What Happens to Equity When You Leave a Company?

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What Happens to Equity When You Leave a CompanyWhether you intend to stay at your current company for a few years or forever, it is always essential to understand what happens to your equity when you leave a company. The truth is that unforeseen things happen, and being prepared in the event of a layoff, termination, disability, or any unexpected change in employment can mean the difference in leaving thousands of dollars on the table. 

Often, employees miss out on a lot of money simply because they are unaware of how to handle post-termination equity and the stringent timelines. Familiarizing yourself with your document plan’s vesting terms and post-termination exercise period can save you time and money.

Notably, while most areas of law are governed by statute or some form of government guidance, here, the authoritative resource for your equity package, including what happens to your equity when you leave a company, lies in your plan agreement. Reach out and speak with an employment law attorney today for more information.

Stock Options & Shares

Understanding what happens to your company equity when you quit or otherwise leave your company will depend on your equity type because each can have different implications.

Restricted Stock Units

Restricted stock units are a way your employer can grant you company shares. The grant is “restricted” because it is subject to a vesting schedule, which can rely on several variables, including the length of your employment or performance goals.

Upon job termination, you almost always forfeit your unvested restricted stock units. However, there are exceptions depending on the vesting terms of your employment agreement or stock plan. For instance, there may be special provisions for retirement, disability, or a corporate acquisition.

Incentive Stock Options

Incentive stock options (ISOs) are not stock shares but the opportunity to purchase shares at a set price. Post-termination, you must decide whether to exercise your purchase options or forfeit them

Your plan document should detail the post-termination exercise window (i.e., the time to purchase the shares). Usually, you have 90 days after termination to exercise stock options. 

Every individual plan agreement differs, and yours may give you more time. However, it is essential to be mindful that the IRS stipulates holders of ISOs have up to 90 days to exercise vested stock options to avoid specific tax implications

Non-Qualified Stock Options

Non-qualified stock options can be granted to employees and non-employees, including contractors, consultants, and vendors related to the granting company. 

If you are laid off with unvested NSOs, they will usually expire on your last day of employment.

You are typically given time to exercise stock options if laid off with vested but unexercised NSOs. Most companies allow for at least 30 days, but it is common to see 90- and even 180-day exercise periods. 

Lastly, if you exercised vest NSOs, you now hold these shares. They are yours, even if you have been laid off.

Stock Option Things to Know

Generally, employee stock options are issued with an expiration date, usually ten years from the grant date. However, every plan is unique and may have its expiration date. 

The expiration date is crucial mainly because it is the last day you can exercise your stock option. 

If you do not exercise your employee stock option by the expiration date, you lose the ability to exercise it and forfeit any established value. Losing your exercise right can happen even if you remain employed with the company. In other words, paying attention to expiration dates is essential even if you stay with a company. 

There is also a post-termination exercise period which refers to the time after your employment concludes with a company. Often, there is a specific timeframe after termination in which they will expire if not exercised.

Clawback Provisions

Clawback provisions allow companies to buy back shares from employees after certain triggering events, such as termination or layoff. 

These clauses can encompass and apply to share options and vested shares. 

You will want to review your plan agreement for words or provisions that state forfeiture, repurchase, or redemption. These words can be an indication of a clawback provision. An experienced attorney can review your plan documents and advise you on the existence of any clawback policy.

How Do I Know What Type of Equity I Have?

You must check your grant agreement to determine your equity type.

Most importantly, your company isn’t obligated to remind you of your stock options or when and how to exercise them once you leave. You must understand the implications surrounding our stock options, including:

  • The amount of time you have left to exercise your options, 
  • How much money you need ready to exercise (i.e., purchase) shares, and 
  • The potential tax implications.

It is solely your responsibility to know what will happen to your equity when you are fired or otherwise separate from a company.

What Happens to My Stock Options After a Job Termination?

While your plan should include an expiration date, generally, if you are terminated from the company, you must exercise your stock options before the stated expiration date.

You may leave a company for several reasons, including: 

  • Involuntary termination (i.e., you are fired),
  • Termination by choice (i.e., you quit),
  • Termination because of a disability, and 
  • Termination by death.

What happens to your equity may vary depending on the reason for separation from the company. Your plan document should help you determine the requirements of post-termination provisions. They can differ depending on the circumstances around your departure. It can be complicated depending on what type of stock options you have. 

Contact an Attorney for Guidance

If you plan to voluntarily leave your company, understanding what might happen to your stock options once you depart ahead of time is crucial. Being prepared and planning can save you a lot of money. You shouldn’t leave any money on the table. Even if you do not intend to leave your company, preparing yourself for the unexpected will put your mind at ease. Plan documents can be complex and challenging to decipher. Contact Smithey Law to help you better understand your options. Our team focuses exclusively on labor and employment law. Let our experienced lawyers assist you!

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Joyce Smithey, a seasoned employment and labor law attorney, has over 22 years of experience representing both employers and employees in Maryland and D.C. Her practice, rooted in a deep understanding of employment law, spans administrative hearings to federal litigation. Joyce's approach is comprehensive, focusing on protecting client interests while ensuring legal compliance. A Harvard graduate, her career began in Fortune 500 companies, transitioning to law after a degree from Boston University School of Law. Joyce's expertise is recognized by numerous awards, including Maryland’s Top 100 Women. At Smithey Law Group LLC, which she founded in 2018, Joyce continues to champion employment rights, drawing on her rich background in law and business.

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