Leaving a company can be a pivotal moment in your career, and it often raises important questions about your equity compensation. Understanding what happens to your equity when you exit is essential for making informed decisions about your financial future. This blog will explore the different types of equity compensation, the implications of leaving a company, and key considerations to keep in mind.
Types of Equity Compensation
1. Stock Options
Stock options grant you the right to purchase company shares at a predetermined price. Here are some critical points to consider:
- Vesting Schedule: Stock options typically have a vesting period, often four years with a one-year cliff. If you leave before the cliff, you generally forfeit all options. If you leave after, you keep the vested options.
- Exercise Period: After leaving, you usually have a limited time, often 90 days, to exercise your options. If you don’t exercise within this period, you may lose them.
2. Restricted Stock Units (RSUs)
RSUs are shares granted to you that vest over time. Here’s how they work:
- Vesting: If you leave before your RSUs vest, you forfeit the unvested shares. Vested shares, however, are yours to keep.
- Tax Implications: RSUs are taxed as ordinary income upon vesting. If you leave before they vest, you won’t owe taxes on the unvested shares.
3. Employee Stock Purchase Plans (ESPPs)
ESPPs allow employees to buy company shares, often at a discount. Consider the following:
- Ownership: Shares purchased through an ESPP typically belong to you once acquired, even if you leave the company.
- Tax Considerations: The discount on shares may be subject to tax, depending on how long you hold them after purchase.
Key Considerations
Vesting Schedule
Understanding your vesting schedule is crucial. Most companies have a standard four-year vesting plan with a one-year cliff. If you leave before the cliff, you lose all equity. If you leave after, you retain only the vested portion.
Exercise Period for Stock Options
Be aware of the exercise period for stock options. After leaving, you might have a short window to exercise your options, often 90 days. Missing this deadline can result in losing your options.
Tax Implications
Exiting a company can trigger various tax events:
- Stock Options: Exercising options can lead to capital gains taxes if the stock has appreciated.
- RSUs: Upon vesting, RSUs are taxed as ordinary income. If you leave before they vest, you won’t incur tax on forfeited shares.
- Consult a Professional: Given the complexities, it’s wise to seek advice from a tax professional to understand how exercising options or selling shares will impact your tax situation.
Negotiation
If you’re leaving on good terms, consider negotiating your equity terms:
- Extended Exercise Period: You might negotiate for a longer exercise period for your stock options.
- Acceleration Clauses: In some cases, particularly during mergers or acquisitions, you may negotiate for accelerated vesting of your RSUs or options.
Conclusion
Understanding what happens to your equity when you leave a company is essential for protecting your financial interests. By familiarizing yourself with the different types of equity compensation, vesting schedules, exercise periods, and tax implications, you can make informed decisions as you transition to the next phase of your career. Always consider seeking professional advice to navigate the complexities of your equity, ensuring you maximize your benefits during this critical time. Your future financial stability may depend on the actions you take today.