What Happens to Your Equity and Stock Options When Leaving a Company (Termination, Lay Offs, & Quitting)

Whether you quit, get the axe, or are blindsided by a layoff, what happens next could make or break your financial future. Play it wrong, and you risk losing a fortune—or getting hammered by taxes.

That’s why Summitry’s advisors (who specialize in Bay Area tech wealth) put together this no-fluff guide. Inside, you’ll learn exactly what to do when you leave your job—so you don’t leave money on the table.

Key Considerations When You Leave a Company

Stock options are a critical component of compensation for many professionals, particularly in Silicon Valley and other competitive environments. These options typically vest over a predetermined schedule, commonly structured as a four-year plan with a one-year cliff.

This means employees must stay with the company for at least one year before any portion of
their options vest. After the cliff, vesting usually continues incrementally, often monthly or quarterly, until the full allocation is vested.

Vested vs Unvested Options

For employees who leave a company, the fate of their stock options depends on their vesting status. Vested options are those that employees have already earned and can retain, provided they exercise them within the company’s specified post-termination exercise (PTE) window (more on that later).

This window is typically 90 days for incentive stock options (ISOs) but may be longer for non-qualified stock options (NSOs) or at companies with more employee-friendly policies. If employees fail to exercise within this period they lose their vested options permanently.

Unvested options, on the other hand, are almost always forfeited upon termination or resignation. However, some companies, particularly in competitive industries, offer accelerated vesting under certain circumstances, such as layoffs, acquisitions, or change-of-control events. Accelerated vesting enables employees to gain immediate or faster access to their unvested stock options, allowing them to benefit from shares they otherwise would have lost. Instead of waiting for the standard vesting schedule to complete, a portion or all of the remaining unvested options become vested ahead of schedule.

There are two common types of accelerated vesting: single-trigger acceleration and double-trigger acceleration. Single-trigger acceleration occurs when a specific event, such as an acquisition or layoff, causes an immediate vesting of some or all unvested shares. This is more common in executive compensation packages and is designed to ensure employees are not left
empty-handed in the event of a sale or restructuring.

Double-trigger acceleration, on the other hand, requires two conditions to be met before unvested shares are accelerated. Typically, this means the company must first be acquired, and then the employee must be terminated within a specified period following the acquisition. Only when both conditions are satisfied will the unvested shares vest immediately.

Companies use accelerated vesting as both a retention incentive and a means to protect employees during acquisitions or layoffs. In a competitive job market, offering accelerated vesting can help attract and retain top talent, ensuring that employees do not lose out on a significant portion of their equity compensation in the event of unforeseen circumstances.

Employees anticipating a layoff or acquisition should review their stock option agreements carefully and consult with HR or a financial advisor to determine whether accelerated vesting applies and how to make the most of their stock options before making any career moves.

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Actionable Steps for You

1. Understand Your Vesting Schedule

• Review your stock option agreement to determine your vesting timeline and cliff period.
• Identify how many options are vested vs. unvested at any given time.

2. Check Your Company’s Policy on Unvested Options

• Confirm whether unvested options are forfeited upon termination or if accelerated vesting applies in certain cases.
• Ask HR or review official documents to understand if your company offers single-trigger or double-trigger acceleration (especially in M&A scenarios).

3. Plan for Termination or Resignation Scenarios

• If you’re leaving voluntarily, ensure you exercise vested options within the PTE window to avoid losing them.
• If facing layoffs or an acquisition, inquire whether accelerated vesting applies to maximize your equity compensation.

4. Clarify Your PTE Window

• Know how long you have to exercise vested options after leaving—this varies by company, often 90 days for ISOs or longer for NSOs.
• Consider tax implications when deciding whether to exercise immediately or wait.

5. Optimize for Taxes and Cash Flow

• Work with a financial advisor to understand the tax impact of exercising stock options, especially with accelerated vesting.
• If your company is acquired, confirm if early exercising could minimize tax liability under capital gains rules.

6. Leverage Accelerated Vesting (If Available)

• If your company is at risk of acquisition or layoffs, confirm if accelerated vesting will apply to maximize your gains.
• If eligible for double-trigger acceleration, monitor events like M&A deals closely and negotiate as needed.

Now that you know what to do, let’s break down how to do it. The next section dives into your exercise options, the costs, and the strategies to keep more of your hard-earned equity.

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How to Exercise Stock Options

Cash Exercise

You pay the exercise price and any applicable taxes out of pocket using your own funds. This method allows you to retain all the shares you exercise, maximizing potential future gains if the stock price rises. However, it requires sufficient cash upfront, which may be a financial burden, especially if the tax liability is high.

Stock Swap

You use shares you already own to cover the cost of exercising your options, rather than paying in cash. Stock swaps allow you to avoid selling newly acquired shares, which can be beneficial if you expect the stock to appreciate. Note that this reduces your overall share count, meaning you give up potential future gains on the swapped shares. Additionally, if the swapped shares have appreciated significantly, you may trigger capital gains taxes.

Cashless Exercise

You immediately sell a portion of your newly exercised shares to cover the exercise price and any tax obligations. Cashless exercise is convenient since it requires no upfront cash and allows you to capture gains while exercising your options. However, because you are selling a portion of the shares right away, you limit your long-term upside potential, especially if the stock price continues to rise after the exercise. This method is commonly used in public companies where shares can be sold easily on the open market.

Summary

Exercise Method	Pros	Cons
Cash Exercise	Maximize potential future gains	Significant upfront cost
Stock Swap	Cover the cost with shares instead of cash when shares can’t be easily sold on the open market	Reduces overall share count; could trigger capital gains tax
Cashless Exercise	No upfront cash required; common with publicly traded companies	Could limit long-term upside potential

 

• Incentive Stock Options (ISOs): Generally, ISOs must be exercised within 90 days of your departure to retain their tax-advantaged status. If you miss this window, they automatically convert to Non-Qualified Stock Options (NSOs), which are subject to different (often less favorable) tax treatment. Exercising ISOs within the 90-day window allows you to maintain eligibility for long-term capital gains tax rates, provided you meet the required one-year holding period from exercise and two years from the grant date. However, exercising ISOs could trigger Alternative Minimum Tax (AMT), so it’s important to consult with a tax advisor before making a decision.
• Non-Qualified Stock Options (NSOs): The PTE window for NSOs is generally more flexible than ISOs, as companies can set their own policies. Some firms maintain the standard 90-day limit, similar to ISOs, while others allow six months, a year, or even several years to exercise after leaving the company. Unlike ISOs, NSOs do not have favorable long-term capital gains treatment at exercise, meaning any gain at the time of exercise is taxed as ordinary income, which could significantly impact your tax liability. Understanding your company’s specific policy is crucial to determining how much time you have and what tax consequences you might face.
• Extended Exercise Periods: Some companies, particularly in competitive industries, recognize that a short PTE window can be a burden on employees. To attract and retain top talent, they offer extended exercise periods, sometimes ranging from one to ten years post-termination. These extended periods are most commonly seen in cases of layoffs, retirement, or long-term service with the company. However, even if a company provides an extended window, ISOs may still convert to NSOs after 90 days due to tax regulations, which could lead to a higher tax bill when you eventually exercise. Additionally, extended windows do not guarantee liquidity, especially for private company shares, where no immediate market for the stock may exist.

Ignoring the PTE deadline could result in losing valuable equity compensation, so check your stock option agreement as soon as you anticipate leaving.

Types of Termination and How They Impact Your Options

Voluntary Resignation

If you leave on your own terms, standard PTE rules apply. You’ll need to exercise vested options within the designated timeframe, and unvested shares will be forfeited.

Layoffs or Termination Without Cause

If you are laid off or terminated without cause, such as during company restructuring or downsizing, you may receive some leniency regarding your stock options. Some companies extend the PTE period as part of a severance package, giving you additional time to exercise vested options. In rare cases, severance agreements may also include continued vesting or accelerated vesting, allowing you to retain or immediately vest additional shares upon termination.

Termination With Cause

If you’re terminated for cause (e.g., misconduct, policy violations), companies often have the right to immediately revoke all vested and unvested stock options. This means you could walk away with nothing.

Tax Implications of Exercising Your Stock Options

Incentive Stock Options (ISOs)

If you exercise ISOs within 90 days and hold the shares for at least one year from exercise and two years from the grant date, you qualify for long-term capital gains tax rates (typically lower than income tax rates).

However, exercising ISOs could trigger the AMT, which requires careful planning.

The spread between the exercise price and the fair market value (FMV) at exercise is considered income for AMT purposes, even though it’s not taxed for regular income tax. This “phantom income” can push you into AMT territory, potentially resulting in a significant tax bill without any actual cash received from selling shares.

The AMT Credit

An important consideration when exercising ISOs is the potential creation of an AMT credit. If your AMT calculation exceeds your ordinary income tax due to an ISO exercise, you generate an AMT credit. This credit can be carried forward indefinitely and used in future years when your regular tax liability exceeds your AMT liability.

For example, if your ISO exercise results in $40,000 more in AMT than your regular tax liability, you would generate a $40,000 AMT credit. In subsequent years, you can use this credit to offset your regular tax liability, but only to the extent that your regular tax exceeds what your AMT would have been.

This AMT credit mechanism helps balance out the tax impact of ISO exercises over time, potentially reducing your overall tax burden. However, it’s crucial to plan carefully, as the credit can only be utilized in years where your regular tax exceeds your calculated AMT.

Specific Scenarios:

• Large exercise in a high-growth company: If you exercise a substantial number of ISOs in a company whose stock price has increased significantly, the AMT impact could be severe.
• Exercise near year-end: Exercising in December leaves little time for tax planning before the tax year closes.
• Multi-year exercise strategy: Spreading exercises over several years can help manage AMT exposure.

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Non-Qualified Stock Options (NSOs)

NSOs are taxed at exercise as ordinary income based on the difference between the exercise price and the fair market value (FMV) of the stock. Additional taxes apply when you sell the shares, either as short-term capital gains (if held for less than a year) or long-term capital gains (if held for longer than a year). State-Specific Tax Considerations Tax treatment of stock options varies across states, which is particularly relevant for employees who have worked remotely or relocated.

• California: Stock option income is taxed at the state’s high rates (up to 13.3%).
• New York: NYC residents face city taxes in addition to state taxes.
• Texas & Florida: No state income tax, making post-termination exercises more favorable.
• Multi-State Taxation: If you worked in multiple states, you may owe taxes in each state based on how much work was performed there.

Private vs. Public Companies

Public Companies

Employees at public companies can generally exercise options and sell shares immediately for liquidity. Stock prices are determined by the market, and selling shares can be done through a brokerage account. However, employees should be aware of insider trading policies, blackout periods, and tax implications related to selling shares. Some companies also offer stock purchase plans or allow for stock swaps to optimize tax strategies.

Private Companies

For startups and pre-IPO companies, stock options may lack immediate liquidity. Exercising can be risky, as you may pay taxes on shares that you cannot yet sell. If the company eventually goes public or is acquired, the payout could be substantial—but if the company fails, you could lose your entire investment. The value of the shares is often determined by the company’s most recent valuation (409A valuation), which may fluctuate over time.

• Liquidity Risks: Private company shares typically cannot be sold until a liquidity event (e.g., IPO, acquisition). If the company does not go public or is not acquired, your shares may be illiquid indefinitely.
• Tax Considerations: Exercising stock options in a private company may trigger tax liabilities without a clear timeline for monetization. Employees should consider strategies like early exercising to reduce long-term tax exposure.
• Secondary Markets: Some private companies allow employees to sell shares through secondary markets or tender offers, but these opportunities are not always available.

Example Scenario

Background:

Jason, a product manager at a publicly traded company, decides to resign after four years to join a competitor. He holds 10,000 vested ISOs at a $5 strike price, which is the predetermined price at which he can buy the shares, regardless of the current market price of $50 per share. He has 90 days to exercise his options, or they will expire.

Action Steps:

1. Evaluate Exercise Costs & AMT Risks – Exercising all 10,000 ISOs requires $50,000 ($5 x 10,000 shares). Since the FMV is significantly higher than the strike price, Jason realizes he may trigger AMT.
2. Consider a Cashless Exercise Strategy – Instead of paying out of pocket, Jason sells some shares immediately to cover the exercise cost and taxes, allowing him to keep more cash on hand.
3. Check Non-Compete Agreements – Before joining his new company, Jason reviews any non-compete clauses that might impact his stock option eligibility.
4. Plan for Future Sales – Since he wants to maximize long-term capital gains tax treatment, Jason holds onto some of his exercised shares for over a year before selling.

Outcome:
Jason does a cash free exercise of his ISOs before the 90-day window closes, and plans to hold onto his stock for at least a year so that he can pay his tax at long-term capital gains rates. He avoids unnecessary taxes while ensuring he doesn’t lose valuable equity due to his resignation.

Final Thoughts: Don’t Let Your Stock Options Go Up in Smoke

Stock options can be a goldmine—or a financial trap—depending on how you handle them. Play it smart, and they can fuel your long-term wealth. Ignore the fine print, and you could watch years of hard-earned equity vanish overnight.

If you’re leaving your company—by choice or not—you don’t have time to drag your feet. Deadlines are real. Tax traps are lurking. And every decision you make (or don’t make) can cost you tens of thousands, if not more. That’s why getting expert guidance is not optional—it’s essential.

At Summitry, we aim to help Silicon Valley innovators cash in on their equity the right way—without losing out to taxes, bad timing, or rookie mistakes. Need a solid strategy for your stock options? Let’s talk. Your wealth is on the line.

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Disclosure: Example scenario is for illustrative purposes only and does not reflect an actual client’s experience or results. Actual results may differ and there is no guarantee that clients will experience similar results. For informational purposes only. Consult your financial professional and tax professional for personalized advice as each person’s financial situation may dictate different recommendations and approaches.