Job loss sparks thoughts. Short-term cash-flow issues include: How can I pay bills? Can I pay them till I find work? How does termination pay work? Will severance pay support me? Next come long-term issues like finding fulfilling substitute work and 401(k) administration.
All are valid questions. However, equity pay is another issue in tech. Since the computer business has lost substantial jobs, everyone should learn about these challenges.
How to Understand Equity Comp After Severance
After losing a job, you need to relax and plan.
Vested but unexercised stock options provide the greatest risk. If you have an unexercised stock option, you can acquire company stock at the grant date’s stock price. A stock option’s right to buy stock at a certain price expires. Five to 10 years following the award date is typical. If you quit, your expiration date will likely accelerate.
Consider nonqualified stock options granted in June 2020 that fully vested in June 2023 and expired in June 2029. Your grant agreement expires many years from now, but your actual expiration date is three to six months following termination. Stock options lapse if not exercised before the accelerated expiration date. This is why you must thoroughly analyze plan documentation and engage professionals on your equity compensation status.
You may have also earned incentive stock options before being laid off. ISO exercise is not subject to ordinary income tax until the underlying stock holding is liquidated, but the alternative minimum tax can be costly. Losing a salary and a large tax bill might worsen cash-flow issues. Even if the firm extends the exercise date beyond 90 days after departure from service, an ISO that is not exercised is immediately converted to a nonqualified stock option. Tax effects vary by workout timing. These problems warrant professional advice.
This essay does not cover all possible issues, especially if you have restricted stock awards or work for a private company.
Strategizing: Planning Your Equity Compensation Issues
What should you do after losing a job?
- Inventory. Consider what you have. Include company stock from grants that vested before your termination date and ESPP purchases. Remember your vested stock options, the strike price you can buy stock at if you exercise, the sort of options you own, and their true expiration date.
- Study. Study any equity compensation documentation from the company. Consider checking your original offer letter, employment agreement, stock plan, and grant agreements. Check how termination affects your equity compensation grants.
- Ask questions. Are there noncompete clauses? Do unique circumstances allow you to keep unvested shares? If you leave service at 50 with 10 or more years of experience, do unvested grants vest? Know important dates and actions.
- Follow-up. Consult the stock plan administrator to clarify unclear or contradicting facts. Don’t trust your reading without verification—the financial ramifications can be severe.
- Consider specific cases. Consider how you left your work. How is furloughed equity compensation treated differently from termination? How is equity pay addressed if you’re laid off but still a consultant for the company? These scenarios can be complicated, and the documents above may not address them.
- Improve your status and self. You should try to negotiate a better deal. Can you negotiate your severance? Usually not, but it never hurts to try. If so, discuss unvested equity pay, especially if it will vest soon after termination. Asking challenging questions and having tough talks is good career practice. No is the worst they can do.
Forward-thinking: Preparing for future equity compensation
If equity pay is part of the future work structure, consider what might happen after you leave. It’s hard to think about termination in the start, so read termination provisions before accepting an offer. You may negotiate terms. Knowing how everything works if you’re fired will prepare you and reduce stress. Being as clear as possible when everything is uncertain helps.