High-earning employees who receive equity awards as part of their total compensation package have more to consider than their base salary when changing jobs.
If you’re thinking about making a move, you’ll probably leave some awards on the table, no matter how well you time your departure. But that doesn’t have to be a bad thing—as long as it doesn’t come as a surprise.
Understanding how much of your equity you get to keep and how much you have to forfeit can help you time your exit to protect as much as possible and negotiate a solid offer with your new employer.
But navigating the complexities of equity compensation can be tricky on your own, so getting your financial planner and attorney involved as early as possible is crucial.
The way your equity awards will be handled when you leave your current position may vary based on your role, tenure with the company, award type and vesting schedule.
If you’re planning to leave your current role, it’s essential that you understand the equity you currently have, rules that apply when you leave, and the implications that leaving could have on your earnings and tax liability.
Your equity award agreement should have all the details, but here are some key points to consider before you make a move.
The type of equity compensation you receive will influence the steps you should take when leaving your current employer.
Tip: If you have vested shares of non-public companies (RSAs, RSUs, stock options), your employer may get first crack at buying them back before you sell them privately to a secondary party, affecting the liquidity of your shares.
Because you generally get to hang onto vested shares, while forfeiting unvested shares , understanding your vesting schedule will help you determine what you can take with you when you leave. Common vesting schedules include:
Leaving a company often speeds up the timeline by which you need to exercise vested stock options, if you have them.
Although exercise windows vary by employers, you have 90 days to exercise incentive stock options (ISOs). After that, they will convert to non-qualified stock options (NSOs) and lose their preferential tax treatment.
In some cases, you may have longer than 90 days to exercise ISOs after your departure. If so, it’s important to plan accordingly.
If you’re leaving with NSOs (or ISOs that have been converted to NSOs), the exercise window often ranges from 90 to 180 days, although some employers have longer timelines.
Understanding your post-termination exercise period is critical because changes to the exercise date can significantly affect your cash flow as you need to ensure you have enough cash set aside to buy the shares if you wish to do so.
While it’s not likely you will be able to retain all of the equity you’ve accumulated during your tenure, you can take steps to maximize the value of the awards you get to keep.
Because you only get to keep vested awards when you leave, the timing of your departure will affect how much you get to take with you.
If a substantial number of unvested awards are vesting in the near-term, putting off your last day of employment until after they vest may be worth it.
The same rules generally apply if you’re a casualty of a layoff or leaving voluntarily.
While you get to keep equity awards that have already vested, you won’t have the benefit of timing your departure to align with awards that are vesting soon to maximize the equity you get to maintain.
If you’re fired for cause however, you may have to forfeit some of your equity awards, regardless of whether they’ve already vested
Selling shares of company stock can help diversify your portfolio and align it with your long-term financial goals, but don’t let being an insider at your previous employer come back to haunt you.
If you have non-public information, leaving the company doesn’t nullify concerns of insider trading. You must wait until the information becomes publicly available before selling your shares.
While most information gets shared each quarter during the company’s earnings release, some can remain private for much longer, so be careful when selling shares of your previous employer’s stock.
These rules also apply to shares you may hold in a personal account, not just those you got as part of your equity compensation package. Trading from a personal account doesn’t indemnify you from trading on insider information if you have it.
Before selling any vested equity (whether you have non-public information or not) you need to confirm whether you must follow the trading windows of your previous employer. Check your plan documents for more information as rules vary by plan.
Often, custodians require shares to stay in an account linked to the employer for a specific timeframe. While your shares are in that account, you can only trade during company regulated windows.
Once you have the freedom to transfer the shares to a separate account, the new account won’t have the company blackout periods and won’t outright prevent you from selling. You still need to be mindful of insider trading as detailed above and if you are a current employee, still following the company guided trading windows in this personal account.
Whether stock options were part of your compensation package with your previous employer or not, you can use them as a negotiating tool when you’re hammering out the details of your new job offer to give your total compensation a boost.
If you’re taking a job with a private company, you may also want to negotiate the post-termination exercise window, so you have more time to exercise options if you leave.
Because private companies can change significantly from year to year, giving yourself more time to exercise your options improves your chances of making a financial decision that works in your favor.
Because the value of stock options isn’t predictable, it’s important to balance the need for a consistent paycheck with the potential value stock options may provide.
Some employers allow ex-employees to participate in tender offers, but many give current employees priority, so you may not be able to sell back your shares after you leave.
If your employer has ongoing tender offers, you may want to negotiate the start date for your new role so it’s after the next offer, giving you one last opportunity to liquidate some of your shares.
Taking advantage of tender offers could be crucial to maximizing your equity if your employer participate in them.
Most employees have to give up unvested RSU grants when they leave a company, but you may get to keep them if you’re retiring.
The grants can provide a financial boost if you get to take them with you, but they can also throw a wrench into your cash flow planning because of the tax implications.
Your grant document should outlined the rules for retaining any unvested shares upon retirement and a financial advisor can help you set up your financial plan to minimize your tax burden when they vest.
Navigating the timing and tax treatment of equity compensation plans is complicated. If you aren’t already working with an advisor, it may be a good idea to start before you leave your current role to help avoid a big tax bill.
A financial advisor can help you create a plan that maximizes the equity you get to keep while minimizing your tax burden.
To learn more about how you can make the most of your equity compensation, download our equity compensation guide today.