When you decide to leave a company, there is generally a checklist of items you need to accomplish before you depart. If you’ve been awarded stock options as part of your compensation, there are additional considerations to be aware of to ensure you gain the most value from your benefits. We’ll outline the steps you should take to prepare and determine if you should exercise your options and use your ability to buy the stock at a set price outlined in your plan.
Public and Private Companies
Before we get into managing your stock options before you leave your job, it’s helpful to understand the differences between how public and private companies operate. Most people with stock options are part of a publicly traded company and have ample opportunity for market liquidity for their shares. However, within private companies, there may be certain limitations such as when—or if—you can buy or sell your stock. Additionally, the level of assistance you receive and access you receive from either type of company may be further affected if you’ve announced you’re leaving or are already a former employee. We’ll discuss some of the other differences to keep in mind in the following steps.
Obtain a Copy of Your Stock Options Plan Beforehand
It’s essential to download a copy of the full details of your stock options plan and agreement well before you give your notice. Securing the information as soon as possible helps you avoid losing access once your employer’s aware of your transition. Additionally, companies are not obligated to remind employees of their stock option rights or provide assistance with them when you’re planning to leave. For example, if you’re aware of all your options and their vesting dates, you might consider staying on board a bit longer if you have a new block of options vesting soon.
Share Your Plan Details With a Professional
While the tax rules will be the same for public and private companies, a tax or financial advisor can further guide your strategy in managing or exercising your options before you leave. After you leave your company, you’ll generally have 90 days to decide if you’ll exercise your options before losing any potential value. A professional can help you identify tax implications, the value you may be leaving behind if you don’t exercise your options, or the most suitable time to exercise your options if you choose to do so.
Find the Funds You’ll Need to Exercise Your Options
After a professional consultation, you’ll know if your options are “in the money” or “out of the money.” If you’re “out of the money,” the set price to purchase your shares within your stock options plan exceeds the current stock price. However, if your stock options can be exercised at a price below the current stock price, you are “in the money,” which provides a profit opportunity and a good reason to exercise them. If you stand to gain significant value from exercising your options, you will need to find the funds to purchase the stock. It’s helpful to determine if your company allows “cashless exercise” or “net exercise” options that don’t require you to put in money upfront to buy the stock. If a cashless exercise isn’t possible and you are short on the cash you need, you might consider other alternative ways of funding such as taking a short-term loan, using a HELOC, waiting until your next bonus period before leaving, etc.
Weigh Your Options as a Former Employee
Your ability to gain access, insight, and assistance into your stock plan may be significantly different as a former employee. You’ll have to weigh these changes or challenges when carrying out your stock options strategy. For example, if you work for a private company, you may have to wait until the company goes public to sell the shares or receive an offer to repurchase the options from you. In this case, you have little insight into the company’s performance and development, which could affect the future value of your shares. Read your plan and discuss the process with your company to understand if you’ll be responsible for managing your options on your own or if you’ll have access to information and assistance to help you through the process.
A job transition requires extensive preparation and decision-making regarding your assets. If you have stock options to manage, the process can become even more complicated. Taking these steps in advance and partnering with a knowledgeable professional can help to make the process smoother. If you have questions about how we help professionals move into new chapters while protecting their hard-earned assets, please contact our team.
CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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