What Happens to Your Stock Options When You Quit Before Vesting
Your stock options are a valuable perk that can significantly impact your financial future. However, what happens to them if you decide to leave your job before they vest? This situation can vary based on the specific terms of your stock option agreement. Let's explore the potential outcomes and what you can do to protect your investment.
Outcomes When You Quit Before Vesting
When you resign from your position, there are several scenarios that could occur. Here are the primary possibilities:
1. Shares Go Back to the Company
In some cases, the unvested shares will be returned to the company, and you will lose ownership of those shares. This outcome is unfortunately common and highlights the importance of understanding your stock option agreement before signing.
2. Company Can Buy Back Vested Shares
The company might have the right to repurchase your vested shares at a predetermined price. This often applies to Restricted Stock Units (RSUs) and can be significantly advantageous for both parties if the share price has appreciated.
3. Partial Vesting Based on Pro Rata Basis
Alternatively, you might have the option to vest a portion of your shares on a pro-rata basis, depending on the time you've spent working for the company. This means you would vest based on the percentage of the vesting period you completed before leaving.
4. Grace Period for Exercise
You might have a limited period to exercise your options after leaving the company. Typically, this grace period is 90 days. However, if you do not exercise them within this timeframe, the options will expire and lose their value.
Common Scenarios and Considerations
The most immediate issue is the expiration of unvested options. These shares will lose their value and revert to the company automatically. Vested options require more attention but must be exercised within a grace period to avoid expiring worthless.
Exercising Vested Options
When you exercise your vested options, you pay the grant price per share and also incur taxes on the difference between the grant price and the current market value. If the option grant dates are several years old and the stock's current value is much higher than the grant price, exercising can trigger significant tax obligations.
Consider that if you do not have the financial means to exercise the options or cannot afford the associated taxes, you might face financial risk. In such a case, you may need to explore other options.
Non-Recourse Financing and ESO Fund
The ESO Fund provides a non-recourse financing solution to help employees manage the financial burden of exercising their stock options. This fund offers a way to finance the exercise cost and associated taxes, allowing employees to retain the upside potential of their options.
For more details on how the ESO Fund operates and to discuss your specific situation, contact the ESO Fund.
Conclusion
Your stock options come with both benefits and risks. Understanding the terms of your stock option agreement is crucial before accepting them. If you find yourself in a situation where you need to resign before fully vesting, explore the available options and consider alternatives like non-recourse financing to protect your investment.