Got Employee Equity? Here’s What To Do With It If You’ve Forgotten About It or Leave the Company

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Leaving a company for any reason can be emotionally overwhelming. But in addition to looking ahead to where you’re going to land, you should also look backward to make sure you aren’t leaving anything of value behind. One of the most important things to focus on is your employee equity. If you simply forget about it, you might very well lose it. In some cases, you might not even know you have any to begin with. As you leave your company, be sure to contact your human resources department to check the status of your employee equity. When you talk to them, these are the things you should seek to verify.

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Do You Have Stock or Do You Have Options? Or Both?

Employee equity typically comes in two forms: stock or options. For privately held companies, stock is usually in the form of restricted stock shares, or RSUs. Options generally come in two flavors, incentive stock options and nonqualified stock options. 

If you have company stock, whether it’s publicly traded stock or restricted stock shares, you already legally own this equity. In the case of publicly traded stock, your former company may ask you to move your shares off its books into your own account. But regardless of which type of stock you own, it’s legally in your position and you don’t have to take any actions to own it. 

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Options, however, generally require action on your part. In some cases, your options may be currently “out of the money” and worthless, but if they are “in the money” and have value, you may have to exercise them — meaning, convert them into actual stock shares — if you want to retain their value.

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What Is Your Post-Termination Exercise Period?

A post-termination exercise period, or PTE, refers to the time you have after leaving a company to exercise your existing stock options. Typically, a PTE extends 90 days after termination, although this may vary from company to company. If you don’t take action to exercise your options within the PTE window, you generally lose your rights to those options. Depending on the duration of your employment and how well the company’s stock has performed, this could result in a significant loss for you. That’s why it’s so important to keep track of the grants and awards you’ve earned over the years. 

Even if your company offers a longer PTE period, ISOs lose their favorable tax treatment after 90 days and instead are taxed like NSOs. This distinction is explained below. 

Will You Be Taxed?

Taxation of employee equity can be tricky, so you’ll want to work with a tax advisor. But generally speaking, you don’t owe any tax on stock shares unless you sell them at a profit. Simply taking them with you after you leave a company isn’t a taxable event. But options are a different animal altogether, and their taxation can get complicated.

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Typically, you won’t pay tax if you exercise an ISO. That’s why it’s important to make a decision about your ISOs within that 90-day period. But NSOs usually require you to pay ordinary income tax on their value at the time you exercise them. Then, as with stock shares, you’ll have to pay capital gains if you sell your exercised ISO or NSO shares at a gain in the future. 

What Is Your Vesting Period?

Most companies implement a vesting period that requires employees to serve for a period of time before having access to their grants. In some cases, 100% of employee equity vests after a one-year period, a process known as “cliff vesting.” In others, equity vests at 20% per year over a period of five years, which is known as “gradual vesting.” Other companies may have their own unique vesting schedule. You should verify how much of your employee equity has vested at the time you leave your company, because you lose the rights to any unvested equity as if you were never granted that equity in the first place. If you’re leaving your company voluntarily, you may find out that staying simply an extra month or two could result in a big change when it comes to your vested equity.

What If You Don’t Have the Money To Exercise Your Options?

One dilemma some former employees face is not having enough money to exercise their options. Imagine that you worked at a company for 10 years and have 1,000 vested stock options at a $45 strike price. If you want to convert those all into stock, you’ll have to come up with $45,000 cash. If you’re not in the financial position to do this, you might think your only option is to forfeit your options, even if they are trading at a gain.

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Fortunately, there are a few options for this scenario. One is to ask your former company for a “net exercise,” in which you exercise your options and immediately sell your resulting stock shares. Then, your exercise price is paid out of your net proceeds. Another is to negotiate with your new company to front you the money so you can exercise the options, perhaps as a type of signing bonus. Still, another is to get a short-term loan of some type so you can have the money upfront, exercise your options and sell your stock shares, and then pay back the loan immediately out of your proceeds. 

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
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