What to do with your employee equity if you leave your startup before its IPO

Laid off or leaving your startup? Make a plan for your employee equity

The job market seems like a series of contradictions. On one hand, employees continue to quit their jobs at near-record numbers. As the Great Resignation continues in 2022, 4.2 million Americans per month voluntarily left their jobs in October.1

At the same time, many companies are choosing to let staff go, or employees are worried about potential layoffs. The overall job market remains relatively healthy. But global startup layoffs picked up significantly in 2022, according to Layoffs.fyi.2

Amidst these trends, you might be facing tough decisions around what to do with your employee equity. If you’re thinking of leaving your job or want to be prepared for potential layoffs, it’s important to consider what you might be giving up and how you can navigate this issue to potentially grow your wealth.

Are you leaving money on the table? When leaving a startup, consider whether you’re leaving money on the table by forfeiting employee equity.

First, see what your vesting schedule looks like. If you’re close to vesting stock options or restricted stock units (RSUs), you might decide to delay your resignation. Otherwise, this component of your total compensation package could become worthless. If you’ve already vested, but have unexercised stock options, then you need to decide if you’ll let them go. U.S. employees left behind $33 billion of unexercised options in 2021, according to Pitchbook3.

The tricky part is figuring out what your equity could be worth, if anything. By exercising your stock options when leaving, you’ll have to pay upfront in the hopes that you’ll be able to eventually sell your shares for more than the exercise price.

If the startup ends up folding or has down rounds, for example, you might lose money. On the flip side, exercising your stock options could lead to potential big gains down the road. If the startup has an IPO years later, you might be able to sell those shares for much more than you purchased them for.

So, how can you tell what to do? First step is to research your company’s current valuation and growth trajectory, such as by looking at past fundraising rounds. Forge has valuation data for over two thousand private market companies and startups.

If it seems like your company is on a strong path, you might decide to exercise your options. Then, you could hold onto your employee equity until you can potentially sell employee shares for a gain, such as in the public market after an IPO or through a private marketplace to cash in pre-IPO.

Know your options

To make the best decision around your employee equity when leaving your company, you need to be well informed. First, make sure you’re clear on your vesting schedule. Next, know the rules on your timeframe to exercise options. Many companies give you a 90-day window to exercise your options after leaving the company. Ask your head of HR or other relevant leaders if you’re uncertain.

Some companies have longer post-termination exercise periods — perhaps several years rather than a few months. In that case, incentive stock options (ISOs) generally convert to non-statutory stock options (NSOs) after 90 days.4 That changes the tax consequences — with ISOs, you can potentially avoid taxation until you sell shares, whereas NSOs could increase your income tax when exercising the options.

Still, having longer to decide can be an advantage. If you can wait several years, you don’t have to quickly pull the money together to exercise your options when leaving your company. And over the following years, you can see how the company performs and decide if it’s worth it to cash in.

In general, though, there will be a risk/reward decision to make around your employee equity. Even if you exercised before leaving or have RSUs, you might have a decision to make regarding whether to hold onto your private company shares or sell them through a private marketplace to get some liquidity.

One route you could take is to sell a portion of your shares or exercise some of your options rather than going all in. That way, you can still potentially participate in some of the company’s upside, but if it doesn’t work out, you’re not in as deep. For a deeper dive into the strategy of diversification, see our recent blog “Sell Your Pre-IPO Stock to Diversify Your Net Worth and Reduce Risk

To figure out what to do with your startup employee equity, consider your financial situation, including your risk tolerance, and compare that to the opportunity you have to recognize gains from private company stock.

Want to get a better sense of what your shares could be worth? Register with Forge for free today.

1 U.S. Bureau of Labor Statistics

2 Layoffs.fyi

3 Pitchbook

4 DLA Piper

About the Author

Jake Safane specializes in financial reporting and is a former thought leadership editor for The Economist with articles appearing in Business Insider and The Washington Post among other media outlets.

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