When you’ve worked hard for those equity grants, the last thing you wanna worry about is losing them when you part ways with your company. The question of whether vested shares can be taken away is one that plagues many employees with equity compensation, especially when they’re considering a job change or facing termination.
Let me break this down for you with some straight talk about vested shares and your rights to them.
What Are Vested Shares Anyway?
Before diving deep, let’s get on the same page about what vesting actually means.
Vesting is the process where you earn the right to your equity compensation over time Companies typically grant equity (like RSUs or stock options) subject to a vesting schedule – often 4 years with a 1-year cliff This means you need to stay with the company for a certain period before you actually own those shares.
Vested shares = The portion of your equity that you’ve earned the right to keep based on your completed service time.
Unvested shares = The portion of your equity that you haven’t yet earned the right to keep because you haven’t satisfied the time-based or performance-based conditions
The Basic Rule: Vested Means Yours
Here’s the good news upfront:
When an employee leaves a company, they generally retain their vested RSUs or the resulting shares. Unvested RSUs are usually forfeited upon termination, reverting to the company’s ownership.
This fundamental principle applies to most equity compensation arrangements. Once your shares have vested, they’re considered earned compensation. The company can’t arbitrarily take them back just because you decide to leave.
However (and this is important), there are exceptions and nuances that might affect your specific situation.
Potential Exceptions: When Vested Shares Might Be at Risk
Despite the general rule, there are situations where your vested shares could potentially be compromised:
1. Clawback Provisions
Some companies include clawback provisions in their equity agreements. These allow the company to reclaim vested shares under specific circumstances, such as:
- Financial restatements due to accounting errors
- Employee misconduct or fraud
- Violation of non-compete or confidentiality agreements
- Engaging in activities harmful to the company
2. Bad Leaver Provisions
Some equity plans distinguish between “good leavers” and “bad leavers.” If you’re terminated for cause or violate certain agreements, you might be classified as a bad leaver, which could affect even your vested equity.
3. Repurchase Rights
Companies sometimes retain the right to repurchase vested shares when an employee leaves. This doesn’t mean they can take the shares without compensation, but they may have the right to buy them back at a predetermined price or fair market value.
4. Post-Termination Exercise Periods
For stock options (not RSUs), there’s typically a limited window after termination to exercise your vested options before they expire. If you miss this window, you lose those options even though they were vested. Traditional exercise periods are often 90 days, but some companies offer extended periods.
Different Types of Equity and How They’re Treated
The treatment of vested equity can vary depending on the type of equity compensation you’ve received:
Restricted Stock Units (RSUs)
For RSUs, the treatment upon termination is generally straightforward:
- Vested RSUs: These shares typically remain fully owned by you after termination
- Unvested RSUs: These are usually forfeited immediately upon resignation or termination
Stock Options
Stock options work a bit differently:
- Vested options: You retain the right to exercise these, but usually within a limited time frame after leaving (typically 90 days)
- Unvested options: These are typically forfeited upon termination
Restricted Stock Awards
For restricted stock:
- Vested shares: These remain yours after termination
- Unvested shares: These are typically forfeited, though some companies might accelerate vesting under certain conditions
How Termination Type Affects Your Vested Shares
The reason for your departure from the company can significantly impact how your equity is treated:
Voluntary Resignation
When you choose to leave:
- You generally keep all vested shares or the right to exercise vested options
- You typically forfeit all unvested equity
- You must adhere to any exercise windows for options
Involuntary Termination
When the company terminates your employment:
- For cause: In some cases, you could lose even vested equity if terminated for misconduct
- Without cause: You typically retain vested shares, and some companies might offer accelerated vesting as part of severance
Retirement, Death, or Disability
These special circumstances often trigger more favorable treatment:
- Many companies allow RSUs to vest immediately in cases of death or disability
- Retirement may qualify for special equity provisions, potentially including extended exercise periods or accelerated vesting
Legal Protections for Your Vested Equity
While companies design equity agreements to protect their interests, you do have legal protections:
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Contract Law: Your equity agreement is a legally binding contract. Companies can’t arbitrarily change terms after the fact.
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Employment Law: In some jurisdictions, courts have ruled that employees are entitled to compensation for unvested equity that would have vested during their notice period.
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Legal Precedents: Recent court decisions have impacted how equity is treated. For example, a Delaware Supreme Court ruling in December 2024 affirmed the enforceability of forfeiture-for-competition provisions in RSU agreements.
Practical Steps to Protect Your Vested Shares
To ensure you don’t unexpectedly lose your vested shares, take these steps:
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Review Your Equity Documents Thoroughly
- Read your grant agreements, equity plan documents, and employment contract
- Look specifically for clawback provisions, repurchase rights, and post-termination conditions
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Understand Key Dates and Deadlines
- Know your vesting schedule and upcoming vesting dates
- Be aware of any exercise windows that apply after termination
- Consider timing your departure around vesting milestones if possible
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Consult an Expert Before Making Moves
- Talk to a financial advisor or lawyer who specializes in equity compensation
- Get professional tax advice, as exercising options or selling shares has tax implications
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Negotiate During Separation
- If you’re being laid off, try to negotiate accelerated vesting as part of severance
- Request an extended exercise period for vested options if applicable
- Get all agreements in writing
Tax Implications When Leaving with Vested Shares
The tax treatment of your vested shares after termination depends on several factors:
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Vested RSUs: If already settled (converted to actual shares), they’ve typically already been taxed as ordinary income. Any subsequent sale will have capital gains implications.
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Vested Stock Options: Exercising options after termination triggers the same tax consequences as exercising while employed. For NSOs, you’ll owe ordinary income tax on the spread between the exercise price and fair market value. For ISOs, exercise might trigger AMT, and leaving within the holding period requirements could disqualify them from preferential tax treatment.
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Tax Withholding: If termination coincides with a vesting event that triggers accelerated vesting, your company must still handle appropriate tax withholdings.
Real-World Scenarios and Outcomes
Let’s look at some common scenarios:
Scenario 1: Standard Voluntary Departure
Sarah has 10,000 RSUs on a 4-year vesting schedule. After 2.5 years, she’s vested in 6,250 shares and decides to leave for a new job.
- Outcome: Sarah keeps her 6,250 vested shares but forfeits the remaining 3,750 unvested shares.
Scenario 2: Termination For Cause
Michael has vested stock options for 5,000 shares but is terminated for violating company policy.
- Outcome: If the company’s equity plan has strong bad leaver provisions, Michael might lose some or all of his vested options, or have a severely restricted window to exercise them.
Scenario 3: Company Acquisition
Jennifer has 8,000 RSUs with 5,000 vested when her company is acquired. Her agreement includes double-trigger acceleration.
- Outcome: If Jennifer is laid off within a certain period after the acquisition, her remaining 3,000 unvested RSUs could vest immediately due to the double-trigger provision.
Special Considerations for Different Companies
The treatment of vested shares after termination can vary widely depending on the company:
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Startups vs. Public Companies: Startups often have more flexible policies and might negotiate special arrangements, while public companies typically have standardized, less flexible equity plans.
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International Considerations: If you work for a multinational company or in a different country, be aware that equity treatment can vary significantly by jurisdiction. Some countries have stronger employee protections regarding equity compensation.
Bottom Line: Can Vested Shares Be Taken Away?
In most normal circumstances, vested shares cannot be arbitrarily taken away when you leave a company. They represent compensation you’ve already earned through your service time.
However, your equity could still be at risk if:
- You violate specific terms in your agreements (like non-compete clauses)
- You’re terminated for serious misconduct
- You fail to exercise vested options within required timeframes
- Your equity agreement contains specific clawback or repurchase provisions
The best protection is thorough knowledge of your specific equity agreements and proactive planning before making any career moves.
Final Thoughts
Understanding your rights to vested shares isn’t just important when you’re planning to leave – it’s essential knowledge throughout your employment. Your equity compensation is a significant part of your total rewards package, and knowing exactly what you’re entitled to helps you make informed career decisions.
If you’re uncertain about your specific situation, don’t hesitate to seek professional advice. The investment in expert guidance is small compared to the potential value of your equity compensation.
Remember: knowledge is power when it comes to protecting what you’ve rightfully earned.
Processing good and bad leavers when using Vestd’s Articles of Association and options agreement.
Treatment of ex-employees is governed by leaver provisions found in your Option Agreements, Articles of Association and/or Shareholders’ Agreements.
Option Agreements set out what happens to options that are not yet exercised.
Articles of Association and/or Shareholders’ Agreements outline what happens to employees’ shares when they leave the company.
These can be edited depending on your requirements, however if you have adopted the standard Vestd Articles — and are using Vestd’s options agreement — the following will apply:
A ‘bad leaver’ is someone who has their employment contract terminated for gross misconduct such as theft, physical violence, gross negligence or serious insubordination; or who breaches a restrictive covenant set out in their contract.
A ‘good leaver’ is someone who leaves the company in good faith or under personal circumstances; this could be for another job, retirement, disability or death.
When designing your options scheme on Vestd, you’ll be able to choose how good and bad leavers’ options are treated:
Keep vested options. If a good leaver, the recipient will keep the number of options already vested, and any remaining options will be cancelled. They’ll be able to exercise their options based on the existing criteria. If a bad leaver, they will lose everything.
Allow vested options to be exercised. If a good leaver, the recipient will keep the number of options already vested, and any remaining options will be cancelled. They’ll then need to exercise these options into shares within 90 days. Any options not exercised within this timeframe will be cancelled. If a bad leaver, they will lose everything.
Lose everything. On leaving, any options not already exercised will be cancelled and the recipient will receive nothing further.
Complete discretion. On leaving, the company decides on one of the choices above but with more flexibility on the amount of options and on the exercise choice. They can choose how long the period will be i.e rather than within 90 days, the company could choose to allow 120 days, etc. If the keep options choice is selected, the flexibility is on how many options they can keep – however, the original exercise condition will continue (“Exercisable” or “exit only”).
We go into more detail about changing the conditions of an EMI option agreement with links to HMRCs guidance on acceptable and unacceptable uses of changing the terms.
Its worth knowing that the beneficial EMI tax treatment ends 90 days after an employee leaves, so the employee should be processed as a leaver as soon as possible. And if the options are exercisable upon leaving, they should be exercised within 90 days to retain their tax benefits.
For EMI If the options arent exercised within 90 days, you should obtain a company valuation at the time of leaving to ensure the correct tax is paid when the options are eventually exercised. You can do this through Vestd by going to your Valuations page, starting a new valuation and selecting Exercise valuation.
For CSOP there is a carve out for certain leaver reasons that allow the tax advantages, even if the options have not been held for 3 years from the grant date. For more information on this, please see what are the 6 exemption clauses for CSOPs?
Directors may serve notice at any time within 12 months of an employee’s Termination Date, which will require the leaver to transfer some or all of their shares to the company.
A good leaver will receive the greater amount of either the fair market value on the date when the transfer arose, or an amount equal to the total subscription price originally paid when the shares were issued.
A bad leaver will receive the lower amount of either fair market value on the date when the transfer arose, or an amount equal to the total subscription price originally paid when the shares were issued.
If a Transfer Price cannot be agreed upon, the Board must appoint an Expert Valuer (either an auditor or an independent firm of chartered accountants) to certify fair value (if the fair value has been certified by an Expert Valuer within the preceding 12 weeks, this may be used).
This buyback will be subject to the various Companies Act restrictions associated with this. Please read this FAQ as this is a complex process.
Have an Employee Stock Purchase Plan? Don’t Make This Mistake.
FAQ
Can a company take your vested shares?
After your options vest, you can “exercise” them – that is, pay for the stock and own it. But if you leave the company and your contract includes a clawback, your company can force you to sell that stock back to it.
Do you lose vested stock if you quit?
No. Vesting is based on you working at the company. You get to keep whatever was vested when you left. You’ll lose whatever wasn’t vested.
Can I cash out vested shares?
Once shares vest, you typically have the right to sell your shares (lookout for company enforced periods where they restrict employees from selling shares).
Can my shares be taken away?
It is, of course, not possible to simply ‘delete’ shares from a company. As such, removal of a shareholder requires a transfer of the shares they hold.