If you’re a tech worker who’s been recently laid off, you’re probably scrambling to figure out what to do next. Did you get a severance package, how long will that last you, and can you apply for unemployment? Are you updating your resume and jumping back into the employment pool, or taking some time before your next job?
In the post-layoff scramble, make sure you carve out time to decide what you want to do about your stock options.
If you worked for a publicly traded company and earned RSUs, there’s very little to do — once you leave the company, you keep all of your vested shares and your unvested RSUs get returned back to the company’s stock option pool.
If you worked for a pre-IPO startup and earned incentive stock options (ISOs) or non-qualified stock options (NSOs), you have a limited amount of time — in many cases, just 90 days after getting laid off — to decide whether you want to buy your stock options or forfeit them back to the company.
This article outlines the major questions to ask yourself about your stock options in the wake of leaving your company.
#1: How much time do you have to make a decision?
The majority of startups give people just 90 days after leaving the company to exercise (i.e. buy) their stock options. Not every startup, though — some startups voluntarily extend their post-termination stock option exercise window out to as much as 10 years after you leave the company.
As soon as you can, figure out how much time you have to exercise your stock options.
Bonus: If you think you’ll need more time, some people have been successful in asking their former employer to voluntarily extend their exercise windows. It’s uncommon, but possible.
Caveat: If you happen to have more than 90 days to exercise your stock options, know that ISOs automatically convert into NSOs 90 days after you leave your job. ISOs generally have more favorable tax advantages than NSOs — an important thing to consider as you look at your timeline.
#2: How much will it cost to exercise your stock options?
Next, you’ll want to calculate your total cost to exercise your stock options. You can calculate this cost manually, or use a tool like Secfi’s Stock Option Tax Calculator.
To calculate it manually, take the total number of ISOs or NSOs that you’ve vested, and multiply that by your strike price. For example:
- You’ve vested 1,000 shares of stock options (either ISOs or NSOs)
- Your strike price is $1 per share
- It will cost you $1,000 to exercise (i.e. buy) all of your stock options
Additionally, you’ll want to calculate how much in taxes, if any, you’ll face if you exercise your stock options. ISOs are taxed under the alternative minimum tax system, which means it’s possible for you to exercise some (or all) of your ISOs without owing taxes.
NSOs are taxed under the income tax system, meaning you’ll very likely owe taxes when you exercise.
Taxes are calculated based on the “spread” between your strike price and the company’s current fair market value, also known as a 401(a) valuation.
In 2022, the average entry-level startup employee experienced a “spread” of $10,000, according to Carta’s annual equity report. The average executive experienced a “spread” of $96,000.
Now that you know your timeline and your total cost to exercise — can you afford to buy your stock options?
This is a highly personalized question, largely based on your financial risk tolerance.
The average startup employee living in Silicon Valley will earn stock option values of around 13 percent of their annual income — in other words, if you earn $100,000 per year in salary in Silicon Valley, you’ll also be granted around $13,000 per year in stock options, according to Carta.
You might not have tens of thousands of dollars in cash on hand, or feel comfortable investing such a large amount of money in a single asset. You might feel even less inclined to invest now that you’ve lost your job.
You’ve gathered all your important numbers — you know how much time you have to make a decision, you know how much it will cost to exercise your shares, and you’ve given some thought to how much you might feel comfortable investing in your stock options.
The big question now is: Should you buy the shares?
This is another highly personalized question. Here are a couple of follow-on questions to help:
- How confident are you in the company’s ability to successfully exit, in the form of a profitable acquisition or successful IPO?
- Does the company’s leadership team have a track record of successful exits at other startups?
- If the company was to exit, what do you think the exit value would be?
- When do you think the company will likely exit?
- At what stage did you join the company? Early stage (seed, or Series A?) or late stage (Series C and beyond)?
Evaluate your stock options like you would any other investment — is it smart to buy shares in this specific company, at this specific price?
In 2021, anywhere from 36- to 54 percent of startup employees decided not to exercise any of their stock options, according to Carta.
Remember: Exercising doesn’t have to be an all-or-nothing decision. You always have the option to exercise some (but not all) of your shares after leaving your job — in fact, in 2021, 10- to 17 percent of startup employees decided to partially exercise their stock, according to Carta.
Ideally, the shares you exercise grow in value over time, and the company experiences a successful exit.
Sadly, a number of startups fail each year — by winding down operations and closing completely, or by being acquired at a deep discount. The risk of startup failure is higher during a bear market, when customers are pulling back on spending, and investors are wary of putting fresh money into the startup ecosystem.
If you’re planning to exercise your employee stock options in a bear market, you should be aware of the preference stack (shortened to “pref stack”), which outlines who gets paid first during an exit event.
In many startups, the investors get bumped to the front of the line during an exit event, while people holding employee stock options have to wait behind them. In practice, that means employees with exercised stock options might not make their money back during a less-than-successful exit event.
Helpful resources
If you need to build a plan around what to do with your stock options, we have a few resources that can help. First, check out Secfi’s Equity Planner, a free tool that can help you visualize your employee equity, calculate taxes, and show how many shares you might be able to exercise without paying exercise-related taxes.
If you want personalized help, Secfi also offers 1-on-1 financial planning services. Click here to learn more.
