Stock options are potentially very valuable, especially when granted in a startup company that later goes on to have an initial public offering (IPO). However, if you lose your job, you may miss out on a great opportunity to get stock options.

With great potential wealth comes great litigation. Cases in the courts are numerous involving disputes between former employees and companies over valuable stock options. A recent case in California (Shah v. Skillz Inc.), involving the stock options of a start-up company, ended with a lucrative victory for the plaintiff (a terminated employee) and a notable ruling on how to calculate damages related to options.

Stock options upon termination

First, let’s briefly look at how job loss affects stock options. If you leave a company with vested but unexercised stock options, you typically have only three months to exercise them. After this post-employment exercise period (PTEP) specified in your grant agreement, any unexercised options will be forfeited.

The PTEP length usually varies depending on the reason for termination. In the workforce plan documents, a company may provide for a longer PTEP length in the event of termination due to a misfortune such as disability or death, or perhaps upon retirement. The PTEP may even be extended in the event of mass layoffs or downsizing.

However, anything is possible if you are fired “for cause,” meaning the company terminates your employment because of your bad behavior. In this case, the stock options usually expire immediately on your termination date: no options for you. This brings us to the recent decision in the case of Shah v. Skillz Inc.

Employee no longer plays games after being fired

Gautam Shah, the plaintiff, worked at Skillz Inc., a company that makes games for mobile phones. He joined Skillz in 2015 when it was still a private company in San Francisco and was given stock options. Like many startup companies that may be cash-starved, Skillz relied heavily on stock options and other equity awards to reward employees instead of cash payments. Because a private company’s stock is illiquid, employees of a startup company with stock options hope that their options will become valuable after the company goes public or is acquired.

In 2018, Mr. Shah told Skillz’s two founders that he would consider leaving the company if he did not receive a promotion and raise. Under these circumstances, the founders suspected that he may have done something that undermined the company’s interests. A forensic analysis by the company revealed that Mr. Shah had forwarded a highly confidential business report to his personal email address, apparently without a legitimate business reason. He was fired “for cause” for violating his employment contract, as he allegedly violated company policies on confidential information and theft.

Not surprisingly, Mr. Shah attempted to exercise some of his stock options at the time of his termination, but was told that the options were immediately void due to his termination “for cause,” as provided in his stock option agreement. Mr. Shah claimed that he had forwarded the document to himself merely for convenience and that he was not in breach of contract – to no avail.

In late 2020, Skillz went public via an initial public offering. Several current and former Skillz employees profited significantly from the stock they held in the company. In 2021, Mr. Shah sued Skillz for breach of contract, wrongful termination, and retaliation. He claimed that Skillz had no reason to fire him and therefore wrongfully prevented him from exercising the stock options he had earned as a Skillz employee.

At trial, the jury awarded Mr. Shah over $11.5 million in damages for his lost options, implicitly concluding that he was not lawfully fired for cause. The jury was clearly not convinced that Mr. Shah forwarded the email to his home address in bad faith. In other words, it found that the basis for the company’s firing was an unfounded miscalculation.

A company’s miscalculation leads to high damage calculation

Crucially, the jury calculated the monetary value of Mr Shah’s damages based on the value of his shares after the IPO if he had been allowed to exercise his options at the time. The amount they came up with, over $11.5 million, was a nice payday for Mr. Shah. Had the damages been calculated based on the value of his options at the time of his termination, they would have amounted to a paltry $41,032.

Skillz appealed, arguing that the monetary value of the damages should be measured by the option value at the time of Mr. Shah’s termination. However, the California Court of Appeals held that under California and Delaware law, damages for lost stock options in a breach of contract action may, under certain circumstances, be measured from a date other than the date of the violation.

These circumstances include the availability of a market for the shares at the time of the breach. When Mr. Shah was fired in 2018, Skillz was still private, so its shares were illiquid. On this basis, the court upheld the decision to calculate damages for lost stock options based on the post-IPO stock value, but reduced the damages to $6.7 million.

The court also ruled that stock options were not “wages” under California labor law. This meant that while his claim for breach of contract was successful, Mr. Shah’s claims for retaliation and wrongful termination were dismissed. He therefore lost any right to damages, which could have included punitive damages and attorney’s fees. Interestingly, the court found that restricted stock would be considered “wages” because, unlike options, it has an “ascertainable value.”

Lessons for companies and employees

To avoid costly litigation, companies often consider future vesting dates when firing employees. The actions they take may delay the termination date, extend it by taking “paid leave,” or advance the upcoming vesting date to avoid creating the appearance that they are firing an employee just to give up soon-to-vest stock awards. If a company plans to terminate your employment for what you believe is unfair reasons, you can also negotiate with them to take such actions so that you avoid losing valuable stock options or restricted stock units (RSUs).

Lawyers from the law firm Squire Patton Boggs discuss further implications for the employer Shah vs Skillz in a comment for the company blog Labor law worldview. The lawyers conclude that companies in similar situations should “proceed with caution” when dismissing employees without notice.

Additional resources

For more information on terminating employment when you have stock options and RSUs, see my article on Forbes.com Protect your stock options and RSUs in case of job loss: 3 important steps. Also check out the Job Events section on myStockOptions.com, including a fun interactive quiz.