When leaving your job, whether voluntarily or involuntarily, be sure to check out the rules about your equity compensation.
Here is a look at several types of equity compensation and rules surrounding vested and unvested shares when leaving your employer.
Stock options might include incentive stock options (ISO) or non-qualified stock options (NSO).1 Options are not shares, but rather they offer the opportunity to purchase shares at a predetermined price.
When you leave a company, you will need to decide whether or not you want to exercise your vested options. Many companies set a post-termination exercise period (PTEP) time limit to exercise any vested options. A 90 day PTEP is common, you may be able to negotiate a longer exercise period with your employer in some cases.
ISOs generally need to be exercised within 90 days of leaving the employee to maintain their favorable tax status.
Unlike stock options, restricted stock units are a promise by the employer to give the holder of the RSUs shares of the company’s stock or in some cases the cash equivalent at a future date when certain vesting conditions are met.1 Examples of vesting conditions might include a set period of service with the company and/or the company going public via an IPO (initial public offering).
If the RSUs have not vested as of the date you depart the company, you may leave empty handed as far as any shares from the RSUs are concerned.
Employee stock purchase plans allow eligible employees to purchase shares of company stock at a discounted price.1 Employees can generally do this via a payroll deduction. There are generally limits on the amount of stock employees can purchase each year.
When leaving the company participating employees are generally disenrolled from the plan immediately. Any shares purchased are theirs to keep, however, any unvested shares are typically forfeited.
Performance shares are a version of equity compensation that links the awarding of shares to the achievement of company performance milestones.1 Examples can include attaining a certain level of profitability or generating a specified level of revenue.
When leaving the company any shares that you have received are generally yours to keep. Shares that are vested in that the performance goal has been met but have not been delivered to you may or may not be forfeited if you leave the company. Any unvested shares will be forfeited.
Vesting for equity compensation such as stock options, restricted stock units (RSUs) or other types of stock based compensation refers to the schedule under which you own some or all of this compensation.2 This is, of course, a critically important issue when you leave your employer.
Vesting is often based on the passage of time as an employee of the company. Some examples include:
It is critical that you understand your company’s vesting schedule for any equity compensation that you have. You should also understand your options for this compensation should you leave the company, whether voluntarily or due to a layoff or other type of termination.
When leaving your employer, whether it is by choice or a termination of employment, the vesting status of your options and other equity compensation will determine what happens to this compensation upon your departure from the company.3 Some common issues around vesting at the termination of employment include:
If you resign from your employer if your equity compensation is fully vested, then you either own any shares of stock outright or have the right to exercise any vested stock options. With stock options there is generally a 90-day period for exercising vested options.
If the resignation was the result of a violation of the terms of the stock option agreement the company has with option recipients, you may have to forfeit any remaining vested options. Or worse, if there is a claw back provision in the option agreement, the company may force you to repay the value of the equity compensation.
Generally, if you leave the company before the equity compensation was vested you will lose the shares or related options that were not vested. If you leave the company due to retirement or if as part of a company downsizing there may be provisions that allow immediate vesting or allow you to become vested over a specific time period. Be sure to review the equity compensation agreement to be sure of any specific terms.
If you leave your employer before your equity compensation is vested, you will generally forfeit the unvested shares. In some cases if you are leaving due to retirement or if you accept a downsizing offer, there may be a provision allowing for immediate vesting or vesting over a set time period. Review your equity compensation agreement to be sure.
The length of time that you will have to exercise options or RSUs will vary, but 90 days is common when leaving your employer. In the case of incentive stock options (ISOs) 90 days is the limit before the point when ISOs are treated as non-qualified stock options (NSOs) for tax purposes. ISOs are not taxed upon exercise (they may be subject to the alternative minimum tax), NSOs gains are taxed as ordinary income at the time of exercise.
The fate of your equity compensation may depend on the reason you were terminated. If you were fired for cause, many companies cancel both vested and unvested options. In the case of a layoff or company downsizing many companies may allow you to keep and exercise vested options. Be sure to check your company’s rules on options in the event that your employment is terminated.
It’s important to check the agreement tied to your company’s equity compensation to learn what happens to your equity compensation in the event that you retire from the company or in the event of your death while still employed.
In some cases companies offer distinct vesting schedules for employees who have declared their intent to retire. Some companies also offer an extended period for the beneficiaries of a deceased employee to exercise their equity compensation after their death.
There are various forms of equity compensation that you may be entitled to depending upon your position in the company and the company’s equity compensation plan (if any).
It is critical that you review all aspects of any plan that you are covered by, including vesting rules and what happens if you leave the company under various circumstances. In addition, be sure to work with your financial advisor or tax professional with regard to the tax implications associated with your equity compensation.