How to conduct equity terminations: An employer’s guide

Each year, it seems that layoffs are an unfortunate reality for many companies — especially in the tech industry. And these terminations can impact significant numbers of team members in different jurisdictions.

However, by following best practices, companies like yours can minimize the negative impact, both on your business and the affected employees. In this post, I will provide some tips and guidance on doing this correctly, with a specific focus on equity compensation.

So let’s jump straight in.

How should you handle layoffs?

It’s a basic thing to suggest, but it really is vital to be transparent and communicate clearly with your employees when terminating their employment. As a starting point, be upfront about the reasons for the layoffs, and outline when they will occur and how many employees will be affected. In addition, advise the employee on how the termination affects their equity.

This is important, as nobody wants to be laid off with a vague and unclear explanation as to why. Clear communication can alleviate feelings of frustration, and allow your employees to make informed decisions about their financial future.

Learn more: Check out Remote’s dedicated offboarding guide

What about equity compensation?

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 your employee's total compensation, so when it comes to terminations, it's vital to handle equity compensation with care.

Again, be transparent about how the termination will impact the 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.

In fact, here are three suggested ways to smoothen a termination from an equity compensation angle:

1. Waive the cliff

Being laid off before they have reached their cliff means that your employee won’t be able to exercise any of their granted options. As a result, you could allow the employee to leave your 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.

2. Accelerate vesting

Being laid off often comes as a surprise. By accelerating the vesting by several months, your company could give more equity than the employee has accrued.

For example, accelerating the vesting by three months for an employee who stayed for 18 months allows them to exercise 21 months of vested options, instead of 18.

3. Extend the PTEP

Employees must overcome many unplanned challenges when they are laid off. And 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 post-termination exercise period (PTEP) by several months, you can show empathy and delay the deadline for this critical decision. For instance, it is not uncommon to see companies extending the PTEP to 12 months for laid-off team members.

‍Other tips and best practices

As well as taking the practical steps outlined above, there are a few other things you can do, including the following:

Be mindful of compliance

When conducting terminations, compliance is critical. In general, you need to ensure that you are adhering fully to local laws regarding layoffs, and that you are not conducting discriminatory terminations.

See also: Why employee terminations aren’t as simple as you think

You also need to consider the compliance consequences around equity. 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 your company’s management body (i.e., the board of directors), just like a new equity grant.

This means additional paperwork, which makes some companies shy away from doing things correctly. And even when companies follow the process, it’s usually hindered by ongoing back-and-forths between the equity plan administrator and the company’s outside counsel. This often results in a lengthy and error-prone process that can give rise to misunderstandings and delays.

Learn from the experience

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 may involve taking the following steps:

• Review how your 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 your company's goals and values.

Moreover, proactively managing layoffs will help you maintain a strong alumni network and brand. It will directly shape your employees' perception of the company and their willingness to keep an ongoing relationship post-termination.

This is because 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 your company. In turn, this will help you maintain a strong employer brand, making it easier to recruit and establish lasting connections.

How can Remote help?

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.

It also requires a reliable, knowledgeable equity incentives partner that can save you countless legal headaches and legwork.

Remote Equity does all the heavy lifting, including defining post-termination templates and handling acceleration clauses. We also handle the PTEP for you, which means we take care of tax reporting and withholding obligations, and process taxable events (like option exercises) post-termination.

To learn more about how we can simplify complex situations and save you time and resources, speak to one of our friendly experts today.