If you work in tech or have climbed the ladder throughout your corporate career, you may have accumulated stock options with your employer. These Employee Stock Options (ESOs) are the right granted to employees by an employer to purchase company stock at a set price. This set price is often steeply discounted from the current market value of the company’s stock.
When you’re employed with the company, you are usually permitted to hold your stock options after they vest for a period of time (often 5-10 years). However, if you choose to leave your employer for another job or for retirement, you enter option expiration territory.
It’s common for any options that haven’t been exercised to have a new expiration of 90 days after you separate from service. This often leaves employees in a bit of a bind – they’re unsure of what to do with these options that are about to expire, and they don’t have a game plan for how they’ll use the proceeds of their sale, or how they’ll navigate the tax liability of selling.
Let’s dive into how you can successfully play the “option expiration game” if you choose to leave your current employer.
Prioritizing Your Stock Options
When you look at the total equity compensation you have with your soon-to-be-former employer, you might find:
- Stock options
You’ll want to focus on getting out of your employee stock options before deciding what to do with your RSUs, ESPPs, or any other equity compensation. You own RSUs and ESPPs that have vested, so you aren’t under any obligation to sell within a certain time period. Of course, it may be financially beneficial from a tax perspective to sell, but you aren’t under the gun.
Employee stock options, however, are a different story. Most employees who are separating from service need to sell any vested stock options in 90 days or less, or they disappear. This could be a notable amount of money left on the table if you don’t act quickly.
What Options Do You Have For Your Options?
In general, employee stock options that have vested have three different options to sell:
- Exercise your options and purchase the stock at the set price offered by your employer. This would require you to have the cash upfront to exercise your options.
- Exercise your options and sell off a portion of them. In this case, you could exercise your options but sell off a portion of them to cover the purchase price.
- Exercise your options and sell them all immediately. In some cases, you may want to sell off all of your options immediately. Ideally, your company stock price will have grown over time, and there will be a notable spread between what your options were at the time of vesting and what the company stock is currently worth. By selling all of your options within the 90-day expiration window, you’d be able to avoid any potential overconcentration issues, and cover the cost of exercising your options with the profit you make from selling. This can also provide a bit of a financial cushion as you transition to a new role at a different company.
Of course, if you choose to sell any of your options within the 90-day window, you’re triggering a taxable event. Depending on how long you’ve held your options, you may incur short or long-term capital gains taxes. It may be wise to calculate whether you’ll make enough on the sale to cover any potential tax liability you’ll incur.
Working With An Advisor
If you’re going through a major transition, like a job change, working with a financial advisor to help navigate your options can be helpful. You’ll have several financial considerations that will need to be addressed in the near future including:
- What to do with your employee stock options.
- How to navigate vested RSUs or ESPPs granted by your former employer.
- What tax exposure you’ll have if you sell all (or some) of your options upon terminating service.
- How your new employer will compensate you, and how to navigate any stock options received there.
- What a change in employer could mean for your long-term financial goals, including retirement savings, daily-use company benefits, salary compensation, and more.
If you’d like help navigating these questions, and restructuring your financial plan around a job change, contact us by clicking here. We’d love to learn more about your unique situation and questions.
Want to learn more about Employee Stock Options? Our comprehensive overview is an excellent place to start, whether you’re planning to leave your employer or not.