What happens to equity when you leave a company?

Author: Jackie Ammon

Read time: 8 minutes
Published date: 28 June 2023

When you quit or leave your job, the type of stock, timing of your departure, and individual vesting schedules determine what happens to your vested stock.

Contents:

• What happens to equity when you leave a company?
• What type of equity do you have?
• Restricted stock awards
• Restricted stock units
• Stock options
• How to figure out what type of equity you have
• How much of your equity is vested?
• Vesting schedule example
• How many stock options have you exercised?
• How long do you have to exercise your remaining vested options?
• The 90-day window
• Additional tax implications to consider
• How to exercise equity when leaving a company
• How to turn equity into cash
• Tender offers
• Secondary market transactions
• What to do if you can’t afford to exercise your equity

When you leave a job and sign the exit paperwork, it’s time to make some big decisions about your equity. Your former company isn’t obligated to remind you what choices you have at the time of your departure—including how and when to exercise any vested stock options, how to sell equity on a secondary market, and how to plan for the potential tax implications.

If you’re leaving a private company, you probably can’t turn your equity into cash—at least not right away. But later, if your company has a liquidity event like an initial public offering (IPO) or acquisition, your equity could turn into real wealth. Here’s what you need to know about what happens to vested and unvested stock when you leave a company.

What type of equity do you have?

The type of equity compensation you have matters because each type can have different implications upon acquisition and upon sale of the underlying stock.

Restricted stock awards

Restricted stock awards (RSA) are usually granted and issued early in a startup’s life cycle because the purchase price is, at most, a small cost. If you have RSAs, you likely purchased your shares on the day they were granted. RSAs are usually subject to a vesting schedule, often with time-based or milestone vesting conditions (or both). Any unvested RSAs are usually repurchased by the company within a certain time post-departure, at a price and on the terms outlined in your equity grant agreement.

Restricted stock units

A restricted stock unit (RSU) is a promise from your employer to give you shares of the company’s stock (or the cash equivalent) on a future date and when certain vesting conditions are met. If your vesting conditions have not been met on the date you depart the company, it’s possible that you won’t have any RSUs.

Single-trigger RSUs

If your company issues single trigger RSUs, then you’ll continue to hold whatever units have vested and settled into shares as of your departure date. What you can do with those resulting shares depends on whether the company is public or private.

Stock options

If you have incentive stock options (ISO) or non-qualified stock options (NSO), the situation looks a bit different than it does for RSAs or RSUs. ISOs and NSOs are types of employee stock options, which aren’t actual shares of stock—they’re the opportunity to purchase shares at a fixed price—the strike price.

How to figure out what type of equity you have

To see what type of equity you have, check your equity paperwork or grant agreement.

How much of your equity is vested?

Companies usually tie earning equity to tenure (a process called vesting). When you leave, you are only entitled to the portion of that equity that has vested as of the date of your departure.

Vesting schedule example

How many stock options have you exercised?

If you were granted stock options and have already exercised some or all of those vested options before your departure, you already own those shares. However, you may want to check your grant to be sure.

How long do you have to exercise your remaining vested options?

You only have a certain amount of time to exercise your vested options after leaving a company.

The 90-day window

There are potentially significant tax implications based on your post-termination exercise timing. Your equity plan may give you a PTEP longer than 90 days or you may be able to negotiate a longer PTEP with your employer as part of your individual separation agreement when you depart.

How to exercise equity when leaving a company

If you’re interested in exercising your stock options, start learning about the process required by your company ASAP.

How to turn equity into cash

For shareholders of public companies, liquidity is usually accessible by selling shares on the open market.

Tender offers

If your company holds a tender offer for stockholders, you may have the option to sell your shares on the terms negotiated by the company and the designated buyer(s).

Secondary market transactions

If a company-structured transaction isn’t an option, you may be able to sell your shares through a broker.

What to do if you can’t afford to exercise your equity

Many employees end up walking away from unexercised options because it’s too expensive. If you believe your equity is worth pursuing but are low on cash, you may have some other options:

• Net exercise: Some companies will allow you to give them a portion of your vested shares as payment for the rest of your shares.
• Sign-on bonus: If you’re joining another company, negotiate a sign-on bonus that will help you purchase your shares at your prior employer.
• Stock option lending: If your company allows it, a lender can offer you the money you need to purchase your options.
• PTEP extension: Request that the company extend your PTEP to give you the necessary time to aggregate the necessary funds.
• Secondary sale: If you previously exercised and already hold some stock, you can try selling a portion of that on the secondary market to raise the cash necessary to exercise the remainder of your vested options.

Every departure is different—some people are laid off, others leave for a new opportunity, and some quit for other reasons. We recommend thoroughly reading your grant, asking questions before you leave, and talking to a financial professional. This can help you make the best decisions and move into your next chapter as smoothly as possible.