What Happens To Your Equity If You Are Laid Off?

Brandon R. Amaral, CFP®, EA
Brandon R. Amaral, CFP®, EA

Founder & Financial Planner, Amaral Financial Planning

Whether you were terminated for cause or let go due to company-wide layoffs, it can cause a lot of fear, anxiety, and stress, especially with your finances.

For many tech workers, their equity compensation can make up a majority of their income and investment portfolio. Understanding the tax implications and deadlines can help reduce uncertainty and set you up for success.

Sign up for the AFP newsletter to receive weekly updates and blog posts!

Here are some considerations for your equity compensation if you are laid off:

Read your Severance Agreement carefully

While there are standard practices around your equity compensation, your Severance Agreement will highlight important deadlines and oftentimes provide certain benefits. These can sometimes include:

  • Accelerated vesting of unvested shares
  • The choice to convert ISOs to NSOs
  • Extension of deadline to exercise shares

RSUs (Restricted Stock Units)

When it comes to RSUs, employees are awarded a set amount or dollar value of shares that will vest over time (usually 4 years). If you leave the company before your vesting date, you will lose out on those shares and not be entitled to any of the remaining unvested shares.

If you were terminated due to a company-wide layoff (where the intention is to refill the position later), then you can expect to forfeit any unvested RSUs. However, if you were terminated due to a Reduction In Force (where the intention is to permanently eliminate your position), then you can expect your unvested shares to be accelerated and vest immediately. Whether or not your shares are forfeited or accelerated will depend on your company and role in the organization.

Shares that are accelerated will be taxable income on the date of vest. Shares that are forfeited will not be taxable.

ESPP (Employer Stock Purchase Plan)

For ESPP, a portion of your paycheck is set aside each pay period to purchase company shares, usually every 6 months. If you leave your company before the purchase date, then you will typically be refunded any money set aside on your final paycheck.

However, the tax code allows companies to keep your funds and complete the purchase if you are terminated within 3 months of the purchase date (or 12 months if you leave for disability). While this is allowed by the IRS, most companies do not follow this. You will need to read the details of the Employer Stock Purchase Plan to see what exactly is permitted.

Funds that are refunded to you are not taxable since they were a post-tax deduction.

ISOs & NSOs (Stock Options)

Like RSUs, stock options are used by companies to retain their employees and vest over time (usually 4 years). If you leave the company before your vesting date, you will lose out on those shares and not be entitled to any of the remaining unvested shares. It’s important to note that options are not actual shares, but provide the holder with the right to purchase the shares at a fixed price.

For ISOs, you typically have 90 days from the date of separation to exercise your vested shares (known as the PTE or Post-Termination Exercise window). For NSOs, you typically have 10 years from the date of grant to exercise your vested shares (even after termination).

Some companies will offer extended PTE windows where you can elect to convert your ISOs to NSOs so that you can have more time to exercise your shares after leaving the company. You should consult a tax advisor before making this decision since NSOs have less favorable tax treatment than ISOs.

Having a plan for your equity compensation can ensure that you are not leaving any money on the table after termination. If you would like to work with a financial planner to walk you through your options, I would love to help you!

To learn more about becoming a client, schedule a complimentary meeting now!

Disclaimer: This blog is for informational purposes only, and should not be considered advice or recommendations. All opinions expressed herein are solely those of Amaral Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. You should consult your financial advisor, tax professional or legal counsel prior to implementation.