When an individual owns stock, they own a share of ownership in a company or business. That individual is also entitled to a share of the assets or earnings of the company. The more stock the individual owns, the more earnings or assets they are entitled to.
There are two different types of stock: common and preferred. The most common type of stock is, as the name suggests, common stock.
In general, when stock is discussed, it is common stock. Common stock is more risky than preferred stock and is actually the most risky type of investment.
Preferred stock also gives a stockholder ownership in a company. It does not, however, typically come with the same voting rights as common stock.
One of the major differences between preferred stock and common stock is that preferred stock has a guaranteed, fixed dividend and common stock has variable returns. Preferred shareholders will receive payments before common shareholders in the event the company liquidates. In addition, the stock is callable, which means that the company may repurchase it at any time and for any reason.
Most companies will divide their stock into different classes, which are designated by letters. This division of stock is done in order to keep the voting rights isolated to a particular group of individuals.
It is important to be aware that stock prices may change depending on the economic concept of supply and demand. The more stock that is purchased, the more the price will decrease. The demand for a stock is typically affected by what the investors perceive the company to be worth.
Stocks are a type of securities. Securities also include:
- Debentures; and
- Other interests which involve an investment with a return which is primarily or exclusively depending upon the efforts of an individual other than the investor.
Stock laws, also called securities laws, are the federal laws and regulations which govern all aspects of security interests, including the:
- Sale; and
These laws are derived from the concept that all investors, whether they are private individuals or large institutions, should have access to certain basic facts regarding the investment prior to their purchase.
These securities laws are enforced by the Securities and Exchange Commission (SEC) in the United States. The SEC is responsible for protecting investors and maintaining the integrity of the securities market by requiring public companies to disclose meaningful financial or other types of information to the public so that their securities investments may be evaluated.
An employer will often offer its employees stock options or stock option plans (ESOPs) as an incentive to work for that employer. Typically, stock options become available to an employee after that employee has worked at the company for a certain amount of time.
At that time, the employer will sell shares of the company stock to the employee for less than the market value of that stock. The employee may then sell the shares of the stock on the stock market for more money than was spent by the employee purchasing the stock.
The employee may also retain, or keep, shares and their dividends. This allows the employee to make money off their shares of the stock.
What if My Stock Options Have not Increased in Value as My Employer Promised?
In some instances, a stock option may be a curse instead of an incentive. In many situations, an employee purchases a stock option only to find out that the actual value of the company’s stock has fallen below the price which they paid. They may discover that the stock may even be worthless if the company is not successful and goes under.
If an employee has lost a significant amount of money due to the fact that their stock option became worthless, they may have a legal recourse against their employer, especially if their employer knowingly gave that employee false hopes or earning large amounts of money. An individual can ask themselves the following questions when determining if their employer may have placed them in an unjust situation:
- Did my employer educate me regarding their employee stock option (ESO) programs? An employer has a responsibility to make sure the employee understands what they are getting into by purchasing stock option benefits, including the risks;
- Did my employer provide honest information about the company stock? A company is responsible for making sure its employees understand where the company currently is financially and its future prospects. An employer cannot make promises about the company doubling or tripling in value over the next several years. Knowingly giving an employee a false sense of optimism regarding the future value of the company may be considered fraudulent;
- Did my employer educate me as to the tax implications of stock options? Employers also are responsible for making sure employees understand how their shares in the company will be taxed; and
- Did my employer show me how to protect the value of ESOs and company stock? Some employers restrict employees from purchasing protective puts, such as insurance for stocks, for their stock options. This practice is unlawful. An employer must allow its employees to buy protective puts to protect their investments.
Can a Company Take Away My Stock Options?
Yes, in some instances, a company may take away stock options. This may be disguised in language such as:
- Company repurchase rights;
- Redemption; and
What this language means is that the company may take back the vested stock options before they become valuable. This issue as well as other issues may lead to employment stock option disputes. This may include disputes related to:
- Whether a terminated employee was entitled to accelerated vesting;
- Whether the employee’s termination was implemented to avoid vesting; or
- Whether the company’s failure to grant options or vest shares violated the provisions of applicable agreements.
What Happens To My Stock Options After I Resign?
In many cases, when an individual resigns from a company, their stock options will expire within 90 days of leaving the company. If they do not exercise their options, they may lose them.
It is important to be aware, however, that there are several possible outcomes for an individual’s stock options when they leave a company. Factors determining the outcome may include:
- Whether the shares are vested and exercised;
- What type of equity compensation the individual has, which may include:
- Stock options;
- Restricted stock units;
- Employee stock purchase plan;
- Stock appreciation rights; or
- Phantom stock;
- Whether the employee was public or private;
- Why the individual is leaving the company, such as:
- A new job;
- Being laid off; or
- Being terminated with or without case; and
- What specific terms were negotiated with the company, if any.
What Should I Do If I Was Misled about My Company’s Stock Options?
If an individual believes that they lost money because their company misled them regarding the stock options plan, they may wish to consult with an employment law attorney or an employee stock option attorney. There are several situations which are often sufficient grounds for legal action, including:
- Wrongful cancellation of employee stock options;
- Breach of an employee stock option agreement; and
- Wrongful termination of employee stock options.
It is important to note that state laws vary regarding stock options. For example, California stock option dispute laws may differ from stock option dispute laws in other states.
Do I Need a Lawyer?
It is essential to have the assistance of an employment law attorney or an attorney for stock option disputes. Your attorney can advise you what laws apply to your case.
Your attorney can advise you of your rights and determine if you are entitled to compensation for your lost investment due to an employee stock option. They will help you file your claim and represent you any time you are required to appear in court.