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Scenario: Small US based software startup company with employees that are paid below market wages and receive stock options, with what used to be a caring culture. The company recently had layoffs due to slow sales and if employees wanted to exercise their options, they had to purchase them. For example's sake, let's say it would cost an employee $4000 to exercise them. As a gesture of goodwill, my idea was to give the laid off employees a "bonus" that they could use to purchase their stock options, because in effect, the company would give the money to employees and in theory, the employees would give 100% of the money back, so to the company it's a net zero cash exchange, so technically doesn't actually impact the bottom line negatively.

I realize the employees would have some tax liability and the company would have some administrative cost and would lose the shares that would have come back to it if employees didn't exercise. But, if a company wanted to do this as a kind gesture, is that an okay thing to do?

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    Ok in what sense? And why go through all the gymnastics instead of simply issuing stock in exchange for the options, if that's what you want to do?
    – Aida Paul
    Feb 2 at 16:18
  • @AidaPaul- good question. My thinking was that the stock options have legal agreements that might be hard to change. This was an idea to potentially not have lawyers involved. ;-) Feb 2 at 16:27
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    You will need lawyers in either case, and tax advice (qualified) for anyone who wants to take part as capital gains which may be involved are not easy.
    – Aida Paul
    Feb 2 at 16:29
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    Why do you expect that the employees would all choose to buy company stock with a cash bonus? If I was given $4000, I don't think I would buy stock in the company that just laid me off. Feb 2 at 16:56
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    "How can I give my underpaid, soon to be laid off employees something without actually giving them something and also straddle them with an additional tax burden" - Doesn't sound like a great plan to me.
    – joeqwerty
    Feb 2 at 17:44

3 Answers 3

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But, if a company wanted to do this as a kind gesture, is that an okay thing to do?

There's nothing illegal about it I can think of, but it is likely to be pricy (you will need legal and accountant help here), as you pay people that likely will need taxes paid on, and then buying stock can also require further taxes paid. And obviously you will need some weird contract where you ensure that people won't do the obvious once they get 4k USD from a company that just laid them off and simply pocketing it, instead of buying stock of a company that failed enough to go through forced layoffs.

And of course you will need buying of other stakeholders to even get started on it (likely the board, possibly other investors, check the company by-laws unless this is all 100% self owned).

But there's a bigger issue here that I hinted at: optics.

You are going through forced downsizing because the business is not performing well, and your response is to NOW offer the employees who will not be part of this company success anymore a part of the company. And spend money doing so, as there is no "net zero" here, there will at least be legal costs, likely taxes too.

It has issue of you diluting at least the perceived value of your company (or actual dilution it if this is fueled by issuing new shares, rather than reassignment of them from other holder) for all the people who still have vested interest in it. And to what end? I don't know.

This doesn't seem like time to be wasteful with money, the hard choice to lay people off was already made, now gotta focus to try to avoid it from happening again.

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  • Thanks everyone. I appreciate the thoughtful responses and that makes a lot of sense. Feb 2 at 21:15
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The simplest and least confusing thing to do would be to just let them keep whatever stock options they are vested in. Costs you nothing until they are redeemed, spreads the redemption over time, lets them retain their stake in the company if they want it.

But if you really want to give the laid off people an enhanced severance package, just give them an enhanced severance package. Don't complicate it more than your lawyers insist you must. And this is NOT a good time to ask these people if they believe in the company enough to want to invest in it.

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As a gesture of goodwill, my idea was to give the laid off employees a "bonus" that they could use to purchase their stock options,

But, if a company wanted to do this as a kind gesture, is that an okay thing to do?

That's nice.

And if you are owner of the company, or are the CEO, or perhaps even an influential member of the C-suite, you can probably make it happen.

Make sure you consider how many additional workers you would need to lay off in order to fund this "bonus".

Goodwill isn't free.

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