What happens to your startup stock options when you leave—before an IPO
Layoffs and voluntary departures are a part of startup life. When a job change is on the horizon, one of the most important financial questions to address is what happens to unvested stock you received as compensation. If you're thinking of leaving your job or want to be prepared for a potential layoff, it's important to consider what the financial implications are and how you can navigate the process. while potentially growing your wealth. Another question to consider is whether you lose stock options when you leave a company?
What are startup stock options
Startup stock options give employees the right to purchase company shares at a predetermined price, known as the strike price. This purchase right is earned over time through a vesting schedule, typically spanning four years with a one-year cliff. Until options vest, they cannot be exercised.
The two primary types are ISOs and NSOs. ISOs offer potential tax advantages but come with specific holding requirements. NSOs are taxed as ordinary income upon exercise. The type you hold shapes the financial decisions you'll face if you leave, which is why understanding the distinction early matters.
Are you leaving money on the table?
What happens to stock options when you leave a company? 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 equity compensation package could be forfeited. If you already have vested stock options but have not exercised all of them, then you need to decide if you'll let them go or exercise them. U.S. employees left behind estimated $33 billion of unexercised options in 2021 alone, according to Pitchbook.1
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 its price per share drops below your exercise price, you could lose money. On the flip side, exercising your employee stock options could lead to potential 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 decide what to do? The 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 one 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, ISOs generally convert to NSOs after 90 days. That may change 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.
Risk vs. reward
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 company 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.
Take the next step
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. Create an account with Forge to explore what your shares could be worth and access our self-directed marketplace.
FAQs
Why do startups give options instead of RSUs?
Startups typically offer stock options because they align employee incentives with company growth. Options require the company's valuation to rise above the strike price before the holder sees any financial benefit, which rewards employees for helping build long-term value. Restricted Stock Units tend to be more common at later-stage or public companies, where the stock already carries a more established market value.
Can you sell startup stock options before an IPO?
You cannot sell unexercised options directly. However, once you exercise your options and hold shares, you may be able to sell those shares on the private market through a marketplace like Forge, subject to buyer interest and transfer restrictions. Company policies such as Right of First Refusal (ROFR) may also apply.
What happens to startup stock options if the company is acquired?
The outcome depends on the terms of the acquisition. Vested options may be cashed out at the acquisition price or converted into the acquiring company's equity. Unvested options could accelerate (vest immediately) or be canceled, depending on the deal structure. Reviewing your stock option agreement for acceleration clauses is an important step if an acquisition is on the horizon.
