Cliff & Vest Equity compensation, worked out

What happens to your options when you leave

Resigning starts two clocks at once. One gives you ninety days to find the cash to exercise or lose the options entirely. The other, which almost nobody is told about, quietly converts incentive stock options into non-qualified ones on day ninety-one.

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In short

The equity conversation at a startup is entirely about the upside. Nobody walks a new joiner through what happens when they leave, which is unfortunate, because leaving is what happens to most people and it is where most equity is quietly lost.

Two separate rules bite at once, and they are frequently confused with each other. One is contractual: your grant agreement says how long after leaving you may still exercise. The other is statutory: the tax code says how long after leaving an incentive stock option keeps its favourable treatment. They are both commonly ninety days, they are not the same rule, and neither one is negotiable after you have handed in your notice.

Run your own numbers: Exercise Financing Break-Even Calculator.

Unvested shares simply disappear

Whatever has not vested on your last day is cancelled and returns to the option pool. There is no window, no grace period and no partial credit for the months served since your last vesting date, unless your grant vests monthly and you happen to leave on a vesting day.

This is worth thinking about a month or two ahead of a resignation rather than a week. Vesting cliffs and monthly vest dates are knowable in advance, and the difference between resigning on the twenty-eighth and the second of the following month can be a full month of equity — occasionally, at a one-year cliff, a full quarter of the grant.

Acceleration clauses do exist, but they almost always trigger on a change of control rather than on your departure. Read the grant rather than assuming.

The ninety-day window is a bill, not a benefit

Vested options are yours in the sense that you may buy the shares. You still have to buy them, and the standard grant gives you ninety days from termination to do it. After that they are forfeited and the company keeps them.

For anyone at a company that has grown since they joined, this is a demand for money at the worst possible moment. You have just given up your income, and you are being asked to pay the strike price on every vested share plus, in most cases, a tax bill on the spread. At a company whose valuation has risen tenfold, that total can exceed a year of the salary you have just resigned from.

The window runs from your termination date, not from your last day in the office, not from when your final payslip clears, and not from when HR replies to your email. Get the date in writing on the day you resign.

The uncomfortable truth is that a ninety-day window converts a large notional equity stake into a forced binary choice: find a substantial amount of cash within three months, or hand back everything you spent years vesting. Most people hand it back.

The rule almost nobody mentions: ISOs stop being ISOs

This is the part that catches out even people who planned carefully. §422(a)(2) conditions incentive stock option treatment on the holder having been an employee at all times from the grant date until the day three months before exercise.

Exercise within three months of leaving and everything is normal. Exercise on day ninety-one and the option has not expired — it has silently become a non-qualified option. The consequences are immediate and entirely different: the spread is ordinary income on the day you exercise rather than an alternative minimum tax adjustment, your employer must report it, and Social Security and Medicare apply, which they never do to a statutory option.

Two features of this make it genuinely dangerous. First, nothing visible happens on day ninety-one; the option looks identical in your equity portal. Second, it interacts badly with an extended exercise window — a company that generously gives you ten years to exercise has given you ten years of non-qualified options, because the statute does not care how long the contract allows.

The three-month test is measured to the exercise date, not to the sale. It is extended to twelve months where the termination is due to disability, and it does not apply at all in the case of death.

Extended windows, and why they are worth more than salary

A growing minority of companies replace the ninety days with something humane — commonly seven or ten years from grant, sometimes conditioned on a minimum period of service. Where it exists, it removes the forced choice entirely: you keep the vested options, and you decide when to exercise based on information you do not yet have.

It is, in expected-value terms, one of the most valuable clauses a grant can contain, and it costs the company almost nothing in cash. It is also very rarely raised in offer negotiations, which are dominated by share counts and strike prices — numbers that mean far less than whether you can still act on them after you leave.

The trade-off is the ISO conversion above. An extended window is still the better deal for most people, because a non-qualified option you still hold beats an incentive stock option you had to forfeit. But it should be a decision rather than a surprise.

What to establish before you resign

  1. Your exact post-termination exercise window, in writing, from the grant agreement rather than from a recruiter’s memory.
  2. How many options are vested today, and what vests before any plausible last day.
  3. The current 409A valuation, which sets the tax on exercising.
  4. Whether the company permits early exercise or a net exercise, both of which change the cash required.
  5. Whether there is any secondary market or tender programme, since without one there is no way to sell shares to pay for the shares.

The first of those is the one to get first. If the answer is ninety days and the amount is large, the exercise decision is a real financial event that deserves modelling before you decide when — or whether — to give notice.

Questions

Can I negotiate a longer exercise window on the way out?

Occasionally, and it costs nothing to ask, but your leverage is at its lowest the moment you resign. Some companies will extend the window as part of a separation agreement, particularly where the departure is amicable or the company initiated it.

Be aware that an extension past three months converts incentive stock options into non-qualified ones regardless of how the extension is documented. That may still be worth it — more time to find the money usually beats better tax treatment you cannot afford to use — but you should agree to it knowing that.

What if I am laid off rather than resigning?

The mechanics are generally identical: unvested shares are cancelled and the same window applies. What changes is the negotiating position, because a company managing a layoff often has more appetite to be generous, and severance discussions are a natural place to raise the exercise window.

Check whether your grant or plan contains any acceleration on involuntary termination. It is uncommon outside executive agreements, but it exists, and it is worth reading rather than assuming.

Do I have to exercise everything, or can I do part of it?

Almost always you can exercise any number of vested shares, in as many transactions as you like within the window. This is frequently the right answer when the full exercise is unaffordable: buy the portion you can pay for comfortably, and let the rest go.

Partial exercise also lets you manage the tax. Exercising incentive stock options up to the point where alternative minimum tax begins costs only the strike price, and doing that across a year boundary doubles the room. Whether the window allows you to straddle a year end is worth checking.

The company says my options are worth a lot. Should I borrow to exercise?

It is a real option and it is expensive. Non-recourse lenders will fund the strike price and the tax in exchange for interest plus a share of the eventual upside, and if the company fails you owe nothing. The implied annual cost commonly lands somewhere between 25% and 50% once the participation is counted.

The important thing is that leaving changes the comparison entirely. Someone still employed can simply wait; someone with ninety days on the clock cannot, and against forfeiting the options outright, expensive financing can be rational where it otherwise would not be.

I missed the window. Is there anything to be done?

Realistically no. Forfeited options are gone, and the deadline is contractual rather than discretionary — the company usually could not reinstate them even if it wished to, because the shares have returned to the pool and the plan governs.

It is worth confirming the date in writing rather than assuming, because plan documents occasionally measure the window from a different event than you expect. But do that immediately; every week of delay narrows the options further.

Does any of this apply to RSUs?

No, and the difference is worth being clear about. RSUs are not purchased, so there is no exercise and no window. Unvested units are cancelled on departure exactly as unvested options are, and vested units have either already been settled into shares you own or, at a private company, are waiting on a liquidity event that your departure may disqualify you from.

That last case is the one to check. Private-company RSUs with a liquidity condition are frequently forfeited on departure even though the time-based portion has fully vested.

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Sources

Everything asserted above traces to one of these. We cite the statute, the regulation, or the IRS directly — never another commentary site.

This guide is educational information, not tax, legal or investment advice, and reading it creates no professional relationship. Equity compensation interacts with the rest of your return in ways a single article cannot see. Before acting on anything here, take it to a qualified tax adviser.