What happens to your ISOs if you are laid off?
Being let go is never easy, but the way these tech companies are handling it is as awkward as a 10th-grade me trying to ask a girl to a dance.
I don’t know if it was because they have never really done much but hire or grow, and they don’t know how to handle mass layoffs, or if there is some sort of malice; regardless, this process has been emotionally tough for many.
To add to the fear, frustration, and confusion, many employees wonder, what happens to my equity compensation, like ISOs?
Our industry is notorious for using hard-to-understand lingo, so before we start, a quick reminder that ISOs stand for Incentive Qualified Stock Options. A grant of ISOs is the employer saying if you stick around long enough, we will give you a certain number of options to buy company stock for a specific timeframe. Sticking around “Long enough” is called vesting. Vesting is usually done gradually over time.
When facing a layoff or getting laid off, making the most of your ISOs is more complicated than other equity compensation, like RSUs. The reason is you usually have more options, pun intended.
Before making any decisions, it’s best to inventory all your equity compensation. Knowing all the types and rough values you have can give you an idea of what you have.
With options, valuations are a little more complicated since the time value of the options has to be calculated. Of course, if you are getting laid off or quitting before a layoff, time may be short.
When taking your inventory, it is best to break your ISOs into three groups:
- Vested but Not Exercised
- Vested & Exercised
The plus side of unvested NSOs is you probably have few choices. The negative side of NSOs is you probably have few choices. Because their purpose is to reward you for sticking around, you will most likely lose them if you quit or get laid off since you are not vested.
The company may accelerate your vesting schedule as part of the severance package, or it may be negotiable. The value of the ISOs you leave behind may also be used to negotiate a new job.
If the company is making adjustments to the structure of your ISOs, be on the lookout for them turning into NSOs. NSOs are less tax advantageous, so be on the outlook.
If vesting is in the immediate future and you are thinking about quitting, it might make sticking around a little longer more attractive or make them more negotiable as part of severance.
This is why taking an inventory and knowing what you have will lead to better decisions making.
Vested & Not Exercised
The toughest decision can be around the vested-but-not-exercised ISOs since you have control and more options.
Typically a company will give you between 60-180 days after being laid off to exercise your options.
Regardless of how long they give you, the ISOs will turn into NSOs after 90 days by law. Make sure you stay on top of the time! NSOs have a worse tax profile than ISOs, and the last thing you want to do is pay unnecessary tax right before a reduction in income.
Given how complex the taxes can be around ISOs, including AMT, and leaving your job, it’s all the more critical that you have a plan.
Those of you who work with us know we are big on diversification. In most cases, selling the stock shares after exercise is a good idea, especially if a reduction in income is coming, or if you have exposure to company stock in other places. We are always looking for ways to reduce concentration risk.
Vested & Exercised
This one is easy for NSOs, but more complex for ISOs given tax issues. The shares are yours if you exercised the ISOs. You can take them with you or sell them. But with ISOs, selling too soon will most likely have adverse tax consequences.
A layoff or potential layoff is a good time to review your concentration risk. And if you need funds for expenses while you look for a job, and it can be done in a tax-friendly manner, selling may be an option.
If a private company, you may need a liquidity event to sell your shares, or they may have a repurchase agreement giving the company the right to buy the shares from you if you leave. This can be tough if a private company has yet to go public and a lot of growth is possible.
If a thoughtful risk and concentration plan are in place, leaving the shares with a private pre-IPO company may be a good idea from a risk-return standpoint. Even if you no longer work for the company, you may want to participate in its future growth and success.
Waiting can even be more attractive with ISOs because they have a better tax profile with time. Selling out of anger or fear is never a good idea. Save your passion for your next job.
Final Thoughts & Checklist
- Get to know your company’s policy on how long you have to exercise your ISOs after getting laid off.
- Try and negotiate if needed.
- If your company gives you longer than 90 days, understand that ISOs turn into NSOs after 90.
- Set reminders, so you don’t leave money on the table!
- Calculate the value of your ISOs if forfeited
- Use to negotiate pay and equity at the new job.
- You can probably ignore the time value if the time is short.
- Plan your exercises.
- Plan the sale, or non-sale, of company stock that resulted from the exercise and the taxes.
- Remember that ISO shares have rules for qualified dispositions.
- Get to know your company’s repurchase policy (most likely for private companies).
Luckily we still have a strong labor market, and hopefully, it won’t take too long to find another job. No journey is in a straight line. This new path will lead to new challenges, new rewards and new skills. Try to make informed decisions and focus on what you can control; it will be better than ok!