Losing Stock Options Upon Termination
California Employees May Have a Claim When a Termination Causes Them to Lose Valuable Stock Options
A California Court of Appeal decision arising from a San Francisco employment dispute illustrates just how significant equity issues can be upon termination of an employee in the tech industry. In Shah v. Skillz Inc. (2024) 101 Cal.App.5th 285, a former startup employee obtained a judgment of approximately $6.7 million after his employer terminated him for alleged misconduct and prevented him from exercising vested stock options.
This decision offers several important lessons for California employees whose termination affects valuable stock options or other equity compensation.
The Employee Lost His Stock Options After Being Fired "For Cause"
Gautam Shah joined Skillz Inc. in 2015, while the company was still privately held. Like many startup employees, Shah accepted stock options as a significant component of his compensation. At one point, he also agreed to reduce his cash compensation in exchange for additional stock options. The distinction between an ordinary termination and a termination "for cause" was extremely important under the company's equity plan.
If Shah's employment ended without cause, the plan generally provided a period after termination during which he could exercise his vested options. If he was terminated for cause, however, the options expired immediately.
In January 2018, Shah forwarded a confidential company business report from his work email to his personal email account. Skillz investigated and concluded that his actions justified termination for cause. According to the evidence described by the Court of Appeal, the committee recommending termination did not interview Shah before making its recommendation. Skillz then terminated Shah for cause based on alleged violations involving confidential information and theft. During the termination meeting, Shah told the company that he wanted to exercise his stock options. He was informed that because he had been terminated for cause, his options were being taken away. That decision ultimately became enormously expensive for the company.
A San Francisco Jury Awarded More Than $11.5 Million
Shah sued Skillz in San Francisco Superior Court. By the time of trial, the central dispute was whether Skillz breached its contractual obligations by preventing Shah from exercising his vested stock options based on its assertion that he had been terminated for cause. The jury sided with Shah.
It awarded approximately $7.5 million for one group of lost options and another $4 million for his Performance Grant options - a total verdict of approximately $11.56 million. The trial court subsequently reduced the award.
Both sides appealed, and the California Court of Appeal ultimately directed the trial court to enter judgment for $6.694 million. The size of the recovery is noteworthy, but the reasoning behind it may be even more important for startup employees.
The Value of Lost Stock Options May Not Be Limited to Their Value on the Termination Date
One of the biggest disputes concerned how Shah's damages should be calculated. Skillz argued that the options should essentially be valued at the time of the alleged breach in 2018. That approach would have produced dramatically lower damages. Indeed, one calculation by Skillz's own expert valued Shah's lost options at only about $41,000 as of his termination date.
However, Skillz later went public. Its IPO occurred in December 2020, and employees were subject to a lock-up period that restricted when their shares could be sold publicly. The Court of Appeal approved a damages calculation based on the value of the shares after that lock-up period ended - when Shah realistically could have sold the shares he would have obtained by exercising his options. Using that approach, Skillz's own expert calculated damages of approximately $6.7 million.
The difference is remarkable. For employees of private companies, this is an important point. Determining damages from lost equity is not necessarily as simple as looking at what the shares were worth on the employee's last day of work.
Being Labeled Terminated "For Cause" Can Have Consequences Beyond the Termination Itself
Employees often focus primarily on whether their termination was "wrongful." But when substantial equity compensation is involved, another question can be just as important:
Did the employer properly classify the termination as being "for cause" under the applicable employment agreement, equity plan, stock option agreement, or other contract?
The answer can have enormous financial consequences.
A for-cause termination may affect:
The Company's Investigation Can Matter
The facts surrounding the employer's decision to terminate the employee can also be important. In Shah's case, Skillz relied on his transmission of a confidential report to his personal email account. The Court of Appeal noted evidence that the committee recommending termination did not interview Shah before making its recommendation. The jury ultimately rejected Skillz's position that Shah had engaged in unethical or dishonest conduct relating to the report.
This does not mean that an employer must conduct a perfect investigation before terminating an employee.
But when millions of dollars in contractual benefits turn on whether an employee committed misconduct sufficient to constitute "cause," the circumstances surrounding the employer's determination can become important evidence. For an employee facing this situation, seemingly mundane evidence may therefore matter: emails, Slack messages, company policies, prior practices, investigation records, performance reviews, communications with management, and the precise chronology leading to termination.
Stock Options Are Not "Wages" Under California's Labor Code
Shah also illustrates an important limitation.
The Court of Appeal held that stock options are not wages within the meaning of the California Labor Code.
That prevented Shah from using the loss of the options as the basis for certain damages and attorney's fees he was seeking. But that did not mean that Skillz could simply take away valuable contractual rights without consequence. The court expressly recognized that an employee wrongfully deprived of stock options can pursue a breach of contract claim for the value of the options.
A Termination Does Not Have to Be Illegal Discrimination to Create a Valuable Claim
Perhaps the most useful lesson from Shah is that employees should not analyze every termination solely through the traditional wrongful-termination framework. An employee may not have evidence of discrimination, harassment, whistleblower retaliation, or another statutory violation. But the employee may still have substantial contractual rights. This is particularly important for executives, engineers, sales employees, founders, and other highly compensated employees whose compensation includes significant equity. A termination that causes the employee to lose valuable stock options can require careful analysis of several documents, including:
What Should You Do If You Are Terminated and Your Stock Options Are at Risk?
If you have significant equity compensation, obtain and preserve your employment and equity documents as soon as possible. Pay particular attention to any deadline for exercising vested options after termination. Some exercise periods can be surprisingly short. You should also preserve communications concerning the stated reason for termination and avoid assuming that the employer's characterization of the termination as "for cause" is necessarily the final word.
And if the company is approaching an IPO, acquisition, tender offer, financing event, or other potential liquidity event, the value of the equity can make early legal analysis especially important.
If you worked for a California startup or technology company and lost substantial stock options or other equity compensation when your employment ended, our office can review the employment agreements, equity documents, stated reason for termination, and surrounding circumstances to evaluate whether you may have a claim. Contact us to discuss.
A California Court of Appeal decision arising from a San Francisco employment dispute illustrates just how significant equity issues can be upon termination of an employee in the tech industry. In Shah v. Skillz Inc. (2024) 101 Cal.App.5th 285, a former startup employee obtained a judgment of approximately $6.7 million after his employer terminated him for alleged misconduct and prevented him from exercising vested stock options.
This decision offers several important lessons for California employees whose termination affects valuable stock options or other equity compensation.
The Employee Lost His Stock Options After Being Fired "For Cause"
Gautam Shah joined Skillz Inc. in 2015, while the company was still privately held. Like many startup employees, Shah accepted stock options as a significant component of his compensation. At one point, he also agreed to reduce his cash compensation in exchange for additional stock options. The distinction between an ordinary termination and a termination "for cause" was extremely important under the company's equity plan.
If Shah's employment ended without cause, the plan generally provided a period after termination during which he could exercise his vested options. If he was terminated for cause, however, the options expired immediately.
In January 2018, Shah forwarded a confidential company business report from his work email to his personal email account. Skillz investigated and concluded that his actions justified termination for cause. According to the evidence described by the Court of Appeal, the committee recommending termination did not interview Shah before making its recommendation. Skillz then terminated Shah for cause based on alleged violations involving confidential information and theft. During the termination meeting, Shah told the company that he wanted to exercise his stock options. He was informed that because he had been terminated for cause, his options were being taken away. That decision ultimately became enormously expensive for the company.
A San Francisco Jury Awarded More Than $11.5 Million
Shah sued Skillz in San Francisco Superior Court. By the time of trial, the central dispute was whether Skillz breached its contractual obligations by preventing Shah from exercising his vested stock options based on its assertion that he had been terminated for cause. The jury sided with Shah.
It awarded approximately $7.5 million for one group of lost options and another $4 million for his Performance Grant options - a total verdict of approximately $11.56 million. The trial court subsequently reduced the award.
Both sides appealed, and the California Court of Appeal ultimately directed the trial court to enter judgment for $6.694 million. The size of the recovery is noteworthy, but the reasoning behind it may be even more important for startup employees.
The Value of Lost Stock Options May Not Be Limited to Their Value on the Termination Date
One of the biggest disputes concerned how Shah's damages should be calculated. Skillz argued that the options should essentially be valued at the time of the alleged breach in 2018. That approach would have produced dramatically lower damages. Indeed, one calculation by Skillz's own expert valued Shah's lost options at only about $41,000 as of his termination date.
However, Skillz later went public. Its IPO occurred in December 2020, and employees were subject to a lock-up period that restricted when their shares could be sold publicly. The Court of Appeal approved a damages calculation based on the value of the shares after that lock-up period ended - when Shah realistically could have sold the shares he would have obtained by exercising his options. Using that approach, Skillz's own expert calculated damages of approximately $6.7 million.
The difference is remarkable. For employees of private companies, this is an important point. Determining damages from lost equity is not necessarily as simple as looking at what the shares were worth on the employee's last day of work.
Being Labeled Terminated "For Cause" Can Have Consequences Beyond the Termination Itself
Employees often focus primarily on whether their termination was "wrongful." But when substantial equity compensation is involved, another question can be just as important:
Did the employer properly classify the termination as being "for cause" under the applicable employment agreement, equity plan, stock option agreement, or other contract?
The answer can have enormous financial consequences.
A for-cause termination may affect:
- vested stock options;
- the time available to exercise options;
- unvested equity;
- restricted stock or RSUs;
- bonuses;
- commissions;
- severance rights; and
- other contractual benefits.
The Company's Investigation Can Matter
The facts surrounding the employer's decision to terminate the employee can also be important. In Shah's case, Skillz relied on his transmission of a confidential report to his personal email account. The Court of Appeal noted evidence that the committee recommending termination did not interview Shah before making its recommendation. The jury ultimately rejected Skillz's position that Shah had engaged in unethical or dishonest conduct relating to the report.
This does not mean that an employer must conduct a perfect investigation before terminating an employee.
But when millions of dollars in contractual benefits turn on whether an employee committed misconduct sufficient to constitute "cause," the circumstances surrounding the employer's determination can become important evidence. For an employee facing this situation, seemingly mundane evidence may therefore matter: emails, Slack messages, company policies, prior practices, investigation records, performance reviews, communications with management, and the precise chronology leading to termination.
Stock Options Are Not "Wages" Under California's Labor Code
Shah also illustrates an important limitation.
The Court of Appeal held that stock options are not wages within the meaning of the California Labor Code.
That prevented Shah from using the loss of the options as the basis for certain damages and attorney's fees he was seeking. But that did not mean that Skillz could simply take away valuable contractual rights without consequence. The court expressly recognized that an employee wrongfully deprived of stock options can pursue a breach of contract claim for the value of the options.
A Termination Does Not Have to Be Illegal Discrimination to Create a Valuable Claim
Perhaps the most useful lesson from Shah is that employees should not analyze every termination solely through the traditional wrongful-termination framework. An employee may not have evidence of discrimination, harassment, whistleblower retaliation, or another statutory violation. But the employee may still have substantial contractual rights. This is particularly important for executives, engineers, sales employees, founders, and other highly compensated employees whose compensation includes significant equity. A termination that causes the employee to lose valuable stock options can require careful analysis of several documents, including:
- the offer or employment agreement;
- equity incentive plans;
- stock option agreements;
- grant notices;
- amendments to compensation agreements;
- company policies defining misconduct;
- severance agreements; and
- documents defining what constitutes termination "for cause."
What Should You Do If You Are Terminated and Your Stock Options Are at Risk?
If you have significant equity compensation, obtain and preserve your employment and equity documents as soon as possible. Pay particular attention to any deadline for exercising vested options after termination. Some exercise periods can be surprisingly short. You should also preserve communications concerning the stated reason for termination and avoid assuming that the employer's characterization of the termination as "for cause" is necessarily the final word.
And if the company is approaching an IPO, acquisition, tender offer, financing event, or other potential liquidity event, the value of the equity can make early legal analysis especially important.
If you worked for a California startup or technology company and lost substantial stock options or other equity compensation when your employment ended, our office can review the employment agreements, equity documents, stated reason for termination, and surrounding circumstances to evaluate whether you may have a claim. Contact us to discuss.