Offboarding an employee is a complex process. There’s a lot to get done in a limited timeframe, and missteps can have serious and lasting consequences. Equity is no different in this equation – there are vested and unvested options, shares, exercise windows and more to consider.
Here’s what you need to know and do at each stage, with some notes on how Carta supports the process. We’ll use the catchall term ‘options’ to refer to options, warrants or any other type of equity employees may be holding.Before you get started: if you need a refresher on key terms like vesting schedule, cliff and exercise, check out our equity glossary.
At the outset of your employee share scheme
When you design an employee share scheme, you’ll make a number of choices that come into effect when an employee leaves.
Questions you’ll need to answer:
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What determines a good or bad leaver?
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When should vesting stop?
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What happens to vested and unvested options?
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How long will the exercise window be?
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Will the employee have the opportunity to exercise? And for how long?
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What happens to options that are not exercised?
We recommend working with share scheme specialists to determine the best setup for your business and its employees.With Carta
The platform allows you to set up termination templates for all option plans and grants to account for different scenarios. For example, you may want a different template for good leavers and bad leavers.
Templates can include clauses from the plan such as exercise window duration and whether vested options not exercised will be automatically cancelled at the end of the exercise window.
Termination
The termination is marked as the date the employment contract with the employee is terminated by either the company or the employee.
When it’s decided that an employee will be leaving (whether they hand in or are served their notice), the first thing to do is determine if the employee is a good or bad leaver. Always confirm this with HR or their line manager.With Carta
Read about the automated termination process in our support article: How to terminate a grant, create an exercise window and publish an exercise.
During the notice period
The notice period is the length of time between termination and departure. Right away, you should inform the employee about their rights to exercise vested options. The right to exercise is often limited to an exercise window with a fixed start and end date, so the more forewarning you can give your employee the better.
At the end of the notice period, the employee formally leaves the company and no longer meets working requirements for tax-advantaged schemes such as EMI (see HMRC's User Manual for more details). Vesting of options typically stops at this point.
After leaving
Once an employee leaves, option grants will stop vesting and any unvested options will be cancelled. Note that cancelled options return to your options pool, where they become available for future grants to other employees.
Most bad leaver clauses stipulate employees do not have the right to exercise options, and all options, vested and unvested, are cancelled.
For good leavers, the exercise window begins as vesting stops. This is when the employee can start exercising options.
At the point of exercising
If an employee decides to exercise any options, they must complete, sign and send an exercise notice to the company. At this point the transaction is considered to have taken place.
There are three subsequent steps:
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Payment received: this is when the company has received the payment for the exercise costs.
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Board approval: this is when the company has approved the issuance of shares.
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Shareholder register update: this is the date when the shareholder register is actually updated and the former optionholder enters the shareholder register and is legally considered a new shareholder.
With Carta
Employees are typically expected to exercise options within a predefined window dictated by time-specific tax advantages. Some companies permit employees to exercise options outside of this window – they simply aren’t subject to the same tax advantages.
With Carta, an exercise transaction is recorded on the platform when an employee signs their exercise notice. You can also register the date when exercise costs were received. Finally, if you keep your company shareholder register on the platform, it is automatically updated when the share transaction is published.
At the end of the exercise window
At the end of the window the employee can no longer exercise their options. If the options are tax-advantaged, there are rules that govern when the options ought to be exercised to maximise tax advantages. This is also when vested options that haven't been exercised are cancelled, if specified by plan rules.With Carta
We've automated the termination process of employee contracts from end to end. This means that the platform will automatically cancel any options at the end of the exercise window as applicable. Your cap table is updated to reflect the cancelled options being returned to the options pool, where they are available for future grants to other employees.Letting go of an employee is difficult, so we’ve made the termination and exercising of equity as straightforward as possible on our platform. The automated termination flow is available for all Carta customers, saving you time answering questions during offboarding. It ensures a compliant, accurate process, supporting a range of departments including people, finance, signatories and legal.