Job loss triggers a rush of thoughts. In the short term, there are cash-flow crunch questions such as: How can I pay bills? Can I pay them until I find a new job? How does termination pay work? Will my severance pay keep me afloat? Long-term considerations like finding fulfilling replacement work and financial considerations such as 401(k) management follow soon after.
All of these are valid thoughts. But in the tech industry, another issue often looms: figuring out the right path with equity compensation. Because the tech industry has recently suffered disproportionate job losses, everyone in the field should educate themselves on these issues.
What to Know About Equity Comp After Severance
After losing a job, taking a moment to pause, breathe, and be strategic is essential.
First, it’s important to consider your potential downsides. At this point, it’s unlikely that any additional action is needed with your restricted stock units or employee stock purchase plan. If you have vested or purchased shares, you should be able to keep them. RSUs and stock options that vest after your termination date will likely be lost, and cash contributed to your ESPP during the current purchase period that has not been used to purchase additional stock will likely be refunded through payroll.
The most substantial risk of loss can be found in vested but unexercised stock options. Holding an unexercised stock option means you have the right to buy company stock at a specified price that’s typically equal to the stock price on the grant date. Stock options have an expiration date where the right to buy stock at a specified price lapses. Usually, it’s between five and 10 years after the grant date. However, an accelerated expiration date almost certainly applies if you leave your job.
For example, assume you were granted nonqualified stock options in June of 2020 that fully vested in June of 2023 with an expiration date of June 2029. Even though the expiration date stated on your grant agreement is still many years out, your actual expiration date is likely three to six months after termination. If no action is taken to exercise these stock options before the accelerated expiration date, they lapse. This is why it’s critical to carefully review plan documents and, if necessary, consult professionals on your particular equity compensation situation.
In addition, you might also have received grants of incentive stock options prior to being laid off. Although the exercise of an ISO is not subject to ordinary income tax until the underlying stock position is sold, it is potentially subject to the alternative minimum tax, which can be quite costly. The loss of a salary and a potentially hefty tax bill can compound an already stressful cash-flow problem. It’s also important to understand that, even if the company extends the exercise deadline beyond the typical 90 days after separation from service, an ISO is automatically converted to a nonqualified stock option if left unexercised more than 90 days after leaving the company. Depending on when you exercise, the tax implications can be different. It is wise to consult professional advice in these situations.
There are other potential factors to consider beyond the scope of this article, especially if you own restricted stock awards or work for a privately held company.
Strategizing: Making a Game Plan for Your Equity Compensation Issues
What actions should you take if affected by job loss?
1. Take inventory. Take account of what you have. List shares of company stock you own from grants that have vested prior to your termination date and from prior ESPP purchases. Also, note what vested stock options you own, the price you can buy stock at if you choose to exercise (the strike price), the type of options you own, and the true expiration date of these options.
2. Study up. Review all company materials regarding your equity compensation. Ideas for places to look might include your original offer letter, employment agreement, stock plan document, and past grant agreements, just to name a few. Confirm you understand how termination affects your various equity compensation grants.
3. Ask questions. Are there any noncompete provisions to consider? Are there any special circumstances that allow you to keep unvested shares? For example, do unvested grants continue to vest if you’re separating from service at or above age 50 with 10 or more years of experience? Know key dates and what actions are required.
4. Follow up. Meet with the stock plan administrator to help clarify information that is confusing or seemingly contradictory. Don’t assume that your reading is correct without verification; the financial consequences can be very large.
5. Consider special circumstances. Consider the nature of your job separation. If you’re being furloughed, how does the treatment of your equity compensation differ from termination? If you’re being let go from your current role but still work as a consultant for the company, how is your equity compensation treated? These situations can get tricky, and the documents mentioned above might not directly speak to these situations.
6. Try to better your position and yourself. It’s worthwhile to see if you can negotiate a better position. Is your severance agreement negotiable? It’s often not, but it never hurts to try. If it is, factor unvested equity compensation into the conversation, especially if it would otherwise vest shortly after your termination date. Asking hard questions and having tough conversations is an excellent practice as you continue your career journey. The worst they can do is say no.
Looking Ahead: Planning for Future Equity Compensation
If equity compensation is part of the potential future job structure, it’s prudent to pause and fully understand what might happen upon your future departure. It’s uncomfortable to think of the end at the beginning, but make sure to understand termination provisions before accepting an offer. You might be able to negotiate different terms. At the very least, understanding how everything works if termination happens will prepare you and lessen the stress if it happens. It helps to have as much clarity as possible when everything feels uncertain.
About the guest post author:
Derek Jess is a senior wealth manager and shareholder at Plancorp, a full-service wealth management company serving families in 44 states. With specializations in financial planning for employees with equity-based and deferred compensation plans, Derek helps high-income clients with complex needs navigate through all stages of life.