Disability
Disability will have a large impact on an individual's stock-based compensation and potentially their family as well
How Disability Impacts Stock-Based Compensation
When an individual who owned stock-based compensation becomes disabled, it's critical to understand how this impacts their stock-based compensation. Their hard-earned equity awards can be a significant asset/source of wealth. But, conversely, missteps could lead to a loss of some (or even all) of their accrued value. The key items you need to consider regarding the stock compensation of a disabled individual are (1) how long the individual is anticipated to be disabled for/will they return to work; (2) what to do with vested stock options (if any), and (3) is the vesting schedule modified/accelerated?
How Long Is Disability Expected to Last?
The first focus here is considering how long disability is expected to last.
In some cases, disability is shorter-term and return to work (existing job) is anticipated. If you're in this category, your primary focus regarding your stock-based compensation is to understand your company policy regarding the vesting of stock-based comp during the period you are out on disability. Company policies may specify that you do--or don't--vest while you are out on disability. And if it's not specified it may be up to negotiation.
Reminder that ISOs will become NSOs if you are not actively employed for more than 90 days. IRS rules specify that ISOs are only able to be granted (and retain their status) to employees. If an individual is not actively employed by a company for more than 90 days, ISOs are required to be converted into NSOs.
In other cases disability is anticipated to be long-term in nature, return to work is unlikely (at least anytime soon), and the individual's employment with the company is typically terminated. If you're in this category, your focus is a likely a bit broader; understanding if/when vesting will cease, if any acceleration of vesting should occur, and how long you have to exercise vested options before they expire.
What to Do With Vested Stock Options
For any/all stock options that vested when an individual became disabled, the company's policies, corporate stock-comp plan, and your individual stock grants may all contain important information.
If disability is short-term and you anticipate returning to work, no action is likely to be necessary regarding vested stock options. You'll retain these grants and will not have to face an "exercise or let expire" decision. The major question will be if/how your vesting schedule is to be modified due to your disability time.
If disability is long-term and you cease to be an employee, how to handle your vested stock options becomes a key focus. Company departure rules will (mostly) come into play, and you need to consider how long you (or your family in some disability cases) have to exercise vested options before they expire. This time frame is typically 90 days, but an post termination exercise period (PTEP) policy upon the disability of a recipient is also somewhat common -> so there may be a lengthier period of time to make this decision.
Vesting Will Most Likely Stop, But Could Possibly Be Accelerated
If you are disabled long-term, in most cases you will no longer vest into your stock-comp. The specific date that vesting stops may be a bit fluid (and vary company-by-company), but in most cases it will be informed by your company's policies.
Additionally, long-term disability is one of the more common circumstances where corporate stock-comp policies provide for partial or full acceleration of grants. Like other items, it's important to read the stock-comp policy, and the details of your individual grants, to ensure you know and understand how your stock-comp will (or should be) be treated due to long-term disability.
Other Ways Disability May Impact Stock-Based Compensation
Know the company policies. Company policies may dictate how stock-based comp should be treated in the event of disability, but due to accidents (e.g. human or system error)--or, less commonly, intentional bad faith dealing--it may not always occur. Knowing how things should work helps ensure they actually occur as expected.
Possible negotiation. Company policies dictate how stock-based comp should be treated in the event of disability, but that doesn't mean things are set in stone. In certain circumstances, a conversation with the company--especially a smaller company--may yield incremental benefits (e.g. additional vesting; an extended PTEP period).
Tax planning considerations. Depending on how vested stock options (and possibly accelerated vesting) are treated by the company, you may have a number of choices to make regarding tax planning for your stock-based comp holdings. Many of the strategies detailed in 50+ Tax Strategies are likely to apply, and we recommend reviewing and considering them carefully.
Durable power of attorney. Depending on the circumstances of long-term disability, it may be necessary for the family of a disabled individual to get durable power of attorney (on behalf of the disabled individual). This allows a specified individual to legally act as the "agent" of the disabled individual, and make key property and financial decisions on their behalf.
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