Vested Stock and Equity: What Happens When You Leave Your Company?

Without having to pay them as much up front, vesting shares can be a great way to encourage valuable contributions from skilled workers and other stakeholders. Here’s how they work.

Leaving a company can be a bittersweet experience, filled with excitement for new opportunities and uncertainty about the future. One of the key concerns for employees with equity is what happens to their vested stock and equity when they depart. This comprehensive guide will navigate you through the complexities of equity ownership, helping you understand your rights and options when transitioning to a new chapter in your career.

Understanding Equity Types: RSAs, RSUs, and Stock Options

Restricted Stock Awards (RSAs): Early-stage startups often grant RSAs, which are purchased at a low price and subject to a vesting schedule. Unvested RSAs are typically repurchased by the company upon departure, while vested RSAs remain yours.

Restricted Stock Units (RSUs): RSUs are promises to grant company stock or cash on a future date, contingent on meeting vesting conditions (e.g., tenure, IPO). Unvested RSUs may not be yours upon departure.

Stock Options (ISOs and NSOs): These are opportunities to purchase company stock at a fixed price (strike price) in the future You’ll need to decide whether to exercise these options within the post-termination exercise window,

Vesting Schedules: When Do You Gain Ownership?

Equity ownership is often tied to tenure through vesting schedules Typically, you need to stay for at least a year to vest any equity Your grant agreement will detail the vesting schedule, which could be time-based, milestone-based, or a combination of both.

Example: If you have 4,000 ISOs vesting over four years with a one-year cliff and you leave before your one-year anniversary, you won’t receive any equity. If you stay for two years, you’ll have 2,000 vested options.

Tip: Consider timing your departure according to your vesting schedule to maximize equity ownership.

Exercising Your Vested Options: The 90-Day Window

After leaving, you have a limited time (typically 90 days) to exercise your vested options, known as the post-termination exercise period (PTEP). If you miss this window, you forfeit the options.

Important: Exercising ISOs after 90 days may change their tax treatment to NSOs, impacting your tax liability.

Turning Equity into Cash: Liquidity Events and Secondary Markets

For public companies, selling shares on the open market provides liquidity. However, for private companies, you may need to wait for an exit event (merger, acquisition, or IPO) to cash out. Alternatively, you could explore secondary liquidity events or selling your shares on the secondary market, subject to company policies and restrictions.

Navigating the Tax Implications

Exercising options triggers tax implications. Consider using an AMT calculator to estimate your alternative minimum tax (AMT) liability for ISOs. Consult a financial professional for personalized guidance.

Tips for Handling Your Equity:

Understand your equity type and grant agreement.
Track your vesting schedule and exercise deadlines.
Explore liquidity options and tax implications.
Consider exercising options before leaving if financially feasible.
Negotiate a longer PTEP if needed.
Seek professional advice for complex situations.

Leaving a company with equity involves careful consideration. By understanding your rights, options, and potential tax implications, you can make informed decisions about exercising your vested options, exploring liquidity avenues, and maximizing the value of your equity ownership. Remember, seeking professional advice can provide valuable guidance throughout the process.

Additional Resources:

Carta Learn: Equity Education
Carta Blog: What Happens to Vested Stock & Equity When You Leave
LinkedIn Pulse: Well, at Least I Still Have My Vested Shares…Wait, What?

Disclaimer: This information is for general educational purposes only and should not be considered professional financial or legal advice. Always consult with qualified professionals for personalized guidance regarding your specific circumstances.

Is cliff vesting a good thing?

Cliff vesting has its pros and cons. In order for employees to vest their shares, it incentivizes them to work for the company longer. However, it might deter workers from quitting even if they’re dissatisfied with their position.

What is the vesting period?

The amount of time it takes for a co-founder or employee to receive their entire equity stake in the business is known as the vesting period. It typically has a vesting schedule of four years, but depending on the company, it may be shorter or longer.

A company’s shares may also vest based on specific milestones, a process known as “milestone-based vesting,” because performance is not solely determined by time.

Restricted Stock Units: Common Mistakes

FAQ

Can vested shares be taken back?

Meaning that your vested shares can be repurchased at a value that the company decides – like maybe $0. If you worked hard for those shares, they suddenly have no value, and are no longer yours. Even worse, a company can terminate an employee before the vesting schedule is over, and then take back the RSUs.

Can you withdraw vested shares?

Once RSUs vest, you can sell the shares immediately. There will be no additional taxes to pay if you do this. However, if you decide to hold onto the shares, you may pay capital gains on RSUs. If the value of the shares increases between when they vest and when you sell them, you will have made a capital gain.

What happens if I don’t exercise my vested options?

Unfortunately, yes—stock options have an expiration date. This date should be spelled out in your option grant agreement, and it’s a date you should keep very close to your heart. Why? Because if you don’t exercise your options before the expiration date, they will be worth absolutely nothing.

Can vested stocks be forfeited?

In some cases, if an employee quits or is fired from the company, they may be required to forfeit unvested stock options or RSUs. However, typically, vested stock options or RSUs cannot be forfeited, as they have already been earned by the employee according to the vesting schedule.

What happens if an employee leaves a company before vested?

If an employee is fired or leaves the company before their shares are fully vested, they may forfeit their unvested shares. This is known as “cliff vesting.” The employment contract will determine the terms of the vested shares.

What happens if a company terminates a vested stock?

Normally, termination for cause results in the cancellation of any unvested or vested shares that have not been exercised. And if it is not a termination for a cause like when the company is downsizing, you will have some time to exercise the vested options. The equity agreement would explain the details better.

What happens if a company buys back vested shares?

In these cases, the contract may stipulate that the company can buy back the vested shares after a “triggering” event, such as you leaving the company or being terminated with or without cause. If you are still at the company when it’s sold, you’ll receive the full value of your shares.

What are vested and unvested shares?

What Are Vested Shares? Vested shares are shares of stock that you have earned through a stock option or equity compensation plan, which you are able to fully own and sell without restriction. On the other hand, unvested shares are shares that have been granted but which you do not yet fully own or have the right to sell.