Over a 4 year period I have received a mix of stock options AND restricted stock at a private company. The options are not in the money, but I am wanting to liquidate my restricted stock. I am not sure if or how I should broach this topic with my current employer (flat out ask if they would do a buyback?).

A different company is wanting to hire me and has offered to 'buy me out'; I'm not 100% certain how this works? Does this apply to both options and restricted stock? Is it worth having them buy out underwater options? If my restricted stock is worth say $100k do they pay me roughly that amount and have the restricted stock transferred in their name?

Would they be required to sign the stock holders agreement to do this, or could we draft an agreement between myself and them in the case of a future liquidity event (this way they wouldn't have to sign the stock holders agreement or deal in any way with my current employer)?

Are my assumptions correct or are there any caveats that I am missing?

  • 3
    I would assume they are offering to pay for your unvested stocks, which you will lose when you leave the company
    – Bishop
    Jul 1 '15 at 17:43
  • 4
    In other words, they won't buy any stock or stock options, they will compensate you for your losses.
    – gnasher729
    Jul 1 '15 at 17:49
  • based on this info, and since the options are 75% vested but underwater, there is no gain, so there is no loss that they would compensate for, correct? Jul 1 '15 at 19:12
  • If they are 75% vested, you will lose 25% of them when you leave. That is a loss they would compensate for you. What do you mean by underwater?
    – Bishop
    Jul 1 '15 at 19:28
  • stock is 100% vested, options are 75% vested. The options are underwater since the market value is less than the strike price Jul 1 '15 at 19:32

As the comments above have been trying to get across, the prospective employer is offering to pay you for the bonus/unvested compensation that you would be losing by jumping ship right now to go work for them. They are not offering to buy any securities that you already hold, regardless of whether they're profitable or unprofitable.

Example 1. You participate in your current company's 401(k), and your company matches your contributions at 50%. However, the matching funds are not yours immediately; they vest in 20%/year increments until you have been at the company for 5 years. Let's say you've been there for 3 years and have contributed $50K to the plan. Your company has matched you at $25K, but only 60% of that ($15K) has vested. If you leave right now for the new employer, you're leaving $10K behind. So the new employer might offer to "buy out" (i.e. pay you) that $10K to help encourage you to switch now. You might then counter their offer by pointing out that if you stay where you are that $10K is coming to you tax-deferred, whereas their $10K signing bonus would be taxed. So you ask for $15K instead.

Example 2. You work for a Wall Street investment bank. Each December you receive a performance bonus. Since you began working there, your three yearly bonuses have been (in chronological order) $500K, $750K, and $1M. It's June, so you've worked halfway towards your next bonus. You have a lot of incentive to NOT leave your current employer. A competing employer may offer to "buy you out" of your anticipated bonus by giving you a $1.25M signing bonus (since you'd almost certainly not be eligible for a performance bonus during your first year there). You might negotiate with them and say "I'm on track for $2M this year", and then they would figure out if you're really worth that much to them.

So you can see this all has to do with the prospective employer trying to compensate you for any income you're already counting on receiving from your current employer. By jumping ship now you would be foregoing that guaranteed/expected income, so the competitor wants to remove that anchor that might be holding you back from making the move.

Stocks/options that you already own are irrelevant to the prospective employer. Since you wouldn't be giving those up by changing jobs, there's no reason for them to factor into the equation.

  • Options must often be exercised within a short time after leaving. If I have to exercise within 3 months instead of being able to wait for six years for the best point to exercise, that's a disadvantage.
    – gnasher729
    Jul 3 '15 at 14:43
  • @gnasher729 Truly? Is there a name for that sort of employment-related stock option? I'd like to learn more about it.
    – dg99
    Jul 3 '15 at 18:04

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