Derek, the collegiate soccer star, is aiming for an early retirement at the age of 45. We recently discussed adapting his financial system to account for this life change and how to best do it.
To get started, we walked through his stock option considerations because his employment status will be changing. This thought exercise can be very helpful to you as an options holder. What happens to your stock options after leaving your company?
Stock Options After Leaving Company
When you are considering leaving your employer, it’s best to contemplate what happens to your options long before you walk out the door. You can depart for a variety of reasons – new opportunity elsewhere, some time off, or early retirement.
Regardless of the reason, it’s a great idea to know what happens to your stock options when you no longer work for your current employer.
The answer, of course, is not straightforward. It depends on why your employment status changes, what kinds of options you have, and what you’re allowed and not allowed to do.
The best idea is to review your plan documents, but before you do so, here are some basics to consider.
Stock Options Lifetime
Stock options have an expiration date. This date is the last day you can realize the value of them.
Typically, the expiration date is ten years from the grant date. If you don’t exercise your options by this date, you will forfeit any dollar amount associated with them.
Employed at the company, or not, options do expire.
Employment Status
Your ability to use your options can change as your employment status changes. The lingo that is used to describe this situation is, “post termination exercise period.”
Or as I like to call it – how much time do you have left to use your options?
When you leave on your own volition, you typically have 90 days to use your vested options.
If you have Incentive Stock Options (ISOs), it can be complicated. To keep ISO status, you must exercise the options within 90 days of termination.
Furthermore, if your company gives you one year from termination to exercise your ISOs, you must exercise them within the 90 day timeline to keep them as ISOs. The one year timeframe refers to the period that the options remain ISOs. This is complicated!
Timeline Considerations
Forthcoming expiration dates and changes in employment status are wonderful opportunities to make decisions around your stock options.
For example, if you left a job at the end of last year, your 90 day timeline is spread over two years – 2023 and 2024. This is extremely helpful for tax purposes because you can spread out income over two years, instead of one.
Understanding the timetable and your situation will help you develop a strategy around your options.