different classes for investors and employees.

When there are different classes for investors and employees, the holders of investor-class stock or units will often have very different rights than the holders of employee-class stock or units. These legal differences can be particularly important when there's money from a sale or change of control for the company. The holders of investor-class stock may have the right to be paid first, or they may have the right to be paid certain amounts in proportion to their investments, before holders of employee-class stock or units are paid. 

If you're not sure about your rights as a holder of employee-class options or units, a qualified attorney can help. For more guidance on your rights as a holder of stock in a corporation or units in a limited liability company (LLC), visit my site's Startups and Closely Held Businesses page.