We dug into where the 90-day PTE window came from and how companies are rethinking their policy.
If you’re leaving your company, you probably have a lot on your mind. But between finishing up projects, exchanging contact info with coworkers, and figuring out health insurance coverage, don’t forget to think about your equity.
Remember: your company isn’t obligated to remind you about any stake you may be entitled to. And if the company 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 does well, you could end up earning more from your equity than from your salary.
So regardless of why you’re leaving your company, it’s time to make some big decisions about your equity. Here’s what you need to know.
What type of equity you have
It’s important to know what type of equity you have because each can have different implications.
If you have RSUs, for example, you don’t need to do anything to receive them—you simply receive your shares of stock when certain conditions are met (you stay at the company for a certain amount of time and the company IPOs, for example).
If you have ISOs or NSOs, on the other hand, you have to decide whether you want to exercise your options (purchase your shares) when you leave. 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.
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 companies offer full-time employees ISOs. Then, when they grow, they sometimes switch to RSUs. If you’re a contractor, the company may offer you NSOs.
How much you’ve vested
Companies usually make you stay 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”).
When you leave a company, only your vested equity matters.
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.
If you’re voluntarily leaving your company and 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, 2019 and were planning on leaving on May 30, 2020, changing your last day to June 1, 2020 could help you vest another month’s worth of equity.
How much you’ve already exercised
If you’ve already exercised options, you own those shares—your company usually can’t take them away from you 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 early exercised (exercised options before they vested), your company has the option to repurchase any unvested shares when you leave.
How long 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. If you don’t exercise within this window, you’ll forfeit your options.
At many companies, this period is 90 days (though some offer a longer period and we’re encouraging companies to follow suit). However, some companies are amending PTE windows via individual separation agreements at the time of employee departure.
You should be able to find the details in your grant or ask your company about their policy. Take note of this before you leave—your company probably won’t remind you or keep track of the deadline for you.
Even if your company offers a longer PTE period, 90 is still an important number to remember. If you don’t exercise your ISOs within 90 days, you’ll lose their favorable tax treatment and they’ll be treated like NSOs instead.
How to exercise
If your company is currently remote because of COVID-19 and you’re interested in exercising your options, make sure you 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 PTE period ends. Otherwise, you may miss your exercising window.
To figure out how much you’ll pay, multiply the number of shares you want to purchase by your strike price (which you can find in your option grant). For example, if you want to purchase 1,000 shares and your strike price is $1.50, you’ll pay $1,500.
How liquid your equity is
To help decide whether you want to exercise, you may want to think about (and maybe even ask your company about) liquidity, or whether/when you can exchange your shares for cash. With private companies, if you exercise, you may not get your money back for a while—if at all. The company would have to run a liquidity event, such as a tender offer, get acquired, or go public for you to be able to sell your shares. So it’s important to figure out whether you can afford to part with that cash.
What to do if you can’t afford to exercise
Many employees end up walking away from their options not because they don’t think the shares are valuable, but because it’s too hard to come up with the money. This is especially true because:
- Startups often offer lower salaries than more established (usually public) companies, hoping to make up the difference in equity
- If you were an early employee and have a lot of options, or if you’re a later employee with a high strike price, you may need a significant amount of money to exercise all your options
- You only have 90 days to exercise if you want your ISOs to retain their tax advantage
However, if you really believe your equity is worth pursuing, you may have some options.
- Ask if your company will let you “net exercise,” which is where you 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). They may not allow it, but it doesn’t hurt to ask.
- If you’re joining another company, try to negotiate a sign-on bonus that’ll help you purchase your shares.
- Consider a stock option lending service. With these services, a lender usually offers 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. Before agreeing to one of these programs, though, make sure you read the terms and understand what you’re signing up for—otherwise, you may give away a significant portion of your equity. You should also check your grant to see whether your company allows this—some companies don’t allow you to take out a loan against your shares.
How equity and stock options are taxed
If you exercise your options, you don’t just need enough money to purchase your shares—you should also prepare for the tax implications.
Special note: one of the perks of ISOs is you usually don’t have to pay taxes when you exercise (like you do with NSOs). However, if you don’t sell your shares in the same calendar year, you may have to pay AMT, which can sometimes be a significant amount. Before exercising, we recommend checking out our AMT calculator to see what your AMT bill might look like.
Keep in mind that we’ve only covered common scenarios. Your situation could differ, so we always recommend thoroughly reading your grant, asking any pressing questions before you leave your company, and talking to a financial professional. This can help you make the best decisions for your situation and transition into your next chapter as smoothly as possible.
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.
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