point of clarification: vested vs unvested options

There have been lots of articles about the Zynga "taking away employee's options" brouhaha (another one today in the NYTimes). One thing that bugs me is that many of these articles don't seem to distinguish between vested and unvested options. The difference is VERY important.

When you work at a startup, think of it as you get paid bi-weekly or monthly in two ways: cash (your salary) and options (the options in your option plan that vest that month).  In theory you could actually get option certificates issued to you bi-weekly or monthly the way you get cash sent to you for your salary, but that would create a lot of extra paperwork. So instead someone invented the idea that the employers tells the employee "you get N options over 4 years and they vest every month" or something like that.  Maybe to make things clearer they should have said "you get M options every month you work here" (where M would presumably be 1/48th of N).  This, however, would create a planning complications for the CEO, who needs to carve out options from the "option pool" which usually involves lots of negotiations with the VCs.

So if an employer comes to you and says they want to take away *vested* options, that's like saying they want you to return salary already paid to you. I don't think they could do it even if they wanted to and if they wanted to I think we'd all agree that was highly sketchy behavior.

If, however, an employer comes to you and says they want to take away *unvested* options that's like them saying they want to reduce your salary going forward.  That might be lame and unfair, and if anyone did it to me I'd probably quit, but it's very different than if someone tried to take away vested options.

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8 thoughts on “point of clarification: vested vs unvested options

  1. Ran Ever-Hadani says:

    The salary analogy is quite apt. Say someone made you a job offer with a salary of X. You accepted, left your previous job, perhaps relocated etc. Then 6 months later the employer comes and says, you know what, we have no issue with your performance, we want you to continue working here, but it turns out that when we offered you the job we did not think through the budgetary consequences, oops. So we want you to take a 10% pay cut so that we can fix our previous mistake.I am no expert on labor law, but I would think this would be actionable. Also, if I were one of the star performers that were not at the receiving end of this, I would surely start looking for a job, because I would have lost the trust for the company.

  2. chris dixon says:

    Almost all “rank and file” tech employees are “at will” so can be fired at anytime for non performance. That’s just the legal side – I completely agree with you about the moral/reputational side. I wouldn’t trust a company that did what you describe.

  3. Cody Hatch says:

    Ran: As a general rule, employment is “at will”. You may be fired for any reason or no reason. Your boss can come up to you at any time and say “I don’t like your face. You’re fired.” Your boss can also come up to you at any time and say “I don’t like your face. You’re taking a 40% pay cut, starting now. And if you complain, I’ll fire you.” You seem unaware of this – and not surprisingly, because it’s insanely stupid. You don’t really need LAWS to stop CEOs commiting ritual suicide; on the rare chance they do it anyhow, there will be a newer (and smarter) CEO along soon enough.(Note: You can’t go under minimum wage, in most industries. You also can’t be fired for race, sex, religion, etc. reasons. You can’t be fired for being a whistle blower. You can’t be fired if your contract says you can’t be fired. You can’t be fired for a wide range of union/labour related issues not normally applicable to the tech world. And so on, and so forth. IANAL; TINLA.)

  4. Patrick Moberg says:
  5. bcmanning says:

    Chris, great post. Question: in your experience, is it typical for a company to implement an option buyback policy. Where if an employee leaves, the company has the option to buy back any vested options that the employee has purchased at the current market price?Basically, this policy prevents former employees from holding stock in the company and enjoying any gains in market value that happen after they leave. Obviously not ideal for the former employee, but of course the employer has the right do it. I’m just curious if a policy like this is typical in your experience.

  6. chris dixon says:

    bcmanning – that’s not typical in my experience. they normally have right of first refusal if the employee tries to sell to a third party, but not the right to buy back. i have seen cases where companies offer to buy back to employees that are cash strapped etc.

  7. ScottEdWalker says:

    Agreed, except the option agreement may provide for acceleration of vesting upon (i) a triggering event such as a change of control or (ii) more commonly, two triggering events such as a change of control followed by a termination without cause within 12 months thereafter. Accordingly, in certain cases, the unvested shares have a valuable component more akin to a severance payment/bonus, rather than future salary.

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