Equity Guide for Changing Jobs
On average, $47k worth of equity is left behind per job change. Whether you’re laid off, switching jobs, fired, or retiring, here’s what happens to your equity, how to strategize your exit, and how to potentially walk away with more equity. Besides, $47k of potential savings in a few minutes? That’s not a bad investment!
On average, $47k worth of equity is left behind per job change. Whether you’re laid off, switching jobs, fired, or retiring, neither the company nor the IRS have any legal obligation to notify you of the important information that can save your equity and could keep you from making dumb mistakes. Responsibility solely falls on you, so let me show you exactly what happens to your equity, how to strategize your exit, and how to potentially walk away with more equity than what you started with. Besides, $47k of potential savings in a few minutes? That’s not a bad investment!
WHAT HAPPENS TO MY EQUITY?
Regardless of your unique employment status, cleaning out your desk should be the least of your worries. We need to go to the source of truth regarding your equity. This will be a contract that you signed a long time ago, and perhaps haven’t looked at since. This contract is the Equity Plan documents. The Plan documents are the center of the solar system and everything else revolves around it. If there’s a change in your job, the first place you’ll want to start is by looking at these documents. If you don’t have them, or lost them, ask your employer’s stock plan administrator for these documents, or check the online stock plan portal—such as Carta, or E*Trade. It’s a physical contract so it’s the only reliable and binding source describing your equity upon an employment change. Please don’t rely on what your co-workers say.
These documents typically consist of two pieces: the overarching plan document (“The Plan” or “Equity Incentive Plan” or “Stock Plan”) which is applicable to all shareholders, and the other is the grant (“Grant Notice” or “Grant Agreement”) document which is specific to your individual equity grant (“Grant Agreement”). The combination of these documents should have enough information for you to understand what happens to your equity and how to plan your equity upon exit. You’ll want to look for a few things: The terms of the agreement, how many awards you have, the type of equity you have and vesting. Regardless of the type of equity, when your employment terminates, a few things will happen.
Vesting
First, starting from the day your employment actually terminates (not the date of notice), any unvested equity will likely stop vesting and be forfeited. There may be some one-off exceptions (such as death or disability) where vesting may continue or even accelerate. The vesting will largely depend on your company’s equity documents. If you have double trigger Restricted Stock Units (RSUs) at a private company, you can probably kiss your options good-bye, but more on that in a minute.
Stock Options (ISOs & NSOs)
“ Most equity contracts don’t consider the stock option exercised until the cash is received by the broker or company.”
For owners of stock options, on the date of termination, a timer will start that will limit your ability to exercise. This is known as the Post-Termination Exercise Period (PTEP). This is specific to stock options and sets the standard for how long you have to exercise before you lose your equity. You need to have this date understood as soon as possible, ideally, long before your employment is terminated. Companies and courts are strict with these rules—even if there’s an honest mistake or you barely miss a deadline. There’s no grace here as they follow the PTEP rules to a “T”. For example, if you’re exercising electronically, it takes time to transfer cash between banks. Most equity contracts don’t consider the stock option exercised until the cash is received by the broker or company. I know people who have submitted exercise requests before the deadline, but because the cash wasn’t received in time, it wasn’t considered exercised in time.
90 day window
So what is the typical deadline? Well, starting from the end of your actual employment (not the date of notice), you’ll have 90 days to exercise your stock options in most cases. This depends on the reason for your termination. The different types of termination can include: for cause (fired), without cause (layoffs, furlough), retirement, death, and disability. About 80% of companies have PTEPs of about 90 days without cause. This 90 day rule isn’t something instituted by your employer, but rather, the IRS. These 90 days actually act as a minimum amount of time you have to exercise their options. So could it be longer? Yes!
A 90 day window can often put the employee in an expensive and tight conundrum where they need to come up with the funds on short notice. So companies may extend the PTEP in large layoffs as a form of good will to employees. It doesn’t require large layoffs or other unique circumstances to extend the PTEP beyond the 90 days. Companies like Pinterest, Quora, and Square have extended PTEPs as a form of attracting and recruiting the best talent. I personally like what Carta does as they allow a PTEP equivalent to the number of years worked at the company. If you worked at Carta for 3 years, you get 3 years to exercise post-termination. Well done, Carta, well done! 👏
Extended Post-Termination Exercise Period (PTEP)
When companies choose to extend the post-termination exercise periods (PTEP) there may be adverse tax consequences. Legally, any ISOs that have a PTEP longer than 3 months loses their tax-qualifying status and become NSOs. There’s a tiny nuance here. While options are given 90 days to exercise by the IRS…ISOs have 3 months to retain their Incentive Stock Options status before they become NSOs (except in death or total disability). There is a difference between 90 days and three months. Three months can be as much as 92 days, or as little as 89 days depending on where in the calendar year it falls. I know, it’s picky, but someone out there will thank me for saving them $$.
Speaking of picky, if you’ve been furloughed, you’ll want to clarify with the company if you’re being terminated, or if it’s just a leave of absence. Depending on the contract, some companies will give vesting credit for maternity leave, military service, sickness, or sabbatical, while others don’t. If you have any questions, you can ask your HR director, CFO, or stock-plan administrator.
If your termination is from disability or death, then you’ll usually have 12 months to exercise…I mean…your family or executor will have 12 months to exercise…dead people don’t exercise stock options🤦.
Miss the deadline
If you don’t exercise before the PTEP, then all of your hard work (vested options) will be forfeited back to the company’s option pool to be re-granted to other employees. Carta did some research on how many vested options are forfeited each year. After reviewing 386 companies valued at a billion-dollar or more, they found that $1.8 billion of in-the-money, vested equity was left behind annually. On a per-employee basis, they found that this averaged out to be $47,000 (based on 409a values) left on the table per job change. In my estimation, I’d guess that the $47k/job change would actually be much higher if they used preferred share prices. But missing out on $47k isn’t the worst thing that could happen. I’ll show you how it can actually get a lot uglier than $47k when we talk about strategies.
But first, a quick recap of Restricted Stock Units (RSUs). Typically non-vested RSUs or restricted stock are forfeited, again with some exceptions for disability, retirement, or acquisition. If the shares vested before the termination date, then the shares will continue under your ownership. If you own restricted stock, sometimes private Company have Repurchase rights to previously purchased restricted stock. I mostly see repurchase agreements with the company able to buy back the stock at the lower of two prices: the price you paid, or the fair market value.
Employee Stock Purchase Plans (ESPPs)
A quick note on Qualified ESPPs (IRC Section 423 Plans) before talking about strategies. If you’re participating in your company’s Employee Stock Purchase Plan (ESPP), then any payroll contributions that have yet to purchase company stock will be withdrawn. No company stock will be purchased with those funds and they’ll return back to you. But, there is an instance where the IRS will actually let you purchase company stock through the ESPP despite being terminated. If the purchase date happens within 3 months of the termination date, then your funds can remain in the ESPP to buy company stock, hopefully at a discount.
HOW TO STRATEGIZE
As you plan your departure from a company or deal with a sudden loss of employment, you’ll want to ensure you still have access to the stock plan portal. Most of the time you’ll have your own log-in credentials at Carta or E*TRADE (or wherever your equity is held), but these portals will hold your ability to exercise and view key information like the equity type, and exercise costs.
One piece of key information that you’ll want to quickly check is when your option expires (typically, 10 years from grant). I know this is super nit picky, but technically if your stock options expire before the 90 day PTEP, then you don’t have 90 days—you’ll have until the expiration date to exercise. I know this will save at least one person out there.
Another key piece of information you’ll want to look at, is your vesting schedule. How much equity is vesting and when? You could consider delaying your exit until after a big vest. Of course, it doesn’t make sense to stay longer if you're leaving because of a toxic or emotionally draining work environment. You’ll need to trust your gut on how much you’re willing to prioritize the financial benefit, over your physical, emotional, spiritual, and/or mental health. Just double check your grant so you don’t leave a day early.
For a smooth transition, you’ll also want to keep the contact information of the HR director, CFO, or Stock-plan administrator because you may need their assistance in the future. For example, after your termination, you may be on a tight tax deadline and need a w-2 for reporting an NSO exercise. Having their contact information allows you to continue your equity plan without delay.
Let’s talk about the actual strategies:
“Having the ability to exercise in two separate tax years can allow you to reduce, minimize, or even eliminate a tax bill. ”
If you only have 90 days to exercise, you may consider leaving the company sometime in October so that those 90 days extend into the next tax year. Having the ability to exercise in two separate tax years can allow you to reduce, minimize, or even eliminate a tax bill. It may also buy you more time before your next tax bill is due, if you lack the funds to pay. Please be aware of quarterly estimated taxes so that you’re not under withholding throughout the year. You could even get more specific and leave after October 15 so as to avoid the January 15th estimated tax payment, if you’re exercising in early January. This will absolutely require the help of a tax professional (disclaimer).
Tax-Efficient Exit
When you leave, withholdings are still applicable to RSUs and NSOs. ISOs don’t usually have withholdings to begin with so that doesn’t change. Whatever the company withheld doesn’t get refunded to you. It should continue as normal and be reported on your W2. Sometimes however, the withholding falls in between the cracks and the company doesn’t withhold. In that case, you’ll need to be aware that you’re now on the hook for paying quarterly estimated taxes.
When I was originally writing this script, I was going to say that leaving $47k on the table (or whatever your amount is) was the worst thing that could happen, but that’s far from the truth. If you do choose to exercise, you’ll have financial, and tax ramifications that could easily cause financial ruin. I don’t say this as a platitude, but from seeing people going through this first hand. You really need to nail down the financial and tax risks so that you don't bankrupt your financial future.
What if you can’t afford to exercise?
I’ve got you. Here are several options to consider:
Leverage A Sign on Bonus: If you’ve got another job opportunity lined up, then consider negotiating a sign-on bonus that would cover your exercise costs (don’t forget taxes).
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Get a 3rd party loan: There are companies that offer non-recourse loans for equity comp to cover exercise costs and taxes. You repay this loan when your company has a liquidity event. This comes with its own fees and risks, such as taxable income from loan forgiveness (learn more here).
A Net exercise: This is where you trade in a portion of your shares to cover the exercise costs. You walk away with fewer shares, but at least you kept some.
Sell on a secondary market: Selling on a secondary market may be an option. Check with your company and be aware of repurchase agreements and clawback provisions.
Negotiate a Severance: If you haven’t received a severance package, it's still possible to negotiate a severance package with your employer.
PTEP Extension: This may require some startup cred, clout, or enough influence to the company to pull this off.
It goes without saying, but be a good employee. Don’t do anything that would cause you to get fired “for cause” as that could result in the forfeiture of your equity. This will also affect your ability to negotiate your equity on your way out.
If you leave, it’s likely you will walk out with nothing (especially if you have RSUs), but something is better than nothing. If people are leaving $47k worth of equity behind during a job change, then how can we flip this and actually walk away with more?
WALK OUT WITH MORE
You’ve heard the saying, “you only get what you ask for,” but this first tip doesn’t actually require you to ask for it. You may be obligated to it.
“you may find that the term “service” would allow you to continue to work as a consultant, independent contractor, or even a part-time worker. ”
Look at the company’s stock plan language. The definitions section will define terms like “termination,” “employment,” and “service to company.” See if there’s any wiggle room for interpretation. Upon further reading, you may find that the term "service" would allow you to continue to work as a consultant, independent contractor, or even a part-time worker. Because the 90 day PTEP is dependent on your “service,” you may be able to keep your equity and continue to let it vest. Please ensure that you are actually providing “service” to the company. If you’re doing this solely to keep your options or RSUs, then this could be considered fraud.
If you do become some sort of non-employee director, the reporting of your equity will change. For example, NSO exercises are typically reported on your w2 with your company withholding taxes. But if you become a contractor, expect to see this come through on a 1099-NEC, without any withholdings. Here’s another reminder to check if quarterly estimated taxes are applicable.
Eventually, you could find yourself in a position where you’ll want to ask for something such as accelerated vesting. What’s the worst they could tell you? “No?” I recently worked with an executive who got $3 million of dollars by simply asking for accelerated vesting (even though the original contract didn’t have 100% acceleration in it).
Ideally this is something that you negotiate when you first start your employment—not as your leaving. But even as you’re leaving, your company has the ability to extend the post-termination exercise window, accelerate vesting, or even continue vesting. It’s rare that they actually do this because there’s often adverse tax and accounting consequences. But if you have enough influence at the company, they may do this for you (after weighing the costs).
Especially if there is severance, try and negotiate accelerated vesting or an extended post-termination exercise period. Even if they say no, you now have an idea of how to negotiate your next offer. When negotiating your next offer, you can get more pay, better terms, and more flexibility by implementing the things in this article.
