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Stock Option Rules After Job Loss

It may not be the first thing you think about if you’re abruptly asked to clean out your desk, but deciding what to do about your stock grants or options could have major financial implications. And the rules are neither simple nor intuitive.

“When someone loses a job, the vesting on outstanding stock options usually stops,” says Bruce Brumberg, co-founder of myStockOptions.com, which provides information about stock grants and options. “For options that are already vested, you need to know how long you have to exercise them before they’re forfeited.”

Rules vary according to the type of stock grant or stock option involved. Some companies make grants of restricted stock or of restricted stock units, or RSUs—similar to restricted stock but with important differences. Other employers provide various kinds of options, with grants sometimes linked to length of employment or to meeting performance goals, that let you buy shares at a specified price, often during a stated time window. Vesting approaches may also vary, with some shares or options vesting gradually and others all at once (known as “cliff” vesting).

In the case of restricted stock and restricted stock units (RSUs), you generally forfeit stock that hasn’t vested when you leave the company, while you get to keep shares that have already vested. However, your employment agreement or stock plan may include a provision that protects you if you’re terminated after your company is acquired by another firm.

Performance stock or options grants are typically based on whether you achieve goals during a specified period, and if you have to leave before the period ends, you’ll lose the shares even if you would have met the objective. If shares or options vest gradually, you’ll get to keep only those that have already vested. So, for example, if you’re granted options to buy 1,000 shares of company stock that have a four-year vesting schedule, with 25% vesting each year, and you’re fired after 2½ years, you’ll get to exercise the options for 500 shares. With cliff vesting, you’ll forfeit the entire grant if you leave before vesting.

If you’re forced out, it’s crucial to review the rules about grants and options as soon as possible and to exercise options, if that makes financial sense, during a post-termination exercise period that typically lasts 90 days. If you fail to meet the deadline or to adhere to any special terms of a separation agreement, your options will expire.

Finally, if you participated in an employee stock purchase plan, you get to keep shares bought for you while you were employed, but your eligibility to participate ends with your job. The company will have to return any money withheld from your paycheck to purchase shares you didn’t receive.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.


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