Leaving your company means tying up loose ends—and one of the big ones is learning what happens to your vested equity when you leave. Your company isn’t obligated to remind you when and how to exercise your stock options after you sign your exit paperwork and move on. It’s completely up to you to know what will happen to your shares when you leave—including how much time you have left to exercise your options, have money ready to exercise or purchase any shares, and understand the potential tax implications.
If the company you’re leaving is still privately owned, you probably can’t turn your stock into cash—yet. But sometimes, equity can turn into real wealth. And if your company has a liquidity event like an initial public offering (IPO) or acquisition later on, you could end up earning more from your equity than from your salary.
So it’s time to make some big decisions about your equity. Here’s what you need to know about what happens to vested stock when you quit.
How vesting affects your equity
What you can and can’t do with your equity largely depends on how long you’ve been with your company. Companies usually make you stay onboard for a certain amount of time to earn your equity. This process is called vesting. In most cases, you have to stay for at least a year to vest any equity (your grant may call this a “one-year cliff”).
There are two possible scenarios when you leave a company:
- Buy: If you have vested shares, you can either buy or keep the vested portion of your equity (depending on what type of equity your former company granted you) within the specified timeframe.If the company is private, there are likely significant restrictions on your ability to transfer stock that results from an exercise. Iin some cases, the issuer may provide a liquidity event or permit third-party sales to a willing buyer, but the latter option is unusual. If the company is publicly traded and there isn’t a lockup period, you can trade it as you would any other stock.
- Forfeit: If you haven’t vested, your unvested equity will be returned to the company’s equity pool so they can offer it to new employees or investors.
What type of equity do you have?
The type of equity you have matters because each can have different implications.
Restricted stock units
If you have restricted stock units (RSUs), when certain conditions are met (for example, when you stay at the company for a certain amount of time and the company IPOs) you can receive any vested shares. In the future, if those conditions are met before the RSUs expire, you will receive shares. What you can do with those resulting shares depends on whether the company is public (the shares may be freely tradeable on the market) or private (the shares are likely to not be tradeable until there’s a liquidity event).
If you have restricted stock awards (RSAs), you have the right to purchase your shares on the day they are granted for, at most, a small cost. Any unvested RSAs are usually repurchased by the company at a price outlined in your equity plan agreement.
If you have incentive stock options (ISOs) or non-qualified stock options (NSOs), the situation looks a bit different. ISOs and NSOs are types of stock options, which aren’t actual shares of stock—they’re the opportunity to purchase shares at a fixed price. You’ll have to decide whether you want to exercise your options (purchase your shares) within the post-termination exercise window that your equity plan specifies. (More on that below.)
How to figure out what type of equity you have
To see what type of equity you have, check your grant. In general, though, many early-stage U.S.-based companies offer ISOs to their full-time employees. Then, when they grow, they sometimes switch to RSUs. If you’re a contractor, the company may offer you NSOs.
How much have you vested?
When you leave a company, you are only entitled to exercise your vested equity. Say your company grants you 4,000 ISOs that vest over a four-year period and come with a one-year cliff. If you leave before you hit your one-year mark, you won’t get any equity. If you stay for exactly two years, you vest 2,000 options. You don’t vest all 4,000 ISOs until you work at the company for four years. If you leave before then, you forfeit any unvested options.
|Tenure at company at time of departure||Vested options|
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If you think your equity could be valuable, it may make sense to time your departure date to maximize your vested equity. Many companies switch to monthly vesting after you hit your one year cliff, so if you started on January 1, 2021 and were planning on leaving on July 30, 2022, changing your last day to August 1, 2022 could help you vest another month’s worth of equity.
How much equity have you exercised?
If you’ve already exercised options, you own those shares—your company usually can’t claim them when you leave. However, you may want to check your grant to be sure. For example, if it contains a clawback provision or language around “company repurchase rights,” “redemption,” or “forfeiture,” your company may have the option to forcibly buy back shares from you.
Also, if you took advantage of an early-exercise policy and exercised options before they vested, your company has the option to repurchase any exercised-but-unvested shares when you leave.
How long do you have to exercise your remaining vested options?
One of the most important things to know when leaving a company: You only have a certain amount of time to exercise your vested options after leaving.
This time period is called your post-termination exercise (PTE) period or window (you’ll often hear the phrase “PTEP window”). Many companies set this window at 90 days. If you don’t exercise within this window, you’ll forfeit your options.
The 90-day window
There are potentially significant tax implications on timing your PTE window exercise. Your equity plan may give you a longer PTEP window than 90 days, as that is generally seen as more employee-friendly. Some organizations may change PTE windows via individual separation agreements when the employee leaves the company.
But you should know that the IRS has its own 90-day window to get favorable tax treatment when you exercise ISOs. Even if your company provides for a longer PTE window than 90 days, you should know that if you exercise ISOs more than 90 days after you leave, they will be treated as NSOs for tax purposes. Exercising NSOs requires you to pay the strike price for the options and pay the total tax liability at the time of the exercise. In contrast, for ISO exercises, the tax obligation is assessed as part of that year’s tax return—which can give you more time to come up with the tax portion.
You should be able to find the details of your PTEP window in your grant or ask your company about their policy in relation to your specific equity grant. Look at this before you leave—don’t count on your company to keep track of the deadline for you afterward. (Generally, departing employees of companies that use Carta to manage their equity will receive reminders before their window closes, but it’s always wise to check before you go.)
Additional tax implications to consider
If you exercise your options, you don’t just need enough money to purchase your shares—you also need to prepare for the tax implications. Especially before exercising ISOs, we recommend checking out our alternative minimum tax (AMT) calculator to see what your AMT bill might look like at the end of the year. There are also different tax implications depending on whether or not your options are ISOs or NSOs (the latter is generally less advantageous, taxwise).
Learn how taxes work when you exercise stock options
How to exercise equity when leaving a company
If you’re interested in exercising your options, ask about the process ASAP. Unless your company uses a platform like Carta, you may have to write a paper check and get it to your company by the time your PTEP ends. Otherwise, you may miss your exercising window.
To figure out how much you’ll pay in case of an option exercise, multiply the number of shares you want to purchase by your strike price (this is a fixed price for each of your shares that is spelled out in your option grant). For example, if you want to purchase 1,000 shares and your ISO strike price is $1.50, you’ll pay $1,500 for the shares.
As noted above, don’t forget to take into consideration the year-end tax implications of such an ISO exercise via AMT. If you’re purchasing NSOs, you’ll also owe taxes in full at the same time as you exercise. Connect with your company to determine that amount so you can plan for funding the exercise—it may be substantial.
How liquid is your equity?
To help decide whether you want to exercise, think about liquidity (whether/when you can exchange your shares for cash). If you exercise options with a private company, you may not get your money back for a while—if at all. To sell your shares, your company would have to run a liquidity event, such as a tender offer, acquisition, or third-party platform sale. Take a look at your finances and decide if you can afford to part with that amount of money.
When you’re leaving a public company or one that is offering a tender offer, you may have two options to buy and sell your shares without putting down any money. This involves exercising and selling your options (in full or in part) to cover the purchase price, fees, and taxes. You can then hold on to some of the shares, or you can sell them all and get a lump sum from the transaction.
What to do if you can’t afford to exercise your equity
Many employees end up walking away from their options because it’s too hard to come up with the money. If you believe your equity is worth pursuing, you may have some options:
- Net exercise: Some companies will allow you to give them a portion of your vested shares as payment for the rest of your shares (kind of like a cashless exercise during a tender offer).
- Sign-on bonus: If you’re joining another company, try to negotiate a sign-on bonus that’ll help you purchase your shares at your prior employer.
- Stock option lending: If your company allows it and if the terms are agreeable, a lender can offer you the money you need to purchase your options (and sometimes cover the tax bill), and you pay them back when your company has a liquidity event.
Making the right call with equity when you leave a company
Keep in mind that we’ve only covered common scenarios. Your situation could differ, so we always recommend thoroughly reading your grant, asking questions before you leave, and talking to a financial professional. This can help you make the best decisions and move into your next chapter as smoothly as possible.
Learn how to exercise your vested stock options in the Equity 101 series.
Do you know the tax implications of your equity ownership?
Get expert 1:1 support on your equity and taxes with Tax Advisory—an additional offering exclusively for Carta customers.
DISCLOSURE: This communication is on behalf of eShares Inc., d/b/a Carta Inc. (“Carta”). This communication is for informational purposes only, and contains general information only. Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication 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 communication 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. ©2020–2022 eShares Inc., d/b/a Carta Inc. (“Carta”). All rights reserved. Reproduction prohibited.