What Happens to Stock Options When You Quit?
Navigate equity compensation when leaving your job. Understand vesting schedules, exercise windows, tax implications, and strategic decisions to maximize your equity value.
Leaving a job with equity compensation can be financially consequential. Understanding what happens to your stock options, ESOPs, RSUs, and other equity when you quit is crucial for making informed career and financial decisions. This guide breaks down everything you need to know.
Types of Equity Compensation
Stock Options (ISOs & NQSOs)
Right to purchase company stock at a fixed price
You typically have 90 days to exercise vested options, or they expire worthless. Unvested options are usually forfeited immediately.
Exercise price, current fair market value, tax implications (AMT for ISOs), and cash required to exercise.
Employee Stock Ownership Plans (ESOPs)
Retirement plan holding company stock
You keep vested shares but may lose unvested portions. Distribution timing depends on plan rules and your years of service.
Generally tax-deferred until distribution, potential for rollover to IRA to continue deferral.
Restricted Stock Units (RSUs)
Promise to receive shares upon vesting
Unvested RSUs are typically forfeited. Vested RSUs remain yours, but you may face immediate tax consequences.
Quarterly or annual vesting, potential accelerated vesting for certain termination scenarios.
Typical 4-Year Vesting Schedule
Understanding how your equity vests over time is crucial for timing your departure
Cliff Vesting Alert
If you leave before your 1-year anniversary, you forfeit ALL equity compensation. Even leaving one day before your cliff date means losing everything. Plan your departure timing carefully!
Decision Framework: Exercise or Walk Away?
Follow this systematic approach to make the best decision about your equity
Calculate Current Value
For Stock Options: (Current Market Value - Exercise Price) × Number of Vested Options
For RSUs: Current Market Value × Number of Vested Units
If the result is negative or minimal, exercising may not make financial sense.
Assess Cash Requirements
Exercise Cost: Strike price × number of options
Tax Implications: Potential AMT for ISOs, immediate tax for NQSOs
Consider whether you can afford both the exercise cost and potential tax liability.
Evaluate Company Prospects
Growth Potential: Is the company likely to increase in value?
Liquidity Timeline: When might you be able to sell (IPO, acquisition)?
Financial Health: Is the company financially stable and growing?
Tax Implications When You Quit
Understanding tax consequences can save you thousands of dollars
Incentive Stock Options (ISOs)
Exercise: No regular tax, but potential Alternative Minimum Tax (AMT)
Sale (same year): Disqualifying disposition - treated as ordinary income
Key Risk: AMT can be substantial if exercising large amounts
Non-Qualified Stock Options (NQSOs)
Exercise: Ordinary income tax on the spread (Market Value - Exercise Price)
Sale: Capital gains/loss on appreciation from exercise date
Planning Tip: Consider timing exercise across tax years
Restricted Stock Units (RSUs)
Vesting: Ordinary income tax on full fair market value at vesting
Sale: Capital gains/loss from vesting date value
Withholding: Automatic tax withholding at vesting (often 22% + state)
Professional Tax Advice Essential
Equity compensation tax rules are complex and can result in significant tax liability. Always consult with a qualified tax professional before making exercise decisions.
Your Equity Departure Checklist
Complete these steps to maximize your equity value and avoid costly mistakes