What Happens to ISOs if You’re Laid Off

June 26, 2024 EquityFTW

Incentive Stock Options (ISOs) are a common form of equity compensation that employees receive from companies that typically haven’t gone public yet.

The good news is that if you have ISOs and the company you work for eventually goes public or gets acquired by another company, those ISOs can experience massive gains in value. The bad news is that in 2022 and to start 2023 we’ve seen mass layoffs at both large tech companies and smaller start-ups and this has thrown a giant wrench in people’s plans for those large ISO paydays.

With all of these layoffs happening, we’re frequently asked, “What happens to my ISOs if I’m laid off?”

If you’re employed in the tech industry, you may have heard rumors circulating that layoffs are a possibility. Because of the important consequences a layoff can have on your equity compensation, it’s critical to have a full understanding of what will happen to your ISOs if you’re laid off.

This article will not cover all of the Basics of ISOs or When You Should Exercise ISOs, If you’re wanting to learn more about those, please visit the linked articles. Also, if you haven't filed for unemployment, we highly recommend you check your state's website and apply. It's a benefit you've likely been paying for already.

Understanding ISO Status When You’re Laid Off

To determine what will happen to your ISOs if/when you’re laid off, you’ll want to first take an inventory of every outstanding grant of ISOs you’ve received from your employer. This information shouldn’t be too difficult to gather because most equity plan administrators’ websites include fairly comprehensive summaries.

Once you’ve inventoried your ISO grants, you’ll want to separate them into categories based on type.

Unvested ISOs
Vested But Unexercised ISOs
Vested and Exercised ISOs

We’ll explain more about these groups later, but you’ll want to figure out exactly how many ISOs you have in each category.

Being Laid Off With Unvested ISOs

If you are laid off with unvested ISOs, those ISOs will typically be deemed expired on your last day of work. This scenario is the most unfortunate, but probably the easiest to remember.

In the current environment, some companies have been giving employees notice that their last day of work will be in a few months. This extra notice can provide more time for ISOs to vest, but usually whatever remains unvested on the last day of work will be deemed expired.

If you get laid off and will be leaving equity on the table, it may be worthwhile to calculate how much you’ll be forfeiting. Having this number can be useful when negotiating equity at another company.

Companies will sometimes accelerate the vesting of some/all of your ISOs, but it’s a rare occurrence and creates huge accounting headaches for them. If this does happen, be careful because some of your ISOs may have converted to NSOs (Non-qualified Stock Options) which have a much different personal tax impact after exercise.

Being Laid Off With Vested But Unexercised ISOs

This scenario requires the most planning and usually requires action on your part within 30-90 days of being laid off. As you know, ISOs are special because they can mean preferential tax treatment if you meet certain requirements.

If you are laid off with vested but unexercised ISOs, you’ll have a period of time to exercise them before they expire. And depending on how long your company gives you, it’s possible that your ISOs can convert to NSOs before they expire. (We’ll explain this further in a minute.)

Most employers will give you some period of time to exercise your ISOs after being laid off. We’ve seen 30 days, 180 days, and other time frames in between. Whatever the time frame, if you hang on to your vested ISOs for longer than the employer’s stated time, you’ll forfeit the options and miss out on any potential to exercise.

Another critical piece of information is that ISOs are required by law to convert to NSOs after 90 days. This means that if your employer gives you 180 days to exercise your ISOs after being laid off, in reality you have 90 days to exercise ISOs then another 90 days to exercise NSOs. After that, your ability to exercise any type of option expires.

If you find yourself sitting on valuable ISOs after being laid off, there are important considerations to account for. We suggest reading our articles on when you should exercise ISOs. If you need additional help, we’re happy to be a sounding board. The important thing is that you don’t want to leave money on the table by letting vested ISOs expire.

Another situation in which ISOs can convert to NSOs is if the company decides to extend the length of time you’re able to exercise your options. For example, if originally you were only given 30 days to exercise your ISOs after being laid off but the company later extends the time frame to 90 days. This act would immediately disqualify your ISOs and they’d be deemed NSOs.

The 90 days we mentioned is a statutory maximum. This means that employers can force a shorter window - like 60 days or 30 days. If you live in California, the State requires employers to give employees who are quitting at least 30 days to exercise their ISOs before they convert to NSOs.

Being Laid Off With Vested and Exercised ISOs

If you’ve exercised vested ISOs, the shares you’ve received as a result of the exercises are yours outright. If you are laid off, you won’t lose those shares.

We’ve worked with several people at Airbnb that received ISOs, exercised them at vest, and then left the company to join another tech company. They continued holding Airbnb stock even though it hadn’t yet gone public. Once the company finally went public, they were able to sell at long-term capital gains rates and saw massive gains for holding the stock for so long.

One thing to watch out for here is that some companies require/strongly encourage employees to sign a repurchase agreement once they’ve been granted equity. The terms of these agreements can vary, but it basically gives your employer the right to repurchase shares from you if you leave the company. This can be a good thing because if the company isn’t public, it can provide you with some cash as you leave. The downside is that if the company grows significantly after you leave, you could end up leaving a lot of money on the table.

What to do if You’re Laid Off With ISOs

There’s no way to soft-pedal it; getting laid off stinks. In our article, “What Happens to RSUs When You’re Laid Off,” we offered to send positive vibes and a “Hang In There Baby” cat meme and we’re extending that offer again here. Please remember, you didn’t choose to get laid off, but you can choose how you make the most of your equity. Here’s a summary of some of our recommendations:

Understand the timing of your layoff

Are you laid off immediately? Do you have a couple of weeks? You’ll want to know the exact date.

Understand how long you’ll have to exercise your ISOs

Is the company planning to accelerate any vest dates?
Is the company planning to extend your post-termination exercise period?

If you’ve been given longer than 90 days to exercise, be sure to mark the 90th day on your calendar so you’re aware of when your ISOs will convert to NSOs.
Make an inventory of all your vested but unexercised ISOs
Create a plan to exercise your ISOs.

There are a lot of strategies you can use and it may be worth consulting with a professional

Calculate the value of all the ISOs that you’ll be forfeiting as a result of your being laid off.

This one stings, but it can prove helpful when trying to get a job elsewhere.

Consider filing for unemployment. Every employer you’ve ever worked for has been paying something called FUTA taxes and it’s likely a benefit for which you are now eligible. Filing varies state by state, but we highly recommend doing some research.

Please reach out to us with any questions you have. Being laid off with ISOs is stressful and we can be a resource to help you get through it.