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Rajah Lehal

Is Your Company ESOP Worth the Paper it's Printed On?

October 31, 2015

Links from this article: Read the article here.

The way ESOPs usually work in start-up companies is by issuing the options with a vesting period, usually four years. Once the shares are vested an optionee may purchase and own the shares. However, Skype followed different conventions. The article explains Skype’s unique ESOP agreement. If an employee left or was terminated, Skype was able to terminate both non-vested and vested options, and force employees to allow them to buy back shares that they have already paid for, at the original purchase price. The article explains how Skype terminated many employees in advance of the Microsoft Acquisition. There are speculations that Skype fired the employees and terminated the options in order to maintain the value of the shares.

The article suggests that this ESOP may have been fraudulent for two reasons. First, the employees seemed to have no information about the exact details of the ESOP or the effect of the relevant clauses of the plan. Second, it appears to be very suspicious that many employees were suddenly fired ‘for cause’ at the very moment of a looming acquisition.

The article states that such plans may be attractive to companies that either “don’t want to give away too much equity in stock options”, or to companies that “anticipate a long period of being privately held and don’t want to deal with outside shareholders”. Either way, transparency about ESOP terms is essential.

Read the article here.Take away:

  • Company ESOP’s can provide for the clawback of vested shares, and the termination of options, but the company must provide enough information to the employees so that they can make an informed decision about the financial attractiveness of the ESOP.

Written by Rajah. Rajah Lehal is Founder and CEO of Clausehound.com. Rajah is a legal technologist and technology lawyer who is, together with the Clausehound team, capturing and sharing lawyer expertise, building deal negotiation libraries, teaching negotiation in classrooms, and automating negotiation with software.