It's common for employees to move around, especially in tech and biotech. Before signing a new offer letter, make sure to understand what could happen to your stock options, restricted stock units, or other forms of equity-based compensation if you leave the company. Also, remember that each company has their own unique equity plan and terms which may vary considerably depending on your role, whether the company is public or private, vested status of your shares, and so on.
Although this article is designed to serve as a robust introduction, many individuals may want to consider working with their financial advisor and/or attorney to understand how their specific equity plan and employment agreement may affect the treatment of their shares.
(Note: Darrow Wealth Management offers Private Wealth and Asset Management to individuals and families. This article is not a substitute for personalized tax or legal advice from a CPA, tax advisor, or attorney. Darrow Wealth Management does not provide tax or legal advice; for inquiries regarding your personal tax or employment situation, consult a CPA or employment attorney in your area.)
Can I keep my company stock if I change jobs?
There's a big range of possible outcomes for your stock options after you leave a company. Some of the key factors are:
- Whether your shares are vested and whether or not you've exercised
- What type of equity compensation you have (stock options, restricted stock units, employee stock purchase plan, stock appreciation rights, phantom stock)
- Whether your employer is public or private
- Why you're leaving the company (retirement, a new job, laid off, terminated with/without cause)
- What (if any) specific terms you negotiated with the company
Due to the company-specific and individualized nature of employment agreements and equity incentive plans, we suggest you consider working with your financial advisor and attorney to fully understand the implications of taking a new job.
If your shares are vested
The most common reason employees and executives lose their stock options or RSUs is because they weren't vested in the shares when they left the company. Assuming your plan only requires time-based vesting, you will need to stay at the company long enough to earn your shares. Typically, a portion of the grant will begin to vest after one year of service, but your vesting schedule will detail the terms of your grant.
If your shares are vested, that's a good thing, but there are often still a number of other considerations. Also, keep in mind that vesting ends the day you leave the company.
Vested stock options
If you have vested stock options (incentive stock options (ISOs) or non-qualified stock options (NQSOs)) that you have not exercised, you may have the opportunity to do so before you leave the company or within a defined period of time after your departure from the company. If you have incentive stock options, you will generally be able to exercise your shares up to 90 days after your final day with your previous employer. Equity plans may also allow for a longer period upon separation with the company for ISOs, although they will lose their "qualified" status and potentially favorable tax treatment. Non-qualified stock options may be more flexible, although you'll need to review the terms as outlined in your company's equity plan.
Should you exercise?
Remember, even if you can exercise and keep your vested options, it doesn't necessarily mean you should. Depending on your exercise price and the current value of the stock, your shares could be underwater. Assuming they aren't, be sure to understand the tax consequences and tax treatment of stock options prior to purchasing the shares. Especially for private companies, there may not be a market for you to sell your shares if you have liquidity needs later on. In general, it may be best to talk to your financial advisor to discuss your entire situation and financial goals before acting.
If you're participating in an employee stock purchase plan (ESPP), when you leave the company you will no longer be able to purchase shares in the program. Depending on the employee stock purchase plan, withholding may occur for months before the next pre-determined purchase window. Any funds withheld from your paycheck that were not used to purchase shares during the next window will likely be returned to you. The outstanding shares that you own will not be impacted.
Vested RSUs, restricted stock, phantom stock, stock appreciation rights
In most equity plans, restricted stock units (RSUs), phantom stock, restricted stock awards, and stock appreciation rights (SARs) will deliver shares of stock or settle in cash upon vesting. So there typically isn't a scenario where people hold onto these types of vested or earned equity compensation, as they've most likely already become shares or cash.
However, if you are planning a job change, it's advisable to review your vesting schedule and grant to help ensure that you're not unwittingly leaving money on the table, especially if your shares only vest once per year. Although restricted stock units are typically awarded using a time-based vesting schedule (e.g. dependent only on your continued employment), phantom stock and stock appreciation rights may also include time-based and performance-based vesting requirements.
Special considerations for private companies
Equity options or awards can be a lucrative part of a compensation package, but for employees of private companies, it often adds a few extra layers of risk which require careful planning.
If you have vested stock options (ISOs or NSOs), you may be wondering whether you should exercise or forfeit your shares. As previously mentioned, there are strict time limitations set in the equity agreement. The following are some considerations as you make your decision:
- Is your grant underwater? If your exercise price (also called strike price) is higher than the latest valuation of the stock, then the decision will be much easier as it doesn't make sense to pay more than the shares are worth.
- Do you have the cash to buy the shares? Even if your grant has value, you still need to have the funds required to buy the shares. If not, you'll need to find out if a cashless exercise may be permitted in the plan. A cashless exercise allows employees to "give back" enough of their vested shares to cover the cost of purchasing the remaining shares, brokerage fees, and tax withholding, if any. If your savings are light, really consider whether it makes sense to exercise your shares. Although employers will withhold a standard amount for taxes for non-qualified stock option holders, it may be insufficient. Incentive stock option holders may have greater tax and liquidity concerns, as discussed below.
- For incentive stock option holders, taxes are a particular concern. There are no tax consequences at exercise, but holding the shares at the end of the year could trigger the alternative minimum tax (AMT). Stock in a private company is typically a very illiquid investment, as there is usually no established market for stockholders to sell their shares for cash. The stock of a publicly traded company could potentially be worth less at the time of sale than you paid for it on exercise. Having sufficient savings to cover any potential tax due without the need to sell shares will be critical.
- What's the end game? In a world where more companies are staying private or delisting, it is wise to seriously consider the likelihood that the company will go public, an event that will bring liquidity and (hopefully) a financial windfall. Although M&A activity could also yield a windfall, the outcomes are more unclear.
Clawback provisions and repurchase rights
If you work for a startup, often the greatest value of your stock will follow an exit event such as a merger or acquisition or an IPO. However, if you leave the company before one of these exit events, you may lose out on the upside, even if you've already exercised your options. When you sign an offer letter, you likely receive high-level information about your stock option grant, but typically not the entire equity plan agreement or related documents unless requested. Unfortunately, it is usually these documents that contain language about clawback or repurchase rights.
What clawback provisions or repurchase rights mean is that after a triggering event (e.g. you quitting or getting fired) the company has the right to repurchase vested shares, whether you've already exercised or not, typically at your exercise price or the market value of the stock at the time.
It is fairly obvious why companies do this: they offer equity compensation as a way to retain employees. By allowing former employees to keep their shares, there isn't nearly as much incentive to stay and further dilution may be required to continue offering grants to employees. There may also be restrictions on the number of shareholders the company can have due to regulations.
Protecting yourself against these types of bad surprises is best done before signing the employment agreement or offer letter. Consider working with an attorney familiar with this type of situation during negotiations. Although unlikely for a "rank and file" employee, there are certainly situations where an executive can negotiate more favorable terms and provisions to their stock agreement.
What's the reason for your departure?
To add to the complexity, the treatment of your stock options may vary depending on the reason you're leaving the company and your plans afterwards. Thus far, we've focused the discussion on what could happen if you quit and take a new job with another employer. But what happens if you get fired or decide to work for a competitor? Or retire? There are a number of events that can cause someone to end their employment with a company, and in this case, the "why" often matters.
Important note: This section begins to introduce elements which cross over into employment law. This article is intended to provide generalized information only as to some of the financial planning considerations of equity compensation and should not be misconstrued as the rendering of personalized legal or tax advice. Please consult an attorney in your state to discuss your personal situation.
If you're fired
Without getting into the specifics of employment matters, employees can generally be terminated either with or without cause. Depending on the reason you are no longer with the company, the treatment of your stock options may differ. Typically, termination for cause will result in a cancellation of any vested or unvested options that have not been exercised. If you are not terminated for cause (e.g. company is downsizing and you've been laid off), you may have a period of time to exercise any vested options. The equity plan agreement will have more details about what can happen in these types of situations.
If you have RSUs, SARs, or phantom stock, you will very likely receive nothing from any outstanding/unvested award that has not been earned and paid out.
If you leave to work for a competitor
Without getting into the specifics of employment law which also varies by state, in some situations, if you quit to work for a competitor the company may have the right to clawback your vested options and/or cancel any outstanding vested awards. This will of course depend on a number of factors, such as whether you have signed a noncompete agreement and the laws in your state. Consult an employment attorney in your area to discuss your personal situation.
If you retire
If you're no longer working with the company because you have retired, you may have more favorable terms to exercise your vested options, perhaps anywhere from 3 months to the full option term. Some companies may also have different rules depending on whether they consider it an early retirement or not.
If you have RSUs, RSAs, SARs, or phantom stock, you may want to consider the vesting period as you plan your retirement date. If you are very close to having a large number of shares vest, it could very well be worth delaying your retirement for a few months.
If you are considering retirement, think about how equity compensation fits into your overall financial plan. Since holding single stocks carries more risk than a diversified fund, consider the pros and cons of exercising and holding stock options, versus liquidating and diversifying the proceeds into other investments.
Death or disability
When someone dies or becomes disabled, what happens to their stock options or equity compensation? Much like the other events in this section, each company will have their own rules about what happens following an employee's death or disability which will be spelled out in the equity plan agreement. It is not uncommon for employers to offer periods ranging between three and six months for disabled employees or family/legal representatives of a deceased employee to exercise their vested options.
Important estate planning note: If you have stock options or equity compensation, consider adding a provision in your will or estate planning documents authorizing your estate to exercise any stock options on your behalf. The company may request a copy of the will showing that this authorization was made. Also, particularly for individuals who pass in their working years, it may be difficult for loved ones to sort through your affairs, round up old retirement plans, and so on. Adding this section to your estate plan can help alert the executor that you may have outstanding stock options if they weren't already aware.
If you are planning on leaving your company or have already left, consider working with a financial advisor and/or attorney to discuss your situation and review your options. Planning ahead is always the best idea whenever possible. If you are still with your employer but evaluating the next step in your career, now may be a great time to get your professional team together.
Even if stock options or equity awards are a large part of your compensation, many of us rely on our employer for other financial benefits as well, which should be considered as you evaluate other offers. For example, how does the health insurance compare? What about the retirement plan? If your current employer matches your contributions, what's the vesting period? If you are nearly vested in matching contributions, perhaps it makes sense to wait.
What about life insurance coverage? Although you may be able to buy a policy that was previously given to you as a benefit, it may not make sense financially. In some situations - perhaps your health has deteriorated or you're much older - getting a new policy may be difficult or implausible.
As a fee-only wealth management firm, we regularly work to help clients in biotech and tech sort through these types of situations so they can stay focused on the big picture and what really matters in life. To learn more about Private Wealth Management, schedule a complementary one-on-one phone consultation today.
This article is not a substitute for personalized tax or legal advice from a CPA, tax advisor, or attorney. Darrow Wealth Management does not provide tax or legal advice; for inquiries regarding your personal tax or employment situation, consult a CPA or employment attorney in your area.