How to extend your PTE window

How to extend your PTE window

Author: Charly Kevers
Read time:  4 minutes
Published date:  April 13, 2020
With unemployment skyrocketing, it’s more important than ever to try to help laid-off employees who have been faithfully working for you for years. Here’s what you need to know before extending your PTE window and how to do it.

Even before COVID-19, we’ve been long advocating for longer post-termination exercise (PTE) windows—the amount of time employees have to exercise stock options after leaving a company. The popular 90-day period just isn’t fair to employees who don’t have the money to buy their stock before the window closes. At Carta, our PTE window matches the time that the departing employee has vested in the option grant, and we urge other companies to rethink their own window in our Shareholder Bill of Rights

Now, with unemployment skyrocketing, it’s more important than ever to try to help laid-off employees who have been faithfully working for you for years.

Here’s what you need to know before extending your PTE window and how to do it:

Why you should consider extending your PTE window

Extending your exercise window isn’t just good for your employees—it can also help your company. The percentage of employees with extended PTE has more than doubled (from 5% to 11%) over the past four years. Here are some of the reasons we have seen companies making this change:

It’s fairer

Stock options are meant to reward the people that have helped build your company by allowing them to participate in the increased value. Asking employees to exercise stock options immediately after leaving the company isn’t the right way to treat them for their years of hard work—they shouldn’t have to miss out on the upside of equity because of short-term liquidity issues. The typical 90-day exercise window favors the wealthy, or those who can afford to purchase their options whenever they want. Extended exercise windows allow more employees to participate.

It’s good for recruiting

Longer PTE windows will set your company apart from those who only give their employees 90 days. In fact, there are lists employees can reference that applaud companies with extended exercise windows.

It’s good for company culture

As David Haber, former founder and CEO of Bond Street, puts it, “Careers are long. People don’t forget when you do the right thing (but didn’t have to).”

What to keep in mind before extending your PTE window

Extending your PTE window has other consequences. There are a number of considerations you should take into account before lengthening your exercise window:

Extending your PTE window could trigger tender rules

If you want to modify more than six grants, you may need to run a non-monetary tender offer. This means you need to provide certain documentation and disclosures. Plus, you have to keep the offer open for at least 20 business days, so you may not be able to move as quickly as you’d like.

It’ll likely increase dilution

When you have a longer exercise window, it takes longer for unexercised options to return to your option pool, and usually employees end up exercising more options under these programs. As a result, you’ll need more shares in your plan.

It could have accounting implications

Extending a grant’s PTE period can potentially trigger modification accounting under ASC 718. This may or may not result in additional stock compensation expenses.

It may not always help every employee

While an extended PTE window is inherently a good thing, changing existing grants could end up negatively impacting employees.For example, amending already-issued grants could trigger NSO treatment. If a stock option was issued as an incentive stock option (ISO), modifying the PTE period would result in the option losing its ISO status if it is in-the-money on the day you modify the grant—even if the employee exercises within 90 days after leaving. This means those employees will have to pay taxes when they exercise their options. Also, amending grants could subject your employees to higher tax obligations because of the $100K rule.

These may sound like serious drawbacks, but keep in mind you don’t have to extend every employee’s PTE period—we believe you should give them the choice to opt-in. Also, employees often don’t benefit from ISO treatment as much as you’d think—in order for them to receive favorable tax treatment, the employee must meet the holding period. Plus, employees with ISOs may have to worry about AMT.

In the end, employees may prefer the ability to hold off on exercising (while they gather the appropriate funds and/or see if the stock is even worth purchasing) over favorable tax treatment.

How to extend your PTE window

Carta makes it easier to extend PTE windows. Here are the steps you should take:

1. Talk to your counsel

They can make sure you get the appropriate documents and disclosures to employees, follow regulations like the $100K rule and getting approval from your board and stockholders (if your plan requires it), and figure out the best method to modify grants. If you need recommendations for good counsel, contact us and we’d be happy to help. 

2. Decide the details

How long do you want your new PTE window to be? Who do you want to offer longer windows to? (Everyone who has vested options? Everyone who’s worked for you for a certain amount of time? Do you want to only lengthen the period in new equity plans? Or also offer this to those with already-issued grants?)

3. Get board approval

It may help to show your board why extending your exercise window is a good idea. Once they agree, you can use our board management software to get approvals electronically without leaving our platform. Simply draft your board consent language and hit send.

4. Educate your employees

Walk them through the pros and cons of keeping their original grant vs. accepting a new grant with a longer PTE period, and give them the choice.

5. Open the modification period

Work with your counsel to determine the best approach, and ask whether tender offer rules may apply.

6. Update your issued grants

With Carta, you can edit up to 50 grants at a time, and our support team is always here to help.

Equity Advisory, an addition to Carta’s cap table, provides your employees with personalized equity-based tax support.

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Carta Equity Advisory helps employees make informed decisions about their equity and taxes. Learn how you can help educate your team.
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Special thanks to Reed McBride for contributing to this story.

Charly is Carta’s Chief Financial Officer.
DISCLOSURE: This post contains general information only and eShares, Inc. dba Carta, Inc. (“Carta”) is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.  This post is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.  This post is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. This post contains links to articles or other information that may be contained on third-party websites.  The inclusion of any hyperlink is not and does not imply any endorsement, approval, investigation, or verification by Carta, and Carta does not endorse or accept responsibility for the content, or the use, of such third-party websites. Carta assumes no liability for any inaccuracies, errors or omissions in or from any data or other information provided on such third-party websites.