Planning to quit and worried about your stock options?
You are not alone. There’s enough of us who have given up stock options, vested or not, unwittingly because we didn’t know better or what may become of them.
The good news: it’s not that complicated. And we’re here to help!
You need to primarily ask yourself 4 questions in this scenario:
- Have you completed your cliff period?
- Are your options vested?
- What is the exercise window post-exit?
- What is the exercise price and if offered the chance to exercise, would you like to double-down, exercise and own these shares in the company?
Cliff Period
This is where no shares are awarded, meaning that if you leave the company before the cliff period ends, you will miss out on any shares, no matter how much time has passed since the grant date.
The cliff period is put in place to make sure that you have contributed meaningfully to the company for a set amount of time before you receive any ESOPs.
In India, the minimum cliff period for ESOP vesting schedules as mandated by the law is 1 year.
Vesting Periods, Vested Options
For the uninitiated, most employee stock options have a vesting period, meaning you get the right to purchase shares in exchange of your options only after a stipulated period. Not all granted options vest at the same time, so keep a close eye on your vesting schedule when planning to quit.
Why? Because unvested options go *poof* as soon as you quit.
Post-Exit Exercise Window
This is a finite amount of time before your vested options disappear as well in case you haven’t exercised them. An accurate view of your post-exit exercise window helps: Is it 90 days or 3 years or 10 years?
Historically, companies have kept this at 90 days post the last working day but times are changing. A few startups have begun to herald in change and extended this to as long as 10 years and beyond.
This only makes sense, considering it takes Indian startups 18 years on average to go public.
Exercising your Vested Options
What’s the harm in exercising all my vested options, you may ask.
Ever heard of taxes?
Apart from what you pay to exercise your options (number of options*strike price), exercising options almost always comes with a significant tax implication.
You are taxed on the difference (also known as the perquisite) between what you pay to purchase the shares (strike price) and their fair market value, which is determined (for private companies) by the valuation at which the most recent fundraising round occurred.
For example, if you paid â‚ą10 to buy the options, and their fair market value at the time was â‚ą100, you will be taxed on â‚ą90.
So, what next?
Once you have figured out your post-termination exercise window (which should be clear before accepting any stock option grant), there are a couple of ways this can go.
- You could wait it out till you see a liquidity event like an IPO or a buyback in the horizon before exercising because it significantly reduces the financial risk involved.
- If you are in a company where this exercise window is short, and you don’t expect liquidity anytime soon, you either take a bet on the company’s future growth or let it go.