Equity Grant Agreement Law in California

California law requires equity grant agreements to include mandatory forum and choice-of-law protections for California-based employees, comply with state securities filing and plan content requirements, and avoid any noncompete-based forfeiture provisions that would violate the state's near-absolute prohibition on restraints of trade.

What is an equity grant agreement?

An equity grant agreement is a contract where a company gives an employee, director, or consultant an ownership interest—like stock options, restricted stock units (RSUs), or restricted stock—as compensation for services.

Does Delaware law or California law apply to my equity grant?

California law applies if you primarily live and work in California, unless you had your own lawyer negotiate different terms. If your company is incorporated in Delaware but does more than half of its business in California and more than half its voting securities are held by Californians, California's "pseudo-foreign" corporate governance rules (Corp. Code § 2115) may also apply.

What forum and choice-of-law rules apply?

If you mainly live and work in California, your equity agreement cannot: - Make you sue outside California for claims that arose here; or - Take away California law's protections for those claims (Cal. Labor Code § 925(a), (d)).

If your company violates this rule, you can void the provision, forcing the case to be heard in California under California law, and the court may award you attorney's fees (Cal. Labor Code § 925(b), (c)).

Exception: These rules don't apply if you were individually represented by your own lawyer to negotiate the forum or choice-of-law terms (Cal. Labor Code § 925(e)).

Because whether § 925 protects you depends on where you work and whether you had your own lawyer, Ask Sawyer researches California Labor Code requirements to answer questions about your facts.

What are California's securities filing requirements?

California imposes additional rules beyond federal law for equity grants.

30-Day Notice Filing: Your company must file a notice with the California Department of Financial Protection and Innovation (DFPI) within 30 days after the first security is issued under the plan (Cal. Corp. Code § 25102(o)).

Plan Content Rules for Options: Compensatory option plans must specify (10 CCR § 260.140.41): - Maximum exercise period of 120 months - Post-termination exercise periods: at least 6 months for death or disability; 30 days otherwise - A 10-year grant window from plan adoption - Shareholder approval within 12 months

30% Dilution Cap: California limits all securities issuable under outstanding options and bonus plans to 30% of the company's outstanding securities, unless approved by two-thirds of voting shareholders (10 CCR § 260.140.45). This cap does not apply if the plan complies with all conditions of federal Rule 701.

Can my equity be forfeited if I join a competitor?

No. California law voids any contract that restrains someone from engaging in a lawful profession, "no matter how narrowly tailored" (Bus. & Prof. Code § 16600(b)(1)). Forfeiture provisions triggered by competition are presumptively void, including: - Cancelling unvested or vested equity for joining a competitor - Clawback provisions for competing after termination - Extended holding periods conditioned on non-competition

2024 Enforcement Rules: Void noncompete clauses are unenforceable no matter where or when signed (Bus. & Prof. Code § 16600.5). Employers must notify current and former employees (employed after January 1, 2022) of void clauses, and employees can sue for damages and attorney's fees.

Narrow Exceptions: Exceptions exist only for the sale of an entire business interest or substantially all assets (Bus. & Prof. Code § 16601), partnership dissolution, or LLC member termination. These do not cover standard employment equity grants.

When will California courts enforce my equity grant agreement?

Employment Classification First: California's strict ABC test presumes you are an employee unless the company proves you are free from its control, perform work outside its usual business, and are in an independent trade (Labor Code § 2775). Misclassification triggers penalties of $5,000-$25,000 per violation (Labor Code § 226.8).

Forfeiture of Unvested Equity: Under Schachter v. Citigroup, Inc., 47 Cal. 4th 610 (Cal. 2009), forfeiture of unvested equity is enforceable if the award was contingent on completing a service period and you voluntarily left before vesting. Forfeiture of vested equity or forfeiture tied to post-termination competition faces invalidation.

Director Conflicts: For California corporations, equity grants to directors require either shareholder approval or board approval by disinterested directors, plus a finding that the grant is "just and reasonable to the corporation" (Cal. Corp. Code § 310(a)).

Do I need a lawyer for my California equity grant agreement?

You need your own lawyer to negotiate a valid out-of-state forum or choice-of-law clause under Labor Code § 925(e). Having counsel is critical to preserve your right to challenge unfair terms.

How is California equity grant law different from other states?

What mistakes should I avoid in my California equity grant?

Pitfall 1: Noncompete-linked forfeiture. Clauses canceling equity for "competition" expose employers to private actions with attorney's fees (Bus. & Prof. Code § 16600.5).

Pitfall 2: Out-of-state forum selection without counsel. Standard Delaware choice-of-law and forum clauses are voidable by California-based employees unless § 925(e)'s counsel representation exception is satisfied.

Pitfall 3: Securities notice filing failure. Missing the 30-day DFPI filing triggers cure obligations and potential rescission liability (Corp. Code § 25503).

Pitfall 4: Plan content noncompliance. Omitting required provisions like a 120-month maximum exercise period voids the state securities exemption.

Pitfall 5: Misclassification under ABC test. Granting equity to workers misclassified as contractors triggers penalties and wage claim exposure.

Pitfall 6: Inconsistent "cause" definitions. Varying definitions across documents creates enforcement uncertainty.

Whether your company must file with DFPI depends on your plan's Rule 701 compliance. Ask Sawyer researches California Corporations Code, Labor Code, and Business and Professions Code provisions to answer questions about your facts.

California Equity Grant Deadlines and Time Limits