The NASPP Blog

Do your award agreements include the phrase “vesting commencement date” or a similar phrase? A recent lawsuit against Tesla hinges on what it means for vesting to “commence.”

The Lawsuit Against Tesla

A group of former Tesla employees have brought a lawsuit against Tesla, claiming that they should have been able to exercise their options at the time of their termination of employment, even though they had not yet fulfilled the one year of service required for the grants to begin vesting.  At the heart of the lawsuit is the language in Tesla’s employment agreement, which states that vesting commences on the first day of employment.  The employees have interpreted this to mean that the options were immediately vested at grant.

What Part of “One Year After” Don’t You Understand?

The whole claim seems rather disingenuous to me.  As explained in The Recorder (“Trial Opens Over Tesla Options,” March 1, 2016):

The entire dispute turns on a single sentence in Tesla’s employment agreement letter, stating that employee stock options “will vest commencing upon your first day of employment.” But parenthetically added in the employment agreement is the following: “1/4th of the shares vest one year after the vesting commencement date, and 1/48th of the shares vest monthly thereafter over the next three years.”

Given the parenthetical, it seems hard to believe that anyone was really confused about when the options vested.

Key Takeaways

The problem with a lawsuit like this, however, is that no matter how disingenuous it might seem, it won’t go away by itself. Responding to a lawsuit often involves a lot of time, resources, and legal fees.  It’s worthwhile to take some precautions to mitigate the company’s risk:

1. Make sure the language in your employment and grant agreements is clear. Avoid terms that are ambiguous, if possible.  If you can’t avoid them, make sure they are clearly defined.
2. Take off your equity compensation hat once in a while.  While a term like “vesting commencement date” might seem obvious to you, it might not be so clear to someone who doesn’t have a background in equity compensation. Plaintiffs’ attorneys are great at exploiting ambiguities.
3. Keep a record of all information communicated to employees about their awards.  In a case like this, educational materials that further clarify how awards vest, possibly with examples, can help bolster the company’s defense.

For more tips, check out the Top Ten List, “From an Expert Witness: Ten Things I’ve Learned From Stock Plan Litigation,” guest authored by Fred Whittlesey of Compensation Venture Group  in the November-December 2013 issue of The NASPP Advisor.

– Barbara