Leaving Your Job? Do Not Forget About Your Equity Compensation
Leaving a job is usually a major financial decision. You are thinking about your new compensation, benefits, retirement plan, health insurance, and the opportunity you are moving toward. If you have equity compensation, there is another part of the transition that deserves attention before your employment ends.
Your equity compensation does not necessarily follow you out the door.
Some awards may be forfeited when you leave, some equity will remain yours, and some stock options may have a limited exercise period after termination. Depending on the type of equity you own, leaving your employer can create decisions that need to be made much sooner than you expected.
The important thing is to understand what happens to each award before you leave, rather than trying to figure it out after your employment has already ended.
Start With What You Own
Step 1 is to separate your equity into different categories.
RSUs
If you have unvested RSUs, you have not received those shares yet; you have an award that is scheduled to become shares, if you remain employed and satisfy the applicable vesting requirements. So if you leave before a scheduled vesting date, the unvested portion will generally be forfeited.
Vested RSUs are different. Once the RSUs vest and the shares are delivered, those shares generally belong to you. Leaving the company does not normally cause you to lose them. They become part of your investment portfolio, just like shares you purchased through a brokerage account.
Stock Options
Stock options require another distinction. A vested option is not the same thing as owning shares. You have earned the right to purchase shares at a predetermined exercise price, but you still have to exercise the option to acquire the stock.
That difference is important when you leave, because your right to exercise may only continue for a limited period of time.
Before leaving, you should know exactly how many RSUs are vested , how many remain unvested, how many options are vested, the exercise price of those options, and the expiration or post-termination exercise period associated with each award.
Unvested RSUs Can Be Lost
If you have substantial RSU compensation, the vesting schedule may be one of the most important things to review before leaving.
Suppose you have 2,000 RSUs scheduled to vest over the next two years, with 500 shares scheduled to vest next month. If the stock is trading at $100, that upcoming vest represents approximately $50,000 of gross equity compensation.
If you leave before that vesting date, you’ll forfeit those shares unless your plan provides an exception or accelerated vesting.
This is where the timing of a job change can matter.
You do not necessarily need to stay at a company because you have an upcoming vest. The value of the opportunity you are leaving, your new compensation, and your long term career goals may be much more important. But you should understand what you are giving up before making the decision.
Some equity plans have special provisions for circumstances like retirement, disability, death, or a change in control. The rules can be very specific, so the award agreement and plan document are more important than a general rule of thumb.
Vested RSUs Generally Stay With You
Once an RSU has vested and shares have been delivered, leaving your employer generally does not cause those shares to disappear.
This is important because employees sometimes think all of their equity is tied to their employment, but that is not necessarily true.
Suppose 1,000 RSUs vest at $100 per share. The $100,000 value is included in your compensation income, and your employer will withhold taxes. If 300 shares are withheld to cover taxes, you might receive 700 shares.
Those 700 shares are now yours.
If you leave the company a week later, you generally still own them. You can sell them, continue holding them, or sell part of the position.
The tax basis of those shares is based on their value when they vested. If you later sell them for more than that amount, the additional appreciation is a capital gain.
So for vested RSUs, leaving the company does not usually create a new tax event simply because you left. The important question is what you want to do with the shares you already own.
NQSOs Can Have a Short Exercise Window
Non-qualified stock options (NQSOs) can create an important deadline when you leave a company.
When you receive an NQSO, you have the right to purchase shares at the exercise price. If the stock is worth more than that exercise price when you exercise, the difference is treated as ordinary compensation income.
For example, suppose you have 5,000 NQSOs with a $25 exercise price and the stock is trading at $75. Your options have a $50 spread per share, or $250,000 in total.
The issue when you leave is the exercise period.
Your option agreement will tell you what happens to vested options after termination. You may have a period during which you can exercise your options after leaving, but that may be much shorter than the original expiration date of the option.
That means leaving your company can effectively move the decision from "someday" to "now."
You May Not Need to Fund the Exercise With Your Own Cash
The exercise price can also make employees incorrectly believe they cannot afford to exercise their options.
Using the previous example, exercising 5,000 options at $25 would require $125,000 to purchase the shares.
For a publicly traded company, however, you may be able to use a broker-facilitated cashless exercise or same-day sale if your plan allows it. The broker can coordinate the exercise and sale, with proceeds from the sale being used to cover the exercise price, tax withholding, and transaction costs.
The 5,000 shares are worth $375,000 at a $75 stock price. You are not necessarily writing a $125,000 check from your bank account. Instead, the transaction can use the value of the shares to fund the exercise.
You could also exercise the options and sell enough shares to cover the exercise price and taxes while keeping the remaining shares.
The mechanics depend on the company, equity plan, and brokerage arrangement, but the important point is that the exercise decision does not always require you to have the full exercise cost sitting in cash.
Exercising and Holding Create Separate Investment Decisions
If you exercise an NQSO and keep the shares, you have made two decisions: 1) To exercise the option; 2) To invest in the company's stock.
Those decisions should not be confused.
Suppose you exercise 5,000 NQSOs when the stock is worth $75 and your exercise price is $25. The $250,000 spread is generally compensation income. You now own shares that are worth approximately $375,000, but you also have a substantial amount of wealth invested in your former employer.
Alternatively, you could exercise and immediately sell the shares. In that situation, you recognize the compensation income associated with the option spread but do not continue carrying the same stock exposure.
Neither approach is automatically right. The important point is understanding that exercising an option does not require you to continue holding the stock.
ISOs Have Different Rules
Incentive stock options (ISOs) require additional attention because their tax treatment differs from NQSOs.
Generally, exercising an ISO does not create regular federal taxable income at the time of exercise, although the difference between the exercise price and the fair market value can create an adjustment for alternative minimum tax purposes.
Leaving the company also matters because the favorable ISO rules generally require the option holder to remain an employee through a specified period before exercise.
If you leave and then exercise an ISO outside the applicable period, the option can lose its favorable statutory treatment and generally be treated as a non-qualified stock option for tax purposes.
That makes the timing of an ISO exercise important.
If you have ISOs and are leaving your employer, you should look at the number of shares, exercise price, current stock value, potential alternative minimum tax consequences, available liquidity, and the timing of any eventual sale before deciding what to do.
Private Company Options Are Different
Leaving a private company can create another set of issues.
A private company can have a fair market value even though its stock does not trade publicly. The company may have a valuation used for tax and equity compensation purposes, but that does not mean you can immediately sell the shares for that amount.
This creates a liquidity problem.
Suppose you have 10,000 options with a $5 exercise price and the company's current valuation indicates a $20 value per share. The options have a $150,000 spread on paper.
Exercising them, however, would require $50,000, and you may have no immediate way to sell the resulting shares.
If you are leaving the company, you need to know whether your options remain exercisable, how long you have to exercise them, if the company permits former employees to hold shares, and if there are any opportunities for liquidity through a tender offer or secondary transaction.
A private company option can have significant value and still require you to put cash at risk for an investment that may remain illiquid for years.
Your New Job Should Be Part of the Calculation
There is one more issue that can easily get overlooked.
When you leave a company, you are not only deciding what to do with your existing equity. You are also deciding what compensation you are receiving in exchange for leaving.
Suppose you are walking away from $300,000 of unvested RSUs over the next two years. Your new employer offers you a higher salary and a new equity package.
The comparison should not simply be your old salary versus your new salary.
You should understand how much unvested equity you are giving up, when it would have vested, what the new employer is offering, and how certain or uncertain the value of both packages may be.
Unvested equity should not be treated as cash. It can be forfeited, its value can change, and you may not have been employed long enough to receive it anyway. But it is still part of the economic value of your current job.
Before You Give Notice, Know Your Deadlines
If you are considering leaving a company and have meaningful equity compensation, I would review your equity documents before giving notice.
Know your upcoming RSU vesting dates, which awards are already vested, the exercise price of your options, the post termination exercise period, and the final date on which you can exercise each option. Also determine whether your treatment changes depending on whether you resign, retire, are terminated, or leave because of another qualifying event.
It can also be helpful to contact your company's equity administration team before leaving and ask exactly what happens to each award after your termination date.
The goal is not necessarily to exercise everything or sell everything before you leave, it’s to avoid discovering after your employment ends that an important deadline has already started.
Equity compensation can be one of the most valuable parts of your compensation package, but it also comes with rules that are easy to overlook.
Unvested RSUs may be forfeited when you leave. Vested RSUs generally remain yours. Vested NQSOs may have a limited period to exercise, and exercising them can create ordinary compensation income. ISOs have their own employment and tax rules. Private company options can require significant cash while providing no immediate liquidity.
The common thread is timing.
A job change is not necessarily the time to make an emotional decision about your company stock. It is a time to understand exactly what you own, what you are giving up, what deadlines have been created, and what choices are available to you.
Your equity compensation was part of the compensation you earned while working for the company. Leaving does not mean you need to make every decision immediately, but it does mean you need to know which decisions have a deadline.
The best time to figure that out is before you leave.
This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.
