What happens to employee stock options or equity compensation if you leave the company? Before giving notice, understand how vested and unvested stock options and restricted stock units are treated if you quit, retire, or leave the company for other reasons.
In brief, here’s what usually happens to stock options when you leave your company:
- If you quit, you’ll often lose unvested stock options and restricted stock units (RSUs), though exceptions for double-trigger RSUs may exist
- After leaving the company, employees typically have a 90 day post-termination exercise window to purchase vested stock options before forfeiting unexercised options
Key factors that help determine if you can keep your stock options after quitting
There is a range of possible outcomes for stock options if you leave the company. Some key factors are:
- Whether your shares are vested and exercised
- What type of equity compensation you have
- Whether your employer is public or private
- Why you’re leaving the company (retirement, a new job, laid off, terminated with/without cause)
- What (if any) specific terms you negotiated with the company
Due to the company-specific and individualized nature of employment agreements and equity incentive plans, we suggest you consider working with your financial advisor and attorney to fully understand the implications before you give notice.
What happens to vested stock options if you leave the company?
If you have vested stock options (incentive stock options (ISOs) or non-qualified stock options (NQSOs)) that you haven’t exercised, you usually have the opportunity to do so before you leave the company or within a defined post-termination exercise period after your termination date.
Note that the stated expiration date on the original grant often doesn’t apply if you’re no longer employed with the company. Exercising stock options after termination should be done in close coordination with the company and understanding of the rules.
So whether you voluntarily leave the company or they terminate your employment, if you have the ability to exercise and desire to do so, pay close attention to deadlines. See the section later in this article on considerations before you exercise employee stock options.
Incentive stock options
- Though the post-termination exercise period may be extended after leaving the company, ISOs lose their “qualified” status and favorable tax treatment 90 days after your terminate employment (IRS rules).
- Extensions beyond the 90 day exercise window can be made at the company’s discretion, but the options would turn into nonqualified stock options at that point.
Non-qualified stock options
- Review the terms as outlined in your company’s equity plan documents and/or grant agreement. It is most common for NSOs to have a 90 day exercise window after the employee’s termination date, but other arrangements are possible. It’s also possible to negotiate a longer exercise window.
What happens to unvested stock options when you quit?
Generally, quitting means forfeiting unvested options. After all, that’s the whole point of vesting! If you have an annual cliff vesting schedule, keep that in mind as you consider when to give notice.
Also, if you did an early exercise by purchasing stock options before they vested, the company will generally repurchase any shares that haven’t vested when you leave your job.
Partially vested double-trigger restricted stock units
For employees of private companies with restricted stock units, you probably have double-trigger vesting. To own the shares (or receive cash), you must satisfy two vesting requirements: usually time and a liquidity event. So if you quit or leave the company before a liquidity event, you might lose time-based vested RSUs.
As more companies stay private for longer, it’s become more common for employers to allow departing workers to keep time-vested RSUs. However, if there is no liquidity by the award’s expiration date, the award will expire worthless. As always, check the plan document and/or grant agreement.
Before exercising at a private company or startup
Equity options or awards can be a lucrative part of a compensation package. For employees of private companies, there are a few extra layers of risk which require careful planning and understanding of tax implications. Exercising stock options before changing jobs can be difficult financially without a public market for the stock.
You need cash to exercise stock options
Even if your grant has value, you still need the money to exercise and buy the shares and pay tax. Exercising nonqualified stock options requires immediate tax withholding on the spread. Aside from the fact that this amount may be insufficient, paying the withholding tax requires more capital. Incentive stock option holders may have a lesser tax liability, depending on the situation (discussed below). There are ways to get loans for this, but that’s another financial risk.
ISOs and the AMT
There are no tax consequences at exercise, but holding ISOs shares at the end of the year could trigger the alternative minimum tax (AMT). Stock in a private company is typically a very illiquid investment, although sales on the secondary market might be possible. Having cash savings to cover any potential tax due without the need to sell shares will be critical. Have your CPA or tax advisor run an analysis to determine the tax implications before exercising stock options after termination.
When’s the Best Time to Exercise Stock Options?
Clawback provisions and repurchase rights
If you work for a startup, often the greatest value of your stock will follow an exit event such as a merger or acquisition or an IPO. However, if you leave the company beforehand, you may miss the upside, even if you’ve already exercised your options.
When you sign an offer letter, you likely receive high-level information about your stock option grant, but typically not the entire equity plan agreement or related documents unless requested. Unfortunately, these documents contain language about clawbacks or repurchase rights.
With clawback or repurchase rights, after a triggering event, the company has the right to repurchase vested shares, exercised or not. The repurchase price is typically the lesser of the exercise price or the current value of the stock. Review your plan documents for these provisions.
Retiring, getting fired, and other situations
Adding to the complexity, the treatment of your stock options may vary depending on the reason you’re leaving the company. Thus far, we have focused the discussion on what could happen if you quit and leave your company voluntarily. But what happens if you get fired, leave for a competitor, retire, or become disabled?
There are a number of events that can cause someone to end their employment with a company. And in this case, the “why” often matters.
Important note: Consult an employment attorney in your state to discuss your situation. Not legal advice.
- If you’re fired, the company may claw back vested and unvested options. Check your plan documents for more on what happens if an employee is terminated with or without cause
- If you quit to work for a competitor, in some situations, the company may have the right to claw back vested options. This depends on several factors, such as whether you have signed a noncompete agreement and the laws in your state. Check your plan document and consult an attorney.
- If you retire, you may have different rules about how your stock is treated. For example, options may have accelerated vesting or you might have longer to exercise your employee stock options. It can also depend on your tenure with the company and retirement age.
- If you’re disabled (or die), again companies typically have different rules to align with unique scenarios. The outcomes range. Some employers will simply cancel outstanding grants (vested or not), others will have a longer post-termination exercise window, or even accelerate the vesting of unvested options or awards.
Kristin McKenna for Forbes: Tips for Negotiating Equity at Your Next Job
Work with a stock option advisor
Darrow Wealth Management is a fee-only financial advisory firm specializing in stock options, stock-based compensation, and sudden wealth events. To discuss your situation and how we may be able to help, schedule a consultation today.
Work with a Stock Option Advisor
Although this article is designed to serve as a robust introduction, many individuals should consider working with their financial advisor and/or attorney to understand how their specific equity plan and employment agreement may affect the treatment of their shares. This article is for general information only and should not be misinterpreted as personal financial, tax or legal advice.
[Last reviewed April 2025]
