Virtual options: forfeiture on resignation invalid

Vested options do not lapse immediately

An employee resigns, and on his last working day his virtual options vanish into thin air. That applies even to those he earned over a period of years. So it said in one company's participation terms. The Federal Labour Court (BAG) declared this rule invalid in a judgment of 19 March 2025 (10 AZR 67/24). Virtual options that have already vested are consideration for work performed. They must not lapse immediately simply because the employee leaves of his own accord. Nor is it acceptable to let them lapse in instalments over two years after departure, as this puts the employee at an unreasonable disadvantage.

How virtual options work

Virtual options give employees a share in the company's success without transferring real shares to them. The employee does not become a shareholder but acquires a payment claim if a particular event occurs, such as a stock market listing. In the start-up world this event is called an exit. Until then, the options first have to be earned. This is known as vesting: the allocated options are earned in stages, in the case decided over a vesting period of four years. This was preceded by a cliff, a minimum waiting period of twelve months during which not a single option vested.

The logic behind it is simple. Leave early and you get nothing. Stay and you accumulate options step by step that are meant to bring you money on exit. The question in this case was what happens to the options already accumulated if the employee does leave after all.

23 options and a resignation

The employee worked for the company from 1 April 2018 to 31 August 2020. In 2019 the employer offered him 23 virtual option rights under a participation programme, and he accepted the offer. The terms of the programme, referred to in the contract as the "Employee Stock Option Provisions", or ESOP for short, governed everything else: the waiting period, the vesting period and forfeiture.

Forfeiture had two stages. If the employee resigned himself, even options that had already vested lapsed immediately. In all other cases of departure, vested options lapsed gradually within two years of the end of the employment relationship. The employee resigned. At that point, 31.25 per cent of his options had vested. He sought a court declaration that he retained those options. The lower courts, most recently the Regional Labour Court of Munich, dismissed the claim. Before the Federal Labour Court he succeeded.

Vested options are pay for work

The Tenth Senate saw things differently. The starting point of its reasoning: options that have vested through the partial expiry of the vesting period are also consideration for the work the employee performed during that time. The court read this out of the programme terms themselves. The vesting period was suspended for as long as the employee was released from work without any entitlement to pay. If you do not work, you do not accumulate options. So the options are remuneration for work.

Cancelling such remuneration immediately, simply because the employee resigns, fails to give appropriate weight to his interests. It runs counter to the statutory principle that the employer must pay for work performed. On top of that, anyone who stands to lose everything he has earned over years by leaving will think twice. The court therefore also regards the clause as placing a disproportionate obstacle in the way of resignation. Because the terms were pre-formulated, the rules on standard business terms apply to them. Under those rules, a clause is invalid if it puts the contracting partner at an unreasonable disadvantage, and that was precisely the case here.

In doing so, the Senate departs from one of its own decisions from 2008. Back then it had held that the immediate forfeiture of already vested options which could not yet be exercised during the employment relationship was permissible. It expressly no longer adheres to that view.

Forfeiture over two years also invalid

The case concerned a resignation by the employee. But the court also examined the second stage of the clause, forfeiture in instalments over two years after departure. It too puts the employee at an unreasonable disadvantage. The Senate's calculation is straightforward: the options vested over four years but were to lapse within two years. They would therefore have disappeared twice as fast as they arose. A programme built in this way likewise does not withstand scrutiny.

What this means for start-ups

For companies with a virtual participation programme, the judgment carries a clear message: a clause under which vested options lapse immediately on resignation can no longer be maintained in pre-formulated terms. In the start-up world, such rules go by the name of leaver clauses, with the distinction between good leaver and bad leaver. A programme that treats everyone who resigns as a bad leaver and strips them of all their vested options is open to challenge after this judgment.

The judgment concerns only options that had already vested on departure. It says nothing about options that had not yet vested. The second point is the period after departure. A programme that lets a departed employee's vested options lapse gradually has to be measured against the pace at which they arose. Four years of vesting and two years of forfeiture do not go together, according to the judgment. What period would be appropriate is left open by the decision. If you want to be on the safe side, take your bearings from the vesting period or dispense with time-based forfeiture altogether.

The judgment also has retrospective effect. Former employees who resigned and whose vested options were supposed to have lapsed under the programme terms can rely on the decision. If an exit comes later, they may well get in touch. Anyone adapting their programme now would therefore do well to clarify at the same time which earlier cases are affected. And one final point: the court read the vesting rules closely and inferred from them that the options are remuneration. If you structure options as remuneration, you also have to treat them as remuneration.