Cashing Out Stock Options Early: What Happens When You Leave a Startup
Leaving a startup can be an exciting but complex move, especially if you've vested in stock options. This article outlines what typically happens to your stock options when you leave the company pre-IPO or acquisition, providing helpful insights into the process and potential options for cashing them out.
Understanding Stock Options
Stock options are a form of equity compensation often offered to early employees and founders of startups. They provide the right, but not the obligation, to buy shares of the company at a predetermined price, known as the strike price. When you vest in these options, you gain ownership over a portion of the company. However, the stock options are not worth anything until you exercise them.
What Happens When You Leave the Company?
When you leave a startup, you lose your employment but still have the ability to exercise your vested stock options. Generally, you have a short period, usually 90 days, to exercise these options from the date of your departure. After this period, they expire and cannot be exercised. It is crucial to understand your specific rights outlined in the company’s formal Stock Option Plan (SOP).
The SOP details the conditions under which stock options can be exercised and the timeline for doing so. If you do not exercise your options within the allotted period, they are typically forfeited. You should review the SOP closely to understand your rights and responsibilities.
Purchasing and Selling Stock Options
Once you have exercised your stock options, you may hold company stock that is subject to restrictions. These restrictions can prevent you from immediately selling the stock, often requiring the company goes public or is acquired. Depending on the terms of your stock option agreement, you may be able to find buyers for your shares, or you may need to wait until the company becomes publicly traded. Some agreements include provisions that allow you to request the company to sell your shares, though not all companies will honor these requests.
Motivations and Challenges
While the primary goal is to cash out your stock options, several factors can hinder this process. For instance, if the company views a share sale as too low to justify the cost of purchasing shares, they may not be willing to facilitate the transaction. This can be frustrating, but it helps prevent opportunistic buyers from taking advantage.
Companies with upcoming IPOs or acquisitions are often more lenient in allowing employees to monetize their stock options. This is because they are focused on deploying capital for income-producing operations rather than employee stock purchases. However, once a certain price point is reached, companies may choose to buy back shares from employees to avoid diluting the value of the company shares.
Alternative Methods to Monetize Options
Several methods can help you monetize your stock options. One popular approach is to use a third-party platform like PreIPOSwap or Equityzen. These platforms connect you with potential buyers of your stock options, increasing the likelihood of finding a buyer and realizing value.
It is important to note that monetizing options depends on demand and the valuation of the company. The shares must also clear any Right of First Refusal (RoFR) provisions, which means that the company may have the right to purchase your shares if they are transferred to a third party.
Key Considerations
The key to understanding the value and potential of your stock options is to carefully review the terms of the option agreement. Pay attention to the vesting schedule, exercise period, and any restrictions on selling or transferring the stock.
Assuming you can find a buyer, the process of monetizing your stock options is contingent upon market demand and the company's valuation. If the options expire worthless, or if they become unvested as a penalty for leaving the company, the situation can be more complex.
Ultimately, the success of monetizing your stock options depends on a combination of market conditions and the company's internal policies. Building a strong network and leveraging specialized services can increase your chances of realizing value from your equity.
Before making any decisions, it is highly recommended to seek advice from a legal or financial professional who can provide guidance specific to your situation.