Stock options (ISOs or NQSOs) generally expire 10 years from the date of grant. This makes sense most of the time as the majority of startups aim to go public or exit within that time frame. What we don’t think about is what happens to stock options at termination.
This isn’t the only time you may be wondering what to do. Stock options add to the fun at:
- Termination
- Expiration and the company is still private
- Massive stock growth since grant
This post will discuss what to do with stock options at termination – when you are looking at leaving your job and moving on to the next opportunity.
Expiring Stock Options at Termination
In the recent month, big vests are occurring for many tech companies and tech professionals seem to be reconsidering where they want to be. Add on ‘The Great Resignation’, and your new ideal may be totally different than what you previously thought possible.
When you terminate your position, you generally have 60 to 90 days to exercise vested stock options. Your choices will be different depending on whether you are at a public company or privately held company.
For a Public Tech Company
Stock options in a public company have the value of being liquid due to an exchange you can easily trade them on. You can choose to exercise and hold, exercise and sell a bit later, or do a cashless exercise.
Since you are no longer an ‘insider’ any trading windows would no longer be applicable for future sales.
This is far less complex.
For a Pre-Exit Tech Company
This is far more difficult. If you haven’t exercised options before, you may be sitting on quite a bit of value and the company may or may not allow you to engage in a secondary market sale.
On the one hand, if you exercise your expiring stock options now, the stock will become ‘paper money’. ‘Paper money’ is basically stock in name that is highly illiquid with no known value in between. If the options are NQSOs, you will be paying tax on the value between the 409(a) and the exercise price as if you received that in cash. Ouch.
On the other hand, if the company does well, then the stock may grow to give you a huge payoff.
What to do?? This is a high risk, high value trade-off in the startup cycle. How much cash out of pocket are you willing to lose? Since this is a bit of a crap-shoot on when it becomes liquid and if it turns into something, we keep the cash in hand trade-off front and center.
Some tech professionals consider a loan to exercise the shares. Firms like ESO may offer liquidity now for a piece of the shares at exit. If you are considering this, read the fine print in the deal and consider your ‘cash out of pocket’ as what they could come to you for if it doesn’t turn out as hoped.
If the company allows a secondary market sale, it may be a bit easier. You will be able to exercise/sell some to offset the exercise and hold of others (if that makes sense based on your financial situation). In this situation, we do like to do both around the same time so that you have a ‘known’ market value for the Form 3921 (exercise of stock options). Otherwise, if another sale occurs closer to your exercise, your stock price may jump up and cause you to pay even more AMT. Always consult your tax accountant or CPA when making this decision.
Another Option to Keep in Mind
Do the above ideas sound too risky to you right now? There may be one final option for stock options at termination. Over the last few years this became more and more common – negotiating for a new stock option grant.
Companies like AirBnB and WeWork who saw some turmoil in the moments leading up to an exit were kind enough to recognize:
- You worked hard for the company with a promise of stock as part of your ‘compensation’
- You should not have to stay at the company to finally get that value
- They may be able to get a longer transition period from you at leaving
In this current down market, many tech professionals are jumping to perceived safety in another job. If you are negotiating to leave your job, bring up the above points and asking for a revised stock option agreement. I am making a bit of an assumption – that you were critical to the success of the company over your lengthy tenure so you have the leverage. 🙂
If you have ISOs, they will most likely be forced to become NQSOs due to the IRS rules around total value. For ISOs or NQSOs, the strike price will become the most current value (so higher). The deal won’t be totally equivalent to your prior grant, but it does allow you to participate in some of the growth longer term with no immediate downside.
A little catch in this – the new stock agreement will show the strike price at the current market value. This may also mean that granted ISOs may not be able to meet the ‘$100K in value’ rule and your new agreement could be NQSOs only.
So if you do have some cash you’d like to put towards your stock options at termination, you may want to exercise some ISOs before bringing this negotiation tactic to the table.
There are so many options (pun intended) when you are looking at leaving your company. I hope that you look forward to a better position that aligns with your values and allows you to grow. As always, consider each opportunity to lean into your ideal financial life with care and try not to overextend yourself. Mistakes in stock option calculations can be so costly and disheartening.
If you are struggling with these decisions and how they fit into your financial life, please reach out to us to schedule an introductory chat. Our passion in life is to help guide and partner with our clients for a better financial future that allows you to live into your values.
The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
