With reports of up to 100,000 jobs lost in the tech industry in early 2023, you may be wondering – “What happens to my equity compensation if I am separated from employment?” In a sudden layoff, emotions can run high. It’s easy to make big mistakes with your stock options during such a disruptive event. Let’s discuss how you can protect your stock options in a layoff.
Know Your Post Termination Exercise Periods
Your employment contract will dictate the timeframe you have to exercise stock options in the post employment period.
Nonqualified stock options (NQSOs) that have vested can be exercised after termination for the time period stated in your contract. In many cases, employers will only offer 90 days for you to decide to exercise or forfeit these grants. Some employers are now offering a longer period of time to exercise these options. It’s important for you to know the date (and type) of options that you have so you don’t forfeit options that are in the money.
Incentive stock options (ISOs) can only be extended to a maximum of 90 days. After this period of time, the grants would convert to NQSOs due to IRS Regs. § 1.422-1(a). In fact, your employer might even give you less time to exercise these shares. ISOs can have significantly different tax treatment from NQSOs. So you’ll want to be sure what type of shares you have before making any decisions.
Restricted stock and restricted stock units (RSUs) are generally forfeited at your termination date. Any shares that haven’t already vested will expire on your final work day. If you are at a smaller employer, you could perhaps negotiate your termination date if a vesting period is close. Larger companies likely won’t provide this convenience, but may choose to accelerate vesting of shares for impacted associates.
Know Your Tax Impact
Any time we are dealing with stock options and RSUs, you want to be sure how the vesting, exercise and sale will impact your tax situation. While a complete discussion of the tax ramifications of these transactions is outside the scope of this article, there are a few basic tax considerations you need to be aware of.
- If you exercise NQSOs, you will receive additional W2 compensation for the difference between the exercise price and fair market value of the stock on the exercise date. Your employer should be withholding Federal (and state, if applicable) income taxes on this transaction. The Federal rate will be 22% in most cases. If your income puts you in a higher tax bracket than this, you’ll want to set aside some of the proceeds to pay the tax bill.
- If you have accelerated RSUs, you will receive additional W2 compensation for the full value of the shares that vested (since there is no exercise price like NQSOs). Again, you’ll want to be fully aware of any tax liability if your marginal tax rate is more than 22%.
- If you exercise ISOs, you’ll need to be aware of the consequences of the Alternative Minimum Tax (AMT) before proceeding. It’s possible to create a HUGE tax liability just by exercising shares (trust us, we’ve seen it), so proceed with caution here.
Grab All Your Documents Related to Equity Compensation
Now is also the time to grab any and all documents related to your equity compensation from your broker’s portal. At some point, your tax professional is going to want to know all about your vesting, exercised and sold shares. Now is a great time to download some of this information for when there are questions at tax time.
You will want to look for the following types of reports:
- Holdings report
- Sales or transaction report
- Future vesting report (in case you have some shares with extended exercise periods)
While your year end 1099 tax document will contain a lot of the information you will need at tax time, sometimes it doesn’t have everything you need. Downloading these reports should provide the missing information.
Be sure to run the reports with all available history and dates so you have a complete record of stock option transactions for your tax professional. Sometimes information starts to “disappear” after employment ends, so getting this information soon after termination should be of utmost importance.
I hope this article has provided you with some actionable steps to take if you are facing a layoff. While we’ve outlined some basic considerations here, we’re always happy to discuss more complex questions for our clients as part of our planning packages. If you would like to know more about our services, please schedule an introductory meeting.