Here’s How to Protect Your Equity If You Get Laid Off

This article was originally posted in TechCrunch.

In 2024, over 150,000 tech employees were laid off across 549 companies. If you’ve found yourself in this position, you should understand exactly what will happen to your equity because it’s likely impacted by your termination… and inaction could cost you a life-changing sum of equity. 

By the end of this guide, you’ll understand: 

• The basics of equity compensation 
• How leaving your company impacts the status of your equity
• Strategies to save your equity from expiring 

Equity 101

Tech employees are well aware that their stock options are a key element of their compensation package, that this equity vests over time, and that they purchase this equity at its original price (the “strike price”)[0]. While equity is an excellent opportunity to build wealth, it’s a challenging decision if and when to purchase your shares. When you consider changing jobs, you can control the timeline so you purchase equity accordingly. When you’re terminated from your company, you lose this flexibility and control. 

When you are terminated, any unvested shares are forfeited. The key question is what to do with your vested, unexercised stock options. These options have a “post-termination exercise window,” which is the period between your departure and their expiration. This window applies to both voluntary and involuntary terminations.

If you don’t exercise your options before they expire, they are returned to the company, and you receive no value. Be mindful—once you leave your company, any unexercised options now have a set expiration date. If you miss it, you lose them.

While some companies have extended the post-termination exercise window, it’s typically 90 days. You will have approximately three months from your termination date to make a challenging decision: do you exercise your stock options or allow them to expire? If you do exercise those options, how will you pay for both the options and potential tax consequences?  

The period after losing your job is never a calm time, especially during a recession. It can feel especially chaotic to contemplate exercising equity at a time when you’re also worrying about your personal cash flow. 

If the company has increased in value during your employment, the tax obligations connected to exercising your options are often much more expensive than the exercise cost itself. The exact amount of taxes you may have to pay depends on factors such as the number of options you hold, the strike price, the current value of your company’s shares, your personal financial situation, and the types of options you hold. (We go into more detail on the types of options in the “Negotiate” section below.)

Exercising all of your options could cost hundreds of thousands of dollars. Investing such a large sum into a risky, illiquid asset may be unaffordable—or too risky—for those who can’t afford to lose it.

[0] If you need a refresher you can browse resources here. 

What does the post-termination exercise window mean for me? 

If you have a 90-day post-termination exercise window (common at most companies), your unexercised stock options will expire 90 days from your termination date. This information should be available in your offer letter. If it’s not, we’d encourage you to reach out to your former manager or the company’s HR department to request this information. 

If your post-termination exercise window extends beyond 90 days (e.g., 7 years), any unexercised incentive stock options (ISOs) will be reclassified as non-qualified stock options (NSOs) after the 90-day mark. This means they will be subject to the less favorable NSO tax treatment if exercised beyond that period. You have until the end of your post-termination exercise window to act.

What actions can I take today?

The most important step is making a decision with your equity. Doing nothing is still a decision, and a small investment of time to evaluate your options can  A) minimize your long-term regret and B) potentially lead to a life-changing sum of money. 

We recommend acting thoughtfully but promptly. Here are some choices you may consider. 

Disclaimer – Compound Planning helps tech employees work through decisions exactly like this one. None of this article is financial advice, but if you are looking for modeling tools or human advisors to help you through this decision, we can help. 

1. Negotiate

If you’re able to negotiate, request an extension of the exercise window and review any restrictions on sources of liquidity. Oftentimes your manager didn’t make the decision to lay you off and your former employer may be sympathetic to this kind of request. 

If you have ISOs, they legally expire 90 days after termination [0]. However, NSOs can have a longer exercise window. You may be able to negotiate converting your ISOs into NSOs after 90 days and then have a longer exercise window. If you already have NSOs, you can simply request an extension of the exercise window.

If you can negotiate a much longer window (2-10 years) for the options that have vested, you can hold off on the decision to exercise until you are ready to incur the risk. Be advised: if the company increases in value before you exercise, your tax obligations will likely increase as well.

One additional negotiation point revolves around restrictions on selling your equity. Many option plans have restrictions on selling your options without company or Board consent, which can decrease your flexibility in liquidating them. Additionally, some plans may restrict various types of loans that involve the equity. Ideally, you want to negotiate maximum flexibility with help from an experienced attorney in your area. 

[0] ISOs have many other nuances. For example, ISOs are only allowed up to $100,000 of value in a single year - so if your shares are worth more than $100,000, some of them must be NSOs by law. Additionally, ISOs have a tax benefit on both the exercise and the sale events. Upon exercise, you pay no tax unless you trigger AMT. Upon sale, you can qualify for the lower long-term capital gains rate if it’s been >1 year since exercising and >2 years since the grant date. ISOs are complicated; you can learn more about them here or consult a tax expert to help you. 

2. View your options as an investment decision 

When you exercise your options, you’re making an investment decision. The first thing you should do is determine if your former company is a good investment. 

The best way to determine this is to answer a few basic questions about your company: 

• Do you still believe in the founder? 
• Does the company have product-market fit? 
• What’s the revenue and growth rate? 
• Do the employees have exceptional talent, drive and integrity? 
• Do customers love your product or service? Is it differentiated from other offerings? How hard/easy is it for a customer to switch? 
• What is the net retention rate - i.e. are existing customers staying with the company and expanding their use?  
• What is your strike price compared to the current value - and what do you think the value will be in 2-5 years?

While there are various complex formulas to model a company's value, answering the above questions often helps you fall into one of two categories: "confident" or "hesitant" about the company. This is sufficient to take the next step. 

3. Figure out your budget

How much can you safely invest in risky, illiquid assets? One simple approach is to total your current and future assets and liabilities, factoring in any significant planned expenses.

Your budget for such investments (e.g., startup stock) should come only after covering near-term priorities—essentials like food, rent, and student loans—and maintaining an emergency fund (typically 3–6 months of living expenses). Keep in mind that startup investments often tie up your money for years until a liquidity event occurs.

4. Decide on financing 

If you want to purchase your options before they expire, the first source of financing you could use is your existing liquidity such as cash (e.g. bank accounts) or public investments (e.g.  brokerage accounts). 

Using existing liquidity to exercise options is a popular choice since it’s simpler and cheaper than other financing methods. However, most people don’t have the cash readily available for what can be a six- or seven-figure expense, including taxes. Once you commit your cash, it remains tied up until a liquidity event.

Another financing option is a non-recourse loan, which covers the cost of exercising your options. The “non-recourse” aspect means that if your company doesn’t succeed, you may not be personally liable for repayment.

Non-recourse loans end up being one of the most common ways to finance post-termination option exercising, but they can be expensive (often 20-50%+ of the value of the options). Although this seems high, this math makes sense! The investor is taking on the risk of an asset that could go to zero, with no collateral to recover if things go wrong. As a result, they charge a high interest rate to the borrower (you). Additionally, non-recourse loan providers are often only originating loans for well-known, objectively healthy companies.  If your employer isn’t on their list, this may not be an alternative for you or the cost may render the transaction unappealing.

Another financing option is a secondary sale, where a fund or individual purchases some or all of your options. However, many stock option plans have restrictions on these sales, so review your plan documents carefully. If restrictions exist, consider consulting a lawyer before proceeding.

In a secondary sale, the price is typically negotiated. To make the deal worthwhile, the price should cover the exercise cost, taxes, and generate some profit for you. Some transactions allow you to exercise all vested options, pay taxes, and sell only a portion to finance the deal—similar to a cashless exercise of public equity. In some cases, your former employer may have board members, investors, or approved secondary market-makers with whom you can negotiate a sale.

The final source of financing is a recourse loan. With this loan, you use the proceeds to purchase your options (similar to a non-recourse loan). However, the difference is that if the shares go to zero, then you will need to pay back all the money. This financing method is much riskier  and it can get you into troublesome situations like lenders coming for your house or other assets. 

Consider these factors at your next job 

All of the above describes how to get yourself out of a less-than-ideal situation. For your next job, be proactive to avoid this scenario. 

To maximize your chances of success, have a clear plan for exercising or not exercising your options from the moment you join the company. While navigating the complexities of equity may seem tedious, understanding your options could be one of the most important financial decisions you make. I recommend to my friends: “take a day, learn everything you can, and even write yourself a short memo explaining your decision whether or not to exercise their stock options.” Your decision should balance your living expenses, sources of cash (salary, investments), risk tolerance, and confidence in both the company and your other assets. 

Additionally, you can join a company that is more friendly to employees. Explicitly ask your interviewer about the length of their post-termination exercise window. While it’s not a requirement to choose a company with a longer window, the greater their length the more time you have to exercise. 

Conclusion

Understanding your equity compensation and the decisions you face after a layoff can be crucial to securing your financial future. Whether it’s negotiating your post-termination exercise window, evaluating the investment potential of your stock options, or carefully considering your financial ability to exercise them, it’s important to act thoughtfully and timely. This is a moment where your long-term financial well-being may hinge on the decisions you make. If you’re feeling uncertain about your next steps, seeking guidance from professionals can be invaluable. At Compound Planning, we’re here to help you navigate these complex decisions, ensuring you make informed choices that align with your financial goals.

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