It's more and more common today for employees to receive company stock.
I'm a huge fan of equity compensation. It can be a great way to accelerate your wealth building.
But to be honest, most people don't understand how their equity comp works or how to plan around it. I've written about how various types of equity comp work, but will not get into it too much in this post. If you need to brush up on your knowledge, here’s a previous post I've written to help out.
One question many have is “what happens to my equity comp if I leave my job?”
To answer this, we need to go through a few things:
Let’s get into it.
Not all stock options are created equal. When you leave a company, your options split into two buckets: vested and unvested.
Vested options are the ones you’ve already “earned” based on your vesting schedule (you know, that 4-year plan with a 1-year cliff most companies love). These are yours to keep, sort of. If you have RSUs that have vested, those obviously stay with you.
Unvested options? Those are the ones you haven’t earned yet, and unless your company’s feeling extra generous, you’re losing them when you walk out the door.
And those unvested RSUs you have? Those just go away and you get no value from them.
I’ve seen people get burned because they didn’t realize how much of their equity was still unvested. Check your grant agreement before you give notice. It’s a simple move that could save you a lot. Sometimes it makes sense to stay 3-6 more months to get a large vest (or negotiate with the new company to match it).
Vested vs unvested is pretty simple when it comes to RSUs, ISOs, NSOs, etc.
Here’s where it gets tricky and where planning is really impactful.
For your vested options, you don’t just get to sit on them forever. Most companies give you a 90-day window (called the post-termination exercise period - PTEP) to decide what to do, or they can go away.
This means you have 3 months to decide if you want to exercise ISOs. If you don’t do it by then, they often turn into NSOs and you have 3 years to exercise. Sometimes you can negotiate this to be longer, but it isn’t super common.
You really need to be on top of this because if you do not plan well, these ISOs turn into NSOs and you lose the tax benefit (ISOs have no tax unless they trigger AMT, whereas NSOs you pay income tax on the spread).
Let's say you have 1,000 vested options with a strike price of $10, and the stock’s now worth $50.
You could exercise them, pay $10,000 to buy the shares and have a spread of $40,000 (you may have AMT tax here).
You could also do a cashless exercise right away and turn them into NSOs. This would mean they withhold $10,000 worth of shares to cover the cost, then would withhold shares for taxes, then you take home the rest. But if this is a private company, you will not have that option. And if it’s a private company, there’s a lot of risk here since you will pay the cost to exercise and maybe AMT without a known liquidity event. The shares could end up worthless.
So how do you decide?
In public companies, it’s easier since you know you have a value you can sell for. You may want to cashless exercise and take the value. Or if you believe in the company, you may just pay to exercise and hold long term to get LTCG treatment.
But what about with private stocks? This is where things do get tricky. You could:
It really comes down to what makes sense for you.
At the end of the day you want to know:
Just know that you have 90 days to exercise those ISOs or they become NSOs and plan around that!
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Financial Advisor