- Nick Burgess
What Your Stock Options Mean Post-Termination
The following article is for entertainment and educational purposes only, and is not investment advice. Please seek a licensed professional for any individual financial advice. Some links below may be affiliate links, providing a small commission to the site at no cost to you.
Do you have stock options or equity plans at your company? If you work for a tech company in Silicon Valley, any number of startup private companies or a senior position in a public company, your answer is likely "yes." But what happens if you get terminated from your job while you still have unvested options?
Exercising stock options after termination from a company can be a complex process with several factors to consider. In this article, we will cover the basics of stock options, the different types of employee stock options, and what happens to stock options after termination from a company. We will also discuss the pros and cons of exercising stock options and provide tips for making the best decision for your financial future.
What are Stock Options?
Stock options are a form of equity compensation that give employees the right to purchase company stock at a set price, known as the exercise price or strike price. This is typically given to employees as part of a benefits package (also called an "employee stock purchase plan") or as a performance-based incentive. Stock options can be either incentive stock options (ISOs) or non-qualified stock options (NSOs).
ISOs are eligible for favorable tax treatment and are only available to employees, while NSOs are available to anyone, including contractors, consultants, and executives. The difference between the exercise price and the market price of the stock when the option is exercised is considered taxable income for NSOs, and is separate to ordinary income.
What Happens to Stock Options After Termination of Employment?
The outcome of stock options after termination from a company depends on several factors, including the terms of the stock option plan, the type of termination, and the company’s policies.
If an employee is terminated for cause or voluntarily resigns, the stock options may immediately become worthless, regardless of the expiration date. However, if an employee is terminated without cause, they may have a limited time to exercise their options, typically 90 to 180 days from their termination date. This is known as the "post-termination exercise window.”
In some cases, companies may allow former employees to retain their stock option agreements if they continue to meet certain conditions, such as being a consultant or continuing to hold a specific position within the company. Additionally, some companies may offer a “cash-out” option, which allows terminated employees to sell their stock options back to the company for a set price.
Pros and Cons of Exercising Stock Options
Stock option exercises can be a complex and potentially risky decision, so it’s important to weigh the pros and cons carefully. Some of the benefits of exercising stock options include the potential for long-term growth, the ability to sell the stock for a profit, and the potential for tax benefits due to advantages in long-term capital gains rate. This could also be advantageous for someone that worked at a private company and received stock option grants as part of their overall equity plans. The exercise of the option could be a potential windfall for you if your private company goes public, and you expect positive performance in the public equity market (just don't forget about the 90-day period of holding your shares!).
However, there are also some potential downsides to exercising stock options, including the risk of losing money if the stock price decreases, the potential for market volatility, and the fact that the stock options may be subject to vesting restrictions.
Tips for Making the Best Decision on Your Unvested Shares
If you are considering exercising your stock options after termination from a company, here are some tips to help you make the best decision:
Assess your financial situation: Before making any decisions, it’s important to assess your current financial situation and determine if exercising your stock options is the right choice for you. This includes considering your current debt levels, future financial goals, and overall risk tolerance.
Consider the terms of your stock option plan: Make sure you understand the terms of your equity plan, including any restrictions or conditions that may apply. This can help you make an informed decision about whether or not to exercise your options. Take a look at the potential number of shares you'd exercise, as well as what is a vested stock option versus a non-vested stock option.
Consider the market conditions: Consider the current market conditions and the potential for market volatility. This can help you make a more informed decision about whether or not to exercise your stock options.
Seek professional advice: If you are unsure about whether to exercise your stock options, consider seeking the advice of a tax advisor or financial professional. They can provide you with valuable insights and guidance on how to make the best decision for your financial future. And thanks to the number of companies now relying on stock compensation as a part of their benefits package, there's now an entire subset of law firms that deal specifically with this type of work. Reach out to them if you're lacking a firm starting point.
Consider the tax implications: Depending on the type of stock options you have, exercising them may have tax consequences. It's important to understand the tax implications before making a decision, and consider consulting with a tax professional if necessary.
Don’t let emotions drive your decision: It's easy to get caught up in emotions when it comes to stock options, but it's important to avoid letting emotions drive your decision. Instead, make a decision based on your financial goals, the terms of your stock option plan, and market conditions.
Keep a long-term perspective: Exercising your stock options is a long-term investment. It's important to keep a long-term perspective when making a decision, and not make any impulsive decisions based on short-term market trends.
In conclusion, exercising stock options after termination from a company can be a complex process with several factors to consider. It's important to weigh the pros and cons, understand the terms of your stock plan, and seek professional advice if necessary. By taking a calculated approach and keeping a long-term perspective, you can make the best decision for your financial future.