Employee Stock Options in Ontario: What Happens When You're Terminated?

Stock Options in the Ontario Employment Context

Employee stock options (ESOs) are a common form of compensation in Ontario, particularly in technology companies and startups. They grant employees the right to purchase company shares at a pre-set price (the "exercise price" or "strike price") for a specified period. When an employee is terminated, the treatment of unvested and vested stock options can have significant financial consequences.

Vesting and the Impact of Termination

Stock options typically vest over a period (commonly 4 years with a 1-year "cliff"), meaning the employee gains the right to exercise them only as they vest. When employment is terminated:

• Unvested options: In most stock option plans, unvested options are forfeited upon termination. However, if you are entitled to a reasonable notice period (wrongful dismissal), you may be entitled to options that would have vested during the notice period.
• Vested options: Most plans provide a short window (commonly 30 to 90 days) after termination to exercise vested options. After this window expires, the options are forfeited — even if they are significantly "in the money."

Ontario Court Treatment of Stock Options in Wrongful Dismissal

Ontario courts have consistently held that stock options (and other incentive compensation) that would have vested or been earned during the reasonable notice period are recoverable as damages in a wrongful dismissal claim. This includes: options that would have vested during the notice period, shares that would have been purchased under an ESPP (employee share purchase plan) during the notice period, and bonuses that would have been paid during the notice period.

What You Should Do Upon Termination

• Immediately review your stock option plan agreement and notice of termination
• Note the deadline to exercise any vested options — the clock starts running on your termination date
• Do not assume that the employer's characterization of your termination is correct — get legal advice before accepting any severance package that does not address stock options
• Consult an employment lawyer who understands equity compensation — the value at stake can be significant