How to Conduct Equity Terminations Like a Pro

Introduction

In 2023, layoffs are an unfortunate reality in the tech industry. It can impact significant numbers of team members in different jurisdictions. However, by following best practices, companies can minimize the negative impact on employees and the company. This post will explore how to do it correctly, specifically focusing on equity compensation.

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Be Transparent and Communicate Clearly

It’s vital to be transparent and communicate clearly to employees when terminating their employment. For example, be upfront about the reasons for the layoffs, when they occur, and how many employees will be affected. In addition, advise the employee on how the termination affects their equity.

Imagine being laid off and receiving a vague explanation for your termination. You'd likely feel confused and uncertain about what happened and what to do next. Clear communication can alleviate those feelings and allow employees to make informed decisions about their financial future.

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Handle Equity Compensation with Care

Equity compensation can be complicated and sensitive, particularly in the tech industry. Stock options and other equity awards are standard and represent an essential share of an employee's total compensation. When it comes to terminations, it's vital to handle equity compensation with care.

Be transparent about how the termination will impact an employee's equity and ensure that each employee clearly understands what they can and can’t do.

For example, if an employee has not vested all their equity, you may want to offer them a vesting acceleration or an extended post-termination exercise period for exercising their options.

Here are the 3 most common ways to smoothen a termination from an equity compensation angle:

• Waive the cliff: being laid off before the cliff means an employee wouldn't be able to exercise any options initially granted. The employer could allow the employee to leave the company with at least some equity by waiving the cliff. For example, if the cliff is one year and the employee is laid off after six months, waiving the cliff allows the employee to vest the next six months of their vesting schedule.
• Accelerate vesting: being laid off often comes as a surprise. By accelerating the vesting by several months, the employer could give more equity than the employee had accrued. For example, accelerating the vesting by 3 months for an employee who stayed for 18 months allows them to exercise 21 months of vested options instead of 18.
• Extending the post-termination exercise period (PTEP): employees must overcome many unplanned challenges when laid off. Forcing ex-employees to decide whether to exercise within 90 days is often an extra concern they don't want to deal with. By extending the PTEP by several months, the employer shows empathy and delays the deadline for this critical decision. It is not uncommon to see companies extending the PTEP to 12 months for laid-off team members.

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Be Mindful of Legal Requirements and Compliance

When conducting terminations, compliance and legal requirements are critical. Generally, ensure that local laws regarding layoffs are followed and prevent discriminatory terminations.

Because it has an impact on equity terms and conditions - which in turn indirectly impact the shareholders’ potential dilution -, amending an equity grant typically requires the approval of the company’s management body (i.e. most often the board of directors), just like a new equity grant.

This means additional paperwork, which make some companies shy away from doing things well. When companies want to do it well, it’s usually tackled by emails back and forth between the equity plan administrator and the company’s outside counsel, which can be a lenghtly and error-prone process that can give rise to misunderstandings and delays.

With Easop, employers can streamline the process and generate grant amendments board consents to approve cliff waivers, vesting accelerations, or PTEP extensions, relieving them and their lawyers from hours of paperwork management.

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Learn from the Experience and Build your Alum Network

Finally, it's essential to learn from the experience of conducting terminations. Evaluate what went well and what could be improved.

In the context of equity compensation, this involves different areas:

• Review how the company amends and manages equity awards.
• Explore ways to improve transparency and communication around equity compensation.
• Change how equity awards are structured to align with the company's goals and values.

Moreover, proactively managing layoffs will help you maintain a strong alum network and brand. It will directly shape employees' perception of the company and their willingness to keep an ongoing relationship post-termination. Employees treated with respect and given appropriate support during a layoff are more likely to speak positively about their experience and maintain a connection with the company and its alum network. In turn, this will help the company maintain a strong brand, making it easier to recruit and establish lasting connections.

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Conclusion

Successfully navigating the termination process, including the complexities of equity compensation, requires a thoughtful approach that prioritizes clear communication, empathy, and adherence to legal compliance.

Easop has streamlined this last part of the equity termination process so you do not spend hours of work filling in Excel tables and sending multiple emails at a time where you should focus on communicating well and showing empathy to your team members.

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