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Worker stock options can bring joy and grief

Many firms use them as recruiting and retention tool

SHARE Worker stock options can bring joy and grief

Employees who get terminated from a company before they exercise their stock options are often required to relinquish them. But many former employees are saying, "Not so fast."

Increasingly, such spurned employees are taking their cases to court.

Employees at DoubleClick sued the New York company, saying they were fired before they could cash in their options. An employee sued IVillage, saying that he had been recruited on the promise of 100,000 stock options, but was fired before he could exercise them.

Stock options have become a powerful recruiting, incentive and retention tool for many companies, especially cash-strapped start-ups.

There are several types of options, says Kaye Thomas, author of "Consider Your Options."

One type usually offered by large companies is the employee stock purchase plan, where employees can buy company stock at a discounted rate. The most popular type of stock option, Thomas says, is the nonqualified stock option. These options allow people to buy the stock at a given price. An incentive stock option is similar to nonqualified options, but it's only for employees.

People need to understand stock options, Thomas says, because they can be "tremendously valuable" or can turn out to be "worthless."

Even if the option's worth is not a problem, the job could be.

Just look at iMotors.com, the Internet auto dealer based in San Francisco. Some 100 recently terminated employees were told that they would have to sell stock back to the company. One employee is getting back $1,600, what he paid for the 800 shares he had purchased with his options. Although he's not losing money, he could be missing out on a bigger payday if the stock takes off and ends up being worth much more than the $2 a share he paid for it. In that scenario, he'll be out of a lot of money he had counted on when he left his job to go to iMotors.com in the first place, he says.

Rachel Canon, a consultant with Ketchum Sheppard, an employee communications consulting company, isn't an attorney but she's skeptical about displaced employees' legal claims when it comes to options. Most stock options are grants, and employees are always given the information up-front that the company would get the stock back if the employee leaves the company.

A good company will thoroughly explain stock options to employees, said Ketchum Sheppard vice president Peggy Sue Davis. That means explaining the risk and making it clear the circumstances under which options must be relinquished.

"Fair and honest companies" tell employees that they are getting "an opportunity," Davis says. If the company does well, then the hope is it will pay off handsomely. But there's no guarantee. The company could go out of business or the company could be sold, Davis says.

The options may also be "under water," meaning that the price at which the option is offered is lower than the value of the stock.

Still, stock options are now losing their luster as a recruiting tool, says Ken Ramberg, co-founder of Jobtrak.com, an online career service for college students and alumni.

In the past six months, Ramberg has seen students looking less at stock options and more at other parts of the compensation plan. Recent college graduates are demanding and getting high salaries, Ramberg says, while last year the trend was to accept lower salaries in exchange for stock options.