In periods of prolonged economic volatility, many companies will have to consider cutting costs – in some cases, this could result in downsizing. In a recent PwC survey of more than 700 executives across a range of industries, half of the respondents surveyed “said that they’re reducing headcount or plan to.” Leaving a company is rarely easy, but with a little preparation it can be less stressful. Whether your departure is planned or unexpected, here are some things to consider as you think about the next step in your career.
Exercise the power of negotiation (and know when to use it)
A common theme in this piece is negotiation. It can be helpful to know that many aspects of your exit from a company can be negotiated, rather than accepting what has been handed to you. In some instances,1 however, the negotiation may need to take place before you sign your offer letter or employment agreement. Certainly, something to keep in mind prior to your next job.
So, what exactly would you want to negotiate? Your unvested options will expire immediately upon your departure date. This can be important as you choose or negotiate your departure date since it can make the difference between having access to part of your equity or losing it. Depending on your contribution to, and relationship with your employer, you may even ask to become an advisor to the company post-departure allowing your remaining options to vest and extending your window to exercise them. Lastly, you may want to negotiate a longer period of time to exercise your vested options, which we will touch on more below.
Understand how (and when) to exercise your options
Be sure to understand what is needed to exercise your options – for example, who is your point of contact, what forms are required, and how much money will you owe for exercise costs and taxes? Much of this will be outlined for you in Carta or Shareworks, but some companies still use inhouse systems or old-fashioned paper forms. Online equity portals should allow you to simulate an exercise, which will give you a good idea of how much money will be needed to exercise your options including exercise costs and taxes. Often, the tax rates used in equity portals are set at defaults, so speaking with a tax professional before exercising can help ensure the correct amount is being withheld, and that you’re planning adequately for future tax bills.
Know the important dates related to your vested options. Per IRS regulation, you only have 90 days post-termination to exercise your incentive stock options (ISOs) before there is a forced conversion to non-qualified stock options (NSOs). Having your ISOs converted into NSOs results in the loss of potential tax benefits associated with ISOs. In addition, a modification to ISOs can result in an immediate conversion to NSOs. Modifications can include extending the post-departure exercise window or changing the expiration date. Some companies offer extended exercise windows to most employees. This can be helpful to know about at your current company or help narrow your search for your next company (here’s a handy crowdsourced list of companies with extended exercise windows). Many private companies, however, still adhere to the 90-day window dictated by the IRS for ISOs. For NSOs, extending your exercise window beyond 90 days is something that you can negotiate prior to your departure or during the 90-day window.
If you are a longtime employee, know your options expiration date, which is generally ten years after the options are issued. Part of this is for the obvious reason that you don’t want to lose something potentially valuable because you lost track of time. It can also be difficult to recreate the economics of an early option grant if options are reissued, and companies are less likely to cooperate with former employees.
Give yourself a buffer with a little extra liquidity
Finally, if you are a shareholder, consider if liquidity using the value of your shares could be useful to take some downtime between jobs or in the event of an extended job search. Additional liquidity can sometimes be included in an options exercise transaction when there is a very low strike price involved and fair market value2 is substantially discounted from the current valuation of the company.
Thinking through all of these items can make a departure from your employer a little smoother with fewer surprises. If you’re interested in exploring your option exercise or liquidity opportunities, please contact Liquid Stock to see how we can be of assistance.About the Author:
Shane Larkin, Founding Team Member at Liquid Stock, is an investment professional with an engineering background and MBA.
1For example, termination provisions in your employment or equity grant agreements, accelerated equity vesting, early option exercise rights, etc.
2As typically reflected in a 409A valuation report
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