What should you do with your stock options if you’re laid off?

February 8, 2023 | equity compensation

Being laid off from a job can be a very stressful situation. On top of the sudden changes to your day to day life, there are many important financial decisions that you should consider.

If you’re a tech employee who has been laid off, you may be wondering what to do with your stock options. Here are a few things to consider:

1. Understand your options:
   
   Before making any decisions, it’s important to understand the type of stock options that you have and the terms of your options.Check your equity awards website and your plan documents to determine the type of stock options you have (ISOs or NSOs), find out how many shares you have vested, how many are unvested, and the expiration terms of your unvested shares. Stock options come with an expiration date which is a set date by which you have to either exercise (ie buy) your options or they expire worthless.
2. Liquidity:
   
   Determine if you can sell your options. If you worked for a private company it’s likely that you can’t sell the shares until right away. For private companies, there needs to be a liquidity event to create a market to sell your shares.If you worked for a public company then you can sell the shares on the open market. It’s important to understand when you will be able to sell the shares since this will help you decide if it’s worth exercising the options in the first place. Now that you don’t have an income, cash reserves become more important – and locking up cash in illiquid company stock may not be the best choice for you.
3. Consider if you should exercise:
   
   If your options are vested, you may want to consider exercising them. By exercising you pay the exercise price and turn your options into company stock, which you can continue holding until a future liquidity event.However, depending on what the exercise price is, it may be expensive to exercise your options. Having enough cash is very important now that your income has stopped so consider this decision wisely. Typically you will have to make a decision on whether to exercise any vested, but not yet exercised options within 3 months after separation (although some agreements may give you longer). If you don’t exercise the options before the expiration date then they will expire worthless and your equity will be worth zero.
4. Tax Implications:
   
   Keep in mind that exercising your options can have significant tax implications depending on the spread (ie the difference between the current market value and your exercise price). For non-qualified stock options (NSOs) you are subject to ordinary income taxes on the difference between the strike price and the fair market value on the date.For Incentive Stock Options (ISO’s) you may be subject to AMT tax on the difference between the strike price and the fair market value. Exercising a large amount of options (to avoid them expiring worthless) in a single calendar year may push you into a higher tax bracket. This can lead to increased taxes being due beyond any withholding on the stock options – thus increasing the amount of cash you need to come up with to cover the exercise.Lastly, it’s always a good idea to evaluate your stock options in conjunction with the rest of your personal finances and determine how they impact your financial goals. Exercising your options allows you to maintain your equity ownership in the company (great for long term upside potential), but it does come at a cost of having to use some of your cash savings and potentially reduced liquidity for an unknown amount of time if the company stock isn’t publicly traded.