If my employment agreement gives me longer after termination to exercise my stock options than the stock plan and grant agreement do, which controls?
Usually the stock plan rules override other agreements made under that plan.
Example: Your company's stock plan gives you up to 90 days after termination to exercise your vested stock options. Your employment agreement gives you one year. Usually, unless there is an additional clarification of the conflict, your stock plan controls, so you have 90 days to exercise after you leave.
When you negotiate an employment agreement, it is important to check on provisions related to your stock grants, such as your post-termination exercise period, to see whether they conflict with the company's stock plan rules. If important inconsistencies exist, both you and the company should clarify in writing everyone's intent on what will apply, and any modifications in the plan.
The Texas Court of Appeals addressed this issue in Donaldson v. Digital General System (Texas Court of Appeals, No. 05-03-01794-CV, 7/22/05).
Alert: People with incentive stock options (ISOs) should be especially careful. Under the Internal Revenue Code, unexercised ISOs convert to nonqualified stock options (NQSOs) 90 days after job termination. If that happens, you lose the beneficial tax treatment that ISOs receive when the shares are held for a stipulated period after exercise and grant. Even if your post-termination exercise provision gives you longer than 90 days to exercise ISOs after you leave the company, the stock options will be taxed as NQSOs if you wait more than 90 days to exercise them. (For more details, see a related FAQ on the post-termination exercise rules of ISOs.)