What Happens to Your Stock Options When You Leave a Startup?
Hi Monica, it’s Richard, Pied Piper’s recruiter. The entire team loved you and I’m excited to extend you an offer to join Pied Piper as a Director of Winning. We think you’ll be a great fit here culturally and we really hope you decide to join the team. We have a few other candidates we really like, so I’ll need a decision by the end of tomorrow, ok?
Well, that happened fast. You weren’t really even in the market for a job because you like your current one, but they reached out to you and Pied Piper is such a cool company. This will look great on your resume and you could really use the salary bump if you’re ever going to be able to afford buying a house.
You have to take this job. And that means you have to leave your current one. With that decided, what happens to your stock options when you leave a startup and decide to move on?
Bye-bye unvested options
Let’s start with the easy part. The options that have yet to vest are forfeited and they go back to the company’s stock option pool. That should be of no surprise to you. Vesting means that you have to stay employed with the company for a certain period before you truly “earn” your options.
But what happens to the options you’ve already earned? Those are yours to keep, right? Unfortunately, it’s not that simple.
Bye-bye vested options?
If you read our beginner’s guide to stock options, you should know that options typically have a post-termination exercise period, or PTE. The PTE indicates how many days you have to decide whether or not you’d like to exercise your stock options after you leave a company (whether voluntary or not).
That period usually lasts 30-90 days, so it’s a decision you have to make pretty quickly after leaving, and in a period in your life that can be a little more stressful than usual given that you’ve just switched jobs. Once you’ve made that the decision, you also have to come up with the money to exercise the options and turn them into shares within the allotted time period.
If you decide to go for it and pay the exercise price (and any taxes that may be due), your options turn into shares and you essentially become a shareholder. As a shareholder in a private company, it may be challenging for you to sell your shares to others as there are typically restrictions on transferring/selling them. This means that you, like the other shareholders (including founders and VCs), will have to wait for a liquidity event, aka an exit, to get money for those shares.
If you don’t exercise your options within the PTE period, you lose them and they go back to the company’s employee option pool.
Many employees decide not to exercise their options within the PTE period and forfeit their options.
First, there are the non-believers – employees who don’t think the company will do well and therefore don’t want to invest in it through exercising their options.
Second, there are the believers – employees who believe in the company, but either don’t have the money to exercise their options or have it but feel like it’s too much to put at risk.
Third, there are the unaware – employees who have never given their options any thought, were surprised there’s even a PTE period and a decision to make, and therefore don’t really feel like dealing with it.
You’re on the clock. What should you do with your stock options when you leave a startup?
First, decide which of the above mentioned three groups you belong to (help here).
If you’re not a believer, then move on and don’t look back – good luck on the new job.
If you’re a believer and short on cash or don’t really feel like dealing with the decision, reach out to us at EquityBee and we’ll try to help you out.