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Stock-based compensation is a gamble, and not everyone wins

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Reader: Anyone employed by my company for a year is granted a number of stock options as a “bonus”. In casual conversation, one of my supervisors estimated that our stock options were worth somewhere north of $500,000 if we went public or were acquired.

A few weeks ago, we learned that all of the company’s patents, licenses and other intellectual property had been sold. The company’s executives have all resigned after receiving significant severance pay. The business will soon be completely worthless. There is no provision for severance beyond a few months of our regular salary if we stay until the end of the year.

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I know it’s not fair, but was it legal? Many of us have considered legal action. Should I jump ship now and give up?

Karla: Gather up, young pipers, and let me tell you a story from the late 1900s.

It was a time when dial-up internet and flip phones were screaming, when investors threw money at any startup with “dot com” in its name. Stock options were a common hiring inducement, and if you happened to exercise those options and perhaps sell the stock at the right time, you did it.

Then, at the turn of the century, the bubble burst. Start-ups collapsed and the stock options that employees hoped would make them millionaires became millstones. When a company’s stock hit rock bottom, employees who had exercised their options lost their investment, with some ending up with huge tax bills they couldn’t afford, even if they didn’t. had never seen a penny of silver in stock.

The point of this vignette is that those of us who first saw this happen are wary of stock-based compensation plans, but a new generation of workers must learn this the hard way. Stock options give employees a chance to bet on the company’s success, but not everyone walks away richer. In the great silicon rush, “for every successful person, there were 100 who did not succeed,” says Robert Ellerbrock, a partner at Fisher Broyles who specializes in benefits law.

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You don’t say if you’ve ever exercised your employer stock options. Otherwise, you have lost nothing beyond the dream of earnings in a future that was never guaranteed. No matter how much smoke anyone blows on IPOs and buyouts, there are only two times when stocks have real value: when you buy them and when you sell them. You might as well get mad at someone for giving you scratch tickets that didn’t pay out.

And if you’ve exercised those options to buy stocks that are no longer worth anything, there’s little hope of getting back what you spent – the same risk you take with any stock you own. Also, you might want to consult an accountant to make sure you don’t have any nasty tax surprises next year.

No, it’s neither fair nor good for management to cash in and leave employees with a soon-to-be-empty bag. But, says Ellerbrock, “whoever owns the majority of capital will do what’s best for the shareholders” and for the company as a whole. Sometimes that means liquidating assets and cutting losses. Unless you have solid evidence of insider trading or mismanagement, while Ellerbrock says you might find a lawyer willing to help you sue your former bosses, he doesn’t see much hope that it does you good.

Don’t let stock options keep you from quitting a job

The question that remains is whether you want to last the rest of the year and receive at least some severance pay. It has to be your decision, but here are some strategic tips to consider:

  • Make sure the promised severance agreement is in writing.
  • Even if you plan to end the year, start looking for your next job, like yesterday.
  • If you get an offer from a company that wants to hire you right away, it’s worth asking if they would consider a signing bonus to at least partially compensate you for the severance pay you would be giving up.
  • Going forward, be sure to focus your expectations on the base compensation you are guaranteed to receive, rather than promises of stock options that may not materialize.