My company recently went through layoffs. What rights do involuntarily terminated employees have in their stock options, and what may my company do?
No law gives you special rights in your stock options. Under most stock option plans and grant agreements, an employee whose termination stems from unfavorable economic conditions generally has no more rights than an employee who quits the company. Consequently, if your employment is terminated in a reduction, a "right-sizing," or a round of layoffs, you will be allowed to exercise only vested stock options.
In certain instances, some companies may choose to accelerate some of the otherwise unvested options, or to extend the post-termination exercise period, as a goodwill gesture or as part of a severance package. However, unless the grant agreement requires this, a company may be reluctant to do so either because such acceleration might set a bad precedent or because the company would incur significant accounting charges by modifying the stock option grants.
The final regulations (pages 36–37) on nonqualified deferred compensation under Section 409A allow option exercise extensions to the shorter of either (1) the original maximum term or (2) 10 years from the original grant date. Exercise extensions for underwater stock options are not considered an additional deferral feature. Extensions that were made before April 10, 2007, the date of the final regulations, are also not subject to these limits (see page 173 of the final regulations). For incentive stock options (ISOs), any extension of the post-termination exercise period or acceleration in vesting may violate the ISO rules and turn them into NQSOs.