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Your Equity Awards Post-Employment: A Guide to Managing RSUs and Stock Options

Your Equity Awards Post-Employment: A Guide to Managing RSUs and Stock Options

November 06, 2023

Amid this recession, downsizing has been the norm for companies, large and small, to navigate the challenging economic landscape. Industry giants like Amazon, Ford, Pepsi, Meta, and X haven’t been immune to these restructurings, potentially affecting thousands of employees who hold Restricted Stock Units (RSUs) in these organizations.

If you find yourself in this situation, you might be concerned about the fate of your compensation as you face the looming possibility of parting ways with your employer. Here are 3 valuable tips, according to findings from a recent myStockOptions webinar, for managing life after separating from your employer to help navigate the uncertainties ahead.

Preserve Your Equity Compensation Records and Employment

The first, and most, critical step when you suspect you may no longer work for your employer is knowing your equity awards, vesting status, and company policies. Keep all documents related to your equity and employment throughout your tenure. Having these documents in advance is crucial. Contact your company's stock plan administrator if you do not have them.

Obtain your compensation and employment records before separating from your employer to understand your awards, terms, and constraints. Ensure you can access relevant websites for stock information post-employment, as companies might not provide this data after departure. Relying on them may prove challenging, as not all companies have comprehensive equity information departments.

Understand How the Rules Apply to You Post-Employment

Keeping records is not enough. Read and understand these documents. Find out how involuntary separation from your employer changes the rules and affects your equity awards and vesting status. Know the timeframes for exercising your equity awards and negotiating different terms.

Usually, you can exercise vested stock options or RSUs within a timeframe determined by your company's plan and grant agreement. Companies stick to these timelines and will not remind you about the expiration date. It’s up to you to do the heavy lifting.

Negotiating different terms often happens during hiring or separation agreements. Rules vary by industry, job level, company practices, and your negotiating ability. Some companies offer extended exercise periods to attract talent. The post-termination exercise period (PTEP) extension benefits private company ex-employees because:

  • Private companies have limited liquidity compared to publicly traded stocks, making it challenging for employees to fund their options. An extended PTEP lets you wait for better opportunities, like an IPO or acquisition.
  • The value of stock options may not be immediately apparent in private companies. With an extended exercise window, you can hold onto your options and benefit from the company's growth and increased valuation over time.
  • A longer exercise window reduces the pressure to exercise your options immediately upon leaving the company.

Leaving before RSUs vest usually means forfeiture unless your grant specifies otherwise or your company allows continued vesting. Another option would be staying on as a consultant post-employment to continue vesting in your equity awards. This option keeps you connected to the company and ensures you don’t forfeit valuable unvested equity.

Understand The Tax Implications

Companies withhold taxes on nonqualified stock options (NQSOs) and RSUs due to their taxable nature, as recognized by the IRS. This process complicates things for former employees, especially those who have left involuntarily. As a former employee, you face challenges because you no longer receive a regular paycheck, leading to uncertainty about tax withholding.

Reporting discrepancies may also occur due to variations in company practices. You might receive a 1099-NEC instead of a Form W-2, which affects tax treatment and timing. Additionally, misclassifying incentive stock options (ISOs) that have converted into nonqualified stock options (NQSOs) can add further confusion to tax matters.

ISOs have a 90-day exercise window after standard job termination for favorable tax treatment. If your company's post-termination exercise period is shorter, it impacts tax treatment. Beyond 90 days, ISOs become NQSOs. Know these rules to handle taxes correctly, especially if your company offers extended exercise periods.

Neither MML Investors Services nor any of its subsidiaries, employees or agents are authorized to give legal or tax advice. Consult your own personal attorney, legal or tax counsel for advice on specific legal and tax matters.