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.
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.
Do I have to exercise my options when I leave a company? ›
Often, vested stock options expire if they are not exercised within the specified timeframe after service termination. Typically, stock options expire within 90 days of leaving the company, so you could lose them if you don't exercise your options.
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.
Can I cash out my employee stock options? ›
A common though sometimes complicated task is converting employee stock options into cash. You must first exercise the options, then sell them. That means buying shares of company stock at the exercise price.
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.
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.
Why would you not exercise an option? ›
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. Holding the stock rather than the option can increase risks and margin levels in the brokerage account.
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.
What is a bad leaver in stock options? ›
Bad leavers lose both their vested and unvested options which means all the options they earned during their time in the company, will be taken away. Vested options are the options that have already been earned and unvested options have not yet been earned.
When you exercise your stock options, your potential tax liability is determined by the difference between your strike price (fixed purchase price) and the current fair market value (FMV) of those stock options. This difference is often referred to as the “spread.”
What happens if an option is not exercised? ›
The majority of options contracts are not exercised but, instead, are allowed to expire worthless or are closed by opposing positions. For example, the holder of an option can close out a long call or put prior to expiration by selling it, assuming the contract has market value.
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.
What happens if you don't exercise employee stock options? ›
You use it or lose it
Unlike every other form of equity compensation, options are use-it-or-lose-it. If you don't exercise your options within the exercise window, they expire. Assuming you leave before the company goes public, a 90 day exercise window means the company will still be private when your options expire.
What happens to options when you quit? ›
Prior to getting into your post-termination exercise periods, you should know that when you leave the company for any reason, unvested options remain unvested in many cases. Practically speaking, this means that the in-the-money value of unvested employee stock options is forfeited.
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.
