What happens if an employee leaves the company before the shares have vested?

This depends on the ESOP policy of the company. The norm is for the unvested ESOPs to lapse upon cessation of employment. This means that the employee will not be able to exercise and avail ESOP benefits from those ESOPs any more.

However, in case an employee suffers a permanent incapacity while in employment, all the ESOPs granted to him as on the date of permanent incapacitation, shall vest in him on that day and in the event of the death of an employee while in employment, all the ESOPs granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.

Below are the typical scenarios:

Company Friendly
Event Vested Unvested
Termination with Cause Lapse Lapse
Termination without Cause Exercise within the notice period Lapse
Resignation Exercise within the notice period Lapse
Death or Disability Exercise within 3 months of the event Exercise within 3 months of the event
Retirement Exercise on or before the last working day Lapse

 

Employee Friendly
Event Vested Unvested
Termination with Cause Exercise immediately Lapse
Termination without Cause Exercise immediately Lapse
Resignation Exercise immediately Lapse
Death or Disability Exercise within 6 months of the event Exercise within 6 months of the event
Retirement Exercise within 6 months of the event Exercise within 6 months of the event

What does Cause in the above scenario mean?

 If your employment agreement has a definition of cause, you could consider including that. If not, then we would recommend the following definition:

“Cause” shall include:

  • Wilful insubordination or disobedience, whether or not in combination with another, of any lawful and reasonable order of a superior.
  • Theft, fraud, misappropriation, embezzlement, moral turpitude or dishonesty in connection with the employer’s business or property.
  • Habitual absence without leave, overstaying the sanctioned leave without sufficient grounds, or proper and satisfactory explanation, or habitual late attendance.
  • Commission of any act subversive of discipline or good behavior on the premises of the Company, such as, drunkenness, riotous, disorderly or indecent behavior, gambling or taking or giving bribes or any illegal gratification whatsoever.
  • Disregard of the rules of the Company.
  • Disclosing to any unauthorized person any confidential information with respect to the Company and/or its business and/or its operation, including but not limited to trade secrets, intellectual property etc.
  • Commission or attempt to commit any cyber-crime.
  • Proven instance of sexual harassment.
  • Any other grounds that results in the Board of Directors of the Company to conclude that the act or omission by the concerned person may result in loss, damage or injury to the Company.

 

 

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