As of late June, over 22,000 tech employees had been laid off this year, a number expected to increase throughout the year. If you’ve found yourself in this position, you should understand exactly what will happen to your equity, because it’s likely impacted by your termination, and inaction could cost you a life-changing sum of equity.
By the end of this guide, you’ll understand:
- The basics of equity compensation.
- How leaving your company impacts the status of your equity.
- Strategies to save your equity from expiring.
Equity 101
Tech employees are well aware that their stock options are a key element of their compensation package, it vests over time, and that they purchase this equity at its original price (the “strike price”) — if you need a refresher you can browse resources here.
While equity is an excellent opportunity to build wealth, it’s a challenging decision if and when to purchase your shares. When you consider changing jobs, you can control the timeline so you purchase equity accordingly. When you’re terminated from your company, you lose this flexibility and control.
Investing a small amount of time to figure out what you want to do can potentially lead to a life-changing sum of money.
First, you should know that any unvested shares are gone. When terminated, the only question is what you will do with your vested and unexercised shares. Stock options have a “post-termination exercise window,” which refers to the period of time between when you exit the company and when your unexercised, vested stock options expire. (The post-termination exercise window applies to both voluntary and involuntary terminations.)
When your stock options expire, they are returned to the company. When this happens, you (the former employee) retain none of the value. So be careful: If you leave your company and you haven’t exercised your options yet, they now have an expiration date. When this date arrives, you lose them.
While some companies have extended the post-termination exercise window, it’s typically 90 days. This means you’ll have approximately three months from your termination date to make a challenging decision: Do you exercise your stock options or allow them to expire? And if you do exercise those options, how will you pay for both the options and their tax consequences?
It’s never a calm time after you lose your job, especially during a recession. It can feel especially chaotic to contemplate exercising equity at a time when you’re also worrying about your personal finances.
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