Figuring out what will happen to your options when you leave a startup takes a little bit of detective work. First, it’s important that you understand a few basic equity concepts in order to answer this question. Check out Paysa’s Fundamentals of Equity Compensation for an overview of any unfamiliar topics. Then ask yourself these questions:
First, What Portion of Your Option Shares Are Vested?
When you leave a startup, you only have a right to the option shares that are already vested. For example, let’s say you have a standard 4-year vesting schedule with the first 25 percent vesting at year one (otherwise known as a one-year cliff), and you quit your job after 366 days. At that point, you only have a right to 25 percent of your option shares because you just hit your cliff.
Make sure you carefully calculate how many shares have been vested as of your last day of work, so you know what you are entitled to.
Next, Have You Exercised Your Options Yet?
If you exercised your vested options, then you already own those shares, both before and after you leave the startup. Some employees are allowed to exercise options before they vest, which is known as “early exercising.” If any of the option shares you exercised are still unvested when you leave your job, the company has to pay to repurchase those shares from you.
Check the grant agreement or any other agreements that govern your options, such as a stock plan, to see how long the company has to repurchase the shares and how much they have to pay you. It’s usually lower than what you paid or the fair market value of the shares on the day of repurchase.
Then, How Much Time Do You Have to Purchase Any Additional Vested Option Shares?
If you have vested option shares that you have not yet exercised, the company will usually give you some time after you stop working to buy these shares. If you hold an Incentive Stock Option (ISO) under the law, you have to buy your vested shares within 90 days in order to maintain the ISO status. If you have a Non-statutory Stock Option (NSO), there is no legal time restriction.
The company decides the amount of time you have to exercise either an NSO or an ISO, so check the grant agreement and stock plan for this information.
If you need more time than the company has given you, you may be able to negotiate an extension. Remember that extending the period beyond 90 days from termination will change the status (and the tax benefits for most people) of an ISO option into an NSO. A high level overview of the tax differences can be found on Paysa, though you should talk through the tax risks and benefits with your own advisor.
Last, Can You Afford to Buy the Shares?
If you have the cash to purchase your vested shares after termination, then this is a no brainer—buy them! Many employees, though, find it difficult to come up with the necessary cash. This is why companies like Pinterest have made the move to extend the post-termination exercise period; they want to give people time to raise money. If you don’t want to or can’t extend your exercise period, there may be a few other options.
Some companies allow employees to “net exercise” their options. This is essentially using a portion of your vested shares as “payment” for the shares you will own. No money has to change hands, but you are decreasing your ownership interest.
Another option is to negotiate a loan from the company to cover the cost of the vested shares. There are several ways to structure this, though trying to negotiate it at the time of your termination could prove difficult.
Read Erin Shinneman’s answer to, “What Happens to Your Stock Options When You Leave a Startup?” on Quora.