Whether expected or not, the upheaval of job loss gives you much to think about. Don’t forget any stock options or restricted stock units (RSUs) that you were granted and are still available to you. Too many departing employees forfeit valuable potential gains from their equity awards because they were unaware of the post-termination rules, or even the vesting dates, of their grants.
The danger is real. Sudden layoffs have recently erupted at many companies, including corporate tech giants such as Amazon, Google, Meta, and Microsoft. You want to be sure you take as much extra compensation for the road as you can. After all, you earned it during your time at the company.
In a myStockOptions.com webinar that I moderated, a panel of financial, tax, and legal advisors came together to discuss various topics on negotiating equity comp in hiring offers, protecting it at employment termination, and avoiding big mistakes when leaving a job with outstanding stock grants. Below are highlights of what they had to say about equity comp in job termination.
1. Keep All Documents Related To Equity Comp And Employment
The first and most important point in job loss is to know what equity awards you have, what their vesting status is, and the company policies and rules that apply when you’re laid off.
For that, you need to have all of the documents related to your equity awards and your employment in general. Be sure you keep all of these during your employment. If you don’t have them, contact the person or department in charge of stock plan administration at your company. You want to avoid getting caught without them in a sudden job loss.
“You need to obtain all the documents before employment termination occurs,” asserted webinar panelist Arthur Meyers, the founding attorney of Meyers Law Firm in Naples, Florida. “You have to understand how many awards you hold, what the terms are, whether there are any restrictive covenants such as noncompete clauses, and so on.”
Arthur listed some of the key items to keep in your possession, ideally before job termination:
- employment agreement
- grant agreements and any separate grant notice for each award
- the stock plan itself
- information about all your grants from the company’s online stock plan portals: both your company’s intranet and the website of its designated brokerage firm or transfer agent
Alert: Confirm you can continue to access the websites to view your outstanding stock grants, and the procedures for making exercises and stock trades, after you leave the company.
Don’t count on your company to provide this information after you’ve left. “It is often surprising to find out how little information you can actually get from your employer,” cautioned panelist AJ Ayers (CFP, EA, CEP), a co-founder of Brooklyn FI in New York City. “Sometimes more mature public companies will have robust finance departments and equity ‘ninja squads.’ But recently public companies or private companies typically don’t have those departments.” Unfortunately, as a result you may end up having “to beg them for this information,” she warned.
2. Understand Your Post-Termination Rules
With your documents, check what equity awards you have, what the vesting status is for each grant, and any special treatment for “involuntary layoff” in the documents. “Confirm not only the award type but also the terms of the exit,” said AJ.
In general, you have rights only to stock options and restricted stock/RSUs that have already vested by your termination date. While the typical timeframe for exercising options after job loss is 90 days from your official end date, your period for exercise will be dictated by the company’s plan and your grant agreement. Make sure you know the date from which the post-termination exercise period (PTEP) is calculated.
Alert: Companies strictly follow PTEP rules, do not give you a grace period for missing the deadline, and have no legal obligation to notify you of upcoming expiration dates.
Usually, to get a different treatment, you’d have to negotiate at hire for the continuation or acceleration of vesting (or have enough clout or justification to do so in any separation agreement). The PTEP can also vary according to the reason for the job termination, AJ continued. “Sometimes if it is a ‘for cause’ firing, we’ve seen all equity being forfeited. But if it is an amicable separation, there is often room for moving the termination date back or forward, depending on when a particular grant may vest.”
These rules can also vary by industry and your level in the company, along with your ability to negotiate them at hire, observed panelist Beata Dragovics (MSFP, CFP, CEP), who advises many clients in the biotech industry with Freedom Trail Financial in Boston.
A few companies, such as Square, Pinterest, and Quora, have extended PTEPs for vested stock options as a feature to make their grants more attractive in recruiting and retaining talented employees.
In a large layoff, some companies will extend the post-termination exercise period beyond what was in the initial grant, perhaps to the full term of the option. Employees are then not rushed into exercising their stock options. In a private company, this extension of the exercise window is an especially beneficial feature, as a private company’s shares have no liquidity to provide the funding for the exercise. Should the company go public or be acquired in the future, the options could become very valuable.
With restricted stock and restricted stock units (RSUs), you almost always forfeit whatever stock has not vested at the time of your termination, unless your grant specifies another treatment or the company decides to continue or accelerate vesting. Therefore, if you are planning to leave your job, you may want to stick around long enough to get any valuable chunk of restricted stock/RSUs that may vest in the near future.
Sometimes the end of your time as an employee does not trigger forfeiture/termination provisions if you will continue to perform services for the company in some way, whether working part-time or as a consultant. “If you’re not going to a new position immediately,” suggested Arthur Meyers, “you may want to explore the opportunity to be a consultant for the company and continue vesting in your existing awards.”
Alert: While this article is focused on the standard job-loss situation, for other life and company events the rules that apply may be different, e.g. in retirement, early retirement, disability, death, or an acquisition of the company (“change of control”). Check your grant agreement and stock plan.
3. Understand The Tax Impact
You also need to understand the tax impact that leaving the company has on your equity compensation. Even for terminated employees, companies withhold taxes upon exercises of nonqualified stock options (NQSOs) and the vesting of restricted stock/RSUs. The income and withholding are typically still reported to you on Form W-2, even if the option exercise occurred after your employment ended—but not always.
“We have seen cases in which a client departs a public company where typically an exercise of nonqualified stock options would show up in their paycheck,” noted AJ Ayers. “Welp, the client does not work there any more, so there is no longer a paycheck. Where is that stuff getting reported?” She urges clients to keep a contact at the employer in the accounting or HR department so that there is someone to reach out to. “Often with tax-return deadlines approaching, we still have issues with getting W-2s from the company.”
AJ went on to note that sometimes companies do not withhold taxes on NQSO exercises by former employees, raising another set of concerns. “It can depend on the staffing in their accounting departments.” If taxes are not withheld and you instead receive a 1099-NEC, which can happen for grants that vest only after you terminated, you need to decide whether to pay estimated taxes for that quarter or wait until your tax return for the year to pay what you owe.
Be Extra Careful With Incentive Stock Options
Special tax issues arise with incentive stock options (ISOs). Under the federal tax code, you have only 90 days to exercise ISOs after a standard job termination and still retain the special tax treatment that ISOs offer (it’s 12 months with disability, and there’s no limit with death). However, if your company’s post-termination exercise period is shorter than 90 days, that is the specified period you have until expiration and forfeiture.
After 90 days from termination, ISOs become nonqualified stock options, which have a different tax treatment.
Alert: If your company allows more than 90 days to exercise ISOs after your termination date, you need to be aware that your type of option—and thus your tax treatment—will change if you wait beyond the 90-day point to exercise.
“Be sure you are well versed on those tax consequences,” urged AJ Ayers. “We have seen in many cases where a client will log into their equity portal and it will actually still say that the options are ISOs when we know that they are not because the client left the company years ago. Watch out for that and be sure you understand the rules.”
Further Resources
The webinar in which these panelists spoke, which also extensively covers ways to negotiate equity compensation at hire, is available on demand. At myStockOptions.com, the section Job Events has abundant educational resources on equity comp in job search, negotiation, hire, termination, and consultant/contractor situations.
Read the full article here