Leaving Your Job? Here’s How It Affects Your Equity!

True Root Financial is a financial advisor and financial planner based in San Francisco, CA. We serve clients across the globe.

If you’re a tech professional in the Bay Area, you’re probably familiar with the complexities of equity compensation. But what happens to it when you’re switching jobs, launching your own venture, or taking some time off?

If you are a tech professional interested in learning how we can help you claim your financial independence by investing wisely, minimizing taxes and maximizing your equity compensation, please book a no obligation call here.

Navigating these transitions can feel overwhelming, but understanding how your equity compensation is affected is key. Knowing your options can help you make smarter financial moves as you take your next step.

Explore the video below to uncover 3 essential steps for financial success when leaving your tech job.

Key Takeaways:

Know when your shares vest and if you’re close to a significant milestone
You may need to exercise your stock options within 90 days of leaving
Prepare for potential tax liabilities, especially with ISOs and RSUs.

Types of Equity Compensation

What are you dealing with?

First, let’s clarify the type of equity compensation you have, as this impacts what happens when you leave:

Stock Options (ISOs or NSOs): These give you the right to buy company stock at a set price, often lower than market value.
Restricted Stock Units (RSUs): These are company shares granted to you after vesting.
Employee Stock Purchase Plans (ESPPs):This program allows you to buy company stock at a discount through payroll deductions.

Different rules apply to each type of equity, and knowing which you have is the first step in understanding your next move.

What are the Vesting Schedules?

Most companies offer equity that vests over time, usually in four-year increments with a one-year “cliff.” Here’s what happens to your unvested and vested shares:

Unvested Equity: If you leave the company before your shares are fully vested, those unvested shares are typically forfeited.
Vested Equity: The shares you’ve already vested are yours, even if you leave the company. However, what happens next depends on the type of equity you have.

Let’s say your company grants you 4,000 ISOs with a four-year vesting schedule and a one-year cliff.

Less than 1 year: You lose all 4,000 ISOs if you leave before your one-year anniversary.
1 year: 1,000 ISOs vest (25% of the total).
2 years: 2,000 ISOs vested.
3 years: 3,000 ISOs vested.
4 years: All 4,000 ISOs vested.

For example, if you plan to leave after 2 years and 10 months, you’ll have 2,750 vested ISOs. If you delay leaving by just two more months, you could vest another 250 options, maximizing your equity.

What happens to your Stock Options if you exercise them before you exit?

If you hold stock options, the key decision is whether to exercise them before you leave.

Incentive Stock Options (ISOs): You generally have 90 days after leaving the company to exercise your vested options. After this period, they convert to non-qualified stock options (NSOs), which have different tax implications.
Non-Qualified Stock Options (NSOs): Similar to ISOs, you often have 90 days to exercise your vested options. However, unlike ISOs, NSOs are taxed as regular income when you exercise them.

If your stock price has risen significantly, exercising your options before you leave could be a profitable move. However, it’s important to consult a tax advisor to navigate potential Alternative Minimum Tax (AMT) implications for ISOs.

RSUs: What Happens to Your Shares?

RSUs are typically simpler to manage. Once they vest, they’re yours to keep, even if you leave the company. You don’t have to take any action to “exercise” them, as you would with stock options.

However, be mindful of the taxes on your RSUs. When they vest, they are considered income and subject to income tax. If you’re close to your next vesting date, it might make sense to time your departure strategically.

ESPPs: Handling Your Discounted Shares

With Employee Stock Purchase Plans (ESPPs), the rules are straightforward. Any shares you’ve purchased through the plan are yours to keep. However, if you’re still in the “holding period”, typically one or two years after the purchase, you may face higher taxes if you sell them too soon. After the holding period, you’ll likely qualify for long-term capital gains tax rates, which are more favorable.

Check out the video to learn how to leverage your equity for stronger job offers or greater financial flexibility, empowering your next career move.

Job Transitions, Layoffs, and Acquisitions

If you’re leaving due to a layoff or company acquisition, the rules for your equity may change:

Layoffs: In some cases, companies may extend the period in which you can exercise stock options beyond the typical 90 days. Check with HR to understand any special provisions.
Acquisitions: If your company is acquired, your unvested shares may either vest immediately (“accelerated vesting”) or be converted into equity in the acquiring company. Keep an eye on the terms of the acquisition to know where you stand.

Planning for Taxes: Don’t Get Caught Off Guard

One of the trickiest parts of managing equity compensation when you leave a company is handling the taxes. Depending on the type of equity and whether you’ve exercised or sold your shares, your tax bill could vary dramatically. It’s essential to consult with a financial advisor who can guide you through the process.

Dive into this video for expert insights on minimizing tax liabilities during your job transition, including strategies for stock options.

Next Steps For You

Leaving your company doesn’t mean you should leave your equity on the table. Timing your departure to maximize your vested shares or minimizing taxes through strategic planning could have a significant financial impact. Book a call below.

Leaving Your Job? Here’s How It Affects Your Equity!

Key Takeaways: