What happens to your NSOs 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 NSOs?
Our industry is notorious for using hard-to-understand lingo, so before we start, a quick reminder that NSOs stand for Non-Qualified Stock Options.
A grant of NSOs 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. “Long enough” is called vesting. Vesting is usually done gradually over time. Once vested, the options on company stock are available to be exercised. Exercising the options turns them into company stock. Once the employee owns the stock, they can do what they want with them, sell them, keep them, whatever.
When facing a layoff or getting laid off, making the most of your NSOs is more complicated than other equity comp, 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 NSOs into three groups:
- Unvested
- Vested but Not Exercised
- Vested & Exercised
Unvested NSOs
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 NSOs you leave behind may also be used to negotiate a new job.
If vesting is in the immediate future, it might make sticking around a little longer more attractive or make them more negotiable for severance. This is why taking an inventory and knowing what you have will lead to better decision making.
Vested & Not Exercised
The toughest decision can be around the vested-but-not-exercised NSOs since you have control and more options. You can exercise the NSOs, pay the taxes, and then sell or hold the stock. Typically a company will give you 60-90 days to exercise your options if you quit, but if part of a layoff, it might be longer.
One common mistake I see is when employees pay the tax on the exercise, get laid off, and then the newly owned shares drop in value. Don’t assume that the share’s value will stay the same or go up as you transition. This situation can be especially painful if exercise happens at the end of a high-income year. If you think the next tax year might be a lower-tax year while you look for a job, and you can move that taxable income to the next year, it might be a good idea.
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. You already paid the tax and own the company shares if vested and exercised. You can take the shares with you or sell them — they are yours to keep.
And like before, this may be a good opportunity to diversify and reduce concentration risk. You may also need to juice up your emergency fund as you look for a job. The only real question is the capital gains, but the timing may be good if it is a low-income year.
If the stock price is down, as most are after 2022, and emotionally you don’t want to sell, you could sell over time. Dollar-cost average your sells over time, spreading out market risk.
If a private company, you may need a liquidy 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.
Final Thoughts & Checklist
- Get to know your company’s policy on how long you have to exercise your NSOs after getting laid off.
- Try and negotiate if needed.
- Calculate the value of your NSOs
- You can probably ignore the time value if the time is short
- Plan your exercises and plan for the resulting taxes!
- Plan the sale, or non-sale, of company stock that resulted from the exercise.
- Get to know your company’s repurchase policy (most likely for private companies).
Getting laid off is never easy. The complexity of equity compensation makes it all the more challenging. And there is naturally some emotion attached to it. You invested time, blood, sweat, and tears into your company, and equity was part of your reward.
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 and new rewards. Try to make informed decisions and focus on what you can control; it will be better than ok!