Leaving your job, whether or not such a departure is voluntary, is a stressful time for employees. However, as you pack your belongings and send out your goodbye emails, you should ensure that you are not forgetting about your stock options. Too often, employees lose out on sizable earnings because they are unaware of the vesting terms and the post-termination exercise period of their stock options.
The post-termination exercise period is the period after the end of your service with your employer during which an option must be exercised before it expires. Often, vested stock options permanently expire if they are not exercised within the specified timeframe after your termination of service.
This article outlines common stock option provisions and key dates that departing employees should keep in mind. After reading this article, you should study your stock option documents in order to confirm the applicable dates of your stock option grants.
You should be aware of your applicable vesting dates.
In general, you have rights only to stock options that have already vested prior to your termination date. For startup companies, many stock option grants are subject to time-based vesting over a period of four years, with 25 percent cliff vesting on the one-year anniversary and the remainder vesting on a monthly basis thereafter.
At the time of your departure, you are generally allowed to exercise the vested portion of your stock option awards, and you will forfeit the unvested portion. If you are planning on leaving your job, you should review the details of your vesting schedule. You may decide to delay your departure to ensure that you do not leave prior to the vesting of a substantial portion of your option grant. For example, if your options are subject to cliff vesting, you forfeit your entire grant if you leave prior to the cliff date and you will not receive a pro-rated portion of the award.
You should be aware of your applicable post-termination exercise period.
Due to certain tax and securities laws, as well accounting rules, it is very common for stock options issued by private companies to have a term of up to ten years from the date of grant.
The post-termination exercise period, however, is almost always shorter than the applicable term of the stock option grant, absent a termination of service. In determining the post-termination exercise period, most companies follow the standard rules set forth in the Internal Revenue Code for incentive stock options (ISOs) by providing a standard three- month period to exercise a vested stock option after termination, which has the effect of shortening the term of the option for those who leave the company before the option’s expiration date.1If your vested stock options are not exercised prior to the expiration of the post-termination exercise period, they expire and are canceled! The post-termination exercise period generally starts on the date of termination (ie, the actual end of your service with your employer, not the date when you give notice).2
Takeaway
Review your stock option documents − including your stock option plan, notice of grant, and option agreement − so that you know the rules and procedures of vesting and post-termination exercise. Your stock option documents are the only reliable and binding sources that determine your contractual rights, including vesting terms and how long you have to exercise your stock options after your termination of service.
1 In the case of death or disability, the post-termination exercise period is often 6 or 12 months.
2 Generally, an employee’s service is not deemed to have terminated merely because of a change in the capacity in which the employee renders service (e.g., change in status from an employee to an independent contractor). However, a change in a service provider’s status from an employee to an independent contractor will result in loss of ISO status, if applicable, on the 91st day after such a transition. As always, you should study your equity documents in order to confirm the applicable terms of your stock option grants.
FAQs
If you were granted stock options and have already exercised some or all of those vested options before your departure, you already own those shares—your company usually can't claim or repurchase them when you leave. However, you may want to check your grant to be sure.
Do I have to exercise my options when I leave a company? ›
Exercise Timeline if You Leave to Take Another Job or Retire
(As always, check your plan document as this period can be shorter or longer.) Even if the expiration date of your employee stock options is further out in time than the 90-day exercise window, you must exercise within this new post-termination period.
What happens if I don't exercise my stock options? ›
Because if you don't exercise your options before the expiration date, they will be worth absolutely nothing. Nada. Zip. Options are very much a use-it-or-lose-it proposition, and it could be very painful to “lose it” if your strike price is below the current fair market value of the common stock.
How long do I have to exercise my stock options after termination? ›
Exercising stock options when you leave the company
After you leave your job, most companies have a 90-day post-termination exercise period (PTE or PTEP) when you can still purchase your shares.
What happens to stocks when you quit a job? ›
Upon job termination, you almost always forfeit your unvested restricted stock units. However, there are exceptions depending on the vesting terms of your employment agreement or stock plan.
What happens to my stock options if I get fired? ›
Unfortunately, in most cases, if you're laid off and your stocks are still unvested, you'll likely lose them. They will revert to the company, and you'll receive no benefit from them.
Should you always exercise your stock options? ›
This is simple: if you have confidence in the company, it is almost always better to exercise than let your hard-earned options drop off the table for nothing. If you have already left the company, then you need to know how long you have before your options expire.
Can you sell options instead of exercising? ›
In most cases, options can be closed (rather than exercised) through offsetting transactions prior to expiration. It doesn't make a lot of sense to exercise options that have time value because that time value will be lost in the process.
How are stock options taxed when exercising? ›
You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don't meet special holding period requirements, you'll have to treat income from the sale as ordinary income.
Do stock options automatically exercise? ›
If an option is ITM by as little as $0.01 at expiration, it will automatically be exercised for the buyer and assigned to a seller. However, there's something called a do not exercise (DNE) request that a long option holder can submit if they want to abandon an option.
Exercise your stock options to buy shares of your company stock, then sell just enough of the company shares (at the same time) to cover the stock option cost, taxes, and brokerage commissions and fees. The proceeds you receive from an exercise-and-sell-to-cover transaction will be shares of stock.
What is an example of exercising stock options? ›
For example, if an employee has the option to buy 1,000 shares at a strike price of $10, they will need $10,000 to carry out a cash transaction. After this transaction, the employee owns these shares outright and can choose to sell them or retain them.
Do I lose my stock options if I quit? ›
At the time of your departure, you are generally allowed to exercise the vested portion of your stock option awards, and you will forfeit the unvested portion. If you are planning on leaving your job, you should review the details of your vesting schedule.
When should you exit stock options? ›
Buyers of an option position should be aware of time decay effects and should close the positions as a stop-loss measure if entering the last month of expiry with no clarity on a big change in valuations. Time decay can erode a lot of money, even if the underlying price moves substantially.
Can a company take away your stock options? ›
Key Points. Your company cannot terminate vested options, unless the plan allows it to cancel all outstanding options (both unvested and vested) upon a change in control. In this situation, your company may repurchase the vested options.
Do I lose my shares if I leave a company? ›
It depends on the company's policies and the type of shares you hold. In some cases, you may be able to retain your shares, while in others, you may need to sell or forfeit them.
Do you lose ESOP if you quit? ›
If you are not 100% vested in employer contributions to your account when you quit, you will only lose (forfeit) the percentage you have not vested in. So if you are 50% vested, you will lose 50%. Note: participants must become 100% vested upon reaching retirement age or if the plan is terminated.
How long do you have to keep stock options? ›
Stock options don't last forever. Typically, there's a vesting schedule that lasts anywhere from one to four years, though some employees may have up to 10 years. And if you leave the company for whatever reason, whether it's because of a layoff, resignation, or retirement, you may only have 90 days to use them.
Do I lose RSUs if I leave a company? ›
Usually, you'll lose all the RSUs that have not yet vested at the time of your resignation. They'll be forfeited back to the company, and you'll walk away with nothing for those unvested units.
