What Happens to ISOs When You Quit?
Incentive stock options (ISOs) are a common form of equity compensation that employees receive from an employer that is still in high-growth mode and (usually) not yet publicly traded.
These ISOs can be a huge catalyst in growing your wealth if the company eventually goes public or gets acquired. A question we get regularly is, “What happens to my ISOs if I quit”?
If you’re employed at one of these younger tech companies that’s offering ISOs, the burnout can get real. It’s likely that you’re working long hours, receiving a salary that’s less than market value, and your benefits probably aren’t great yet because the company can’t afford to offer much better.
Whether you’re burned out and wanting to find another place to work or leaving the workforce for an entirely different reason, the purpose of this article is to explain what happens to your hard-earned ISOs if you quit so you can ensure you don’t make mistakes you’ll regret later.
Status of ISOs When You Quit
The first thing you’ll want to do before you quit is complete an inventory of the ISO grants you’ve received. It might be a little annoying to collect all the data, but you’ll need it to properly assess what’s going to happen with your ISOs when you quit.
Once you have that information, you’re ready to continue reading. Broadly speaking, there are three groups that your ISOs will fall under when you quit:
Unvested ISOs
Vested But Unexercised ISOs
Vested & Exercised ISOs
We’ll explain more about these groups, but you’ll want to figure out exactly how many ISOs you have in each category. If you really want to understand the ins and the outs of your equity compensation, we recommend checking out “Consider Your Options” by Kaye Thomas. It’s not an easy read, but it’s a great guide for understanding the equity compensation you’re receiving.
Quitting with Unvested ISOs
If you quit with unvested ISOs, they’ll be deemed expired on your last day.
This one is the easiest to remember, but also might make you the saddest down the road.
Since ISOs are often granted with some form of vesting schedule attached, you’ll want to determine how much value you’d be leaving on the table if you were to quit.
Most importantly, you’ll want to look up exactly when your ISOs are scheduled to vest because it may be worth sticking it out a little bit longer to hit one last vesting cut-off before you make your exit.
Even if your company isn’t super valuable yet, one small batch of vested ISOs can be worth a considerable sum. We’ve seen people miss out on tens of thousands of dollars by quitting one week too soon. Most of the time they didn’t even realize that they were going to forfeit those ISOs they were so close to receiving. So please be careful!
Quitting with Vested But Unexercised ISOs
This is the most complicated scenario. As you know, ISOs are special because they have preferential tax treatment (if you don’t know this, please check out our ISO Basics article and our NSO Basics article so you can learn).
If you quit with vested but unexercised ISOs, you’ll get to keep some form of stock option, but your ISOs could convert to NSOs if your ex-employer gives you a post termination exercise period of 90 days or more.
For your vested but unexercised ISOs, you’ll typically have 90 days from your last day of employment to exercise your ISOs. After that, your ISOs will convert to nonqualified stock options (NSOs). It’s nice that you get to keep something, but you might like the preferential tax treatment of the ISOs more than the taxes you’ll face down the road with 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. Ideally, you’ll want to know your company’s policy before quitting so that your ISOs don’t convert immediately to NSOs without your knowledge. Whether or not your ISOs convert to NSOs, your options will be subject to your ex-company’s post-termination rules - which means they’ll expire after the specified amount of time.
There are some other special circumstances that may apply to your ISOs: For example, if you become permanently disabled, you’ll likely have between 6 to 12 months to exercise your ISOs. If you die, the ISOs will typically be exercisable until the expiration of the option. If you’re pregnant and take maternity leave, your planned leave won’t force a conversion to NSOs and your ISOs should continue to vest as scheduled.
Quitting with Vested & Exercised ISOs
If you’ve exercised vested ISOs, the shares you’ve acquired are yours. If you quit, you won’t lose those shares like you would if they were unvested.
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.
Quitting With ISOs Final Thoughts
Sometimes sticking with a company for decades isn’t the right move financially or professionally. It’s a nice perk when you can work for a younger company for a few years and then leave while keeping a piece of the pie.
If you’re planning to quit, be sure that you:
(1) Determine the value of the ISOs you’re going to leave on the table
(2) Look at when the next batch of ISOs is scheduled to vest so that you can time your exit appropriately
(3) Understand your company’s policy on ISO to NSO conversion
(4) Determine if your company is going to want to repurchase shares from you
(5) Make a plan to exercise your ISOs or wait and make a plan to exercise your NSOs
(6) Remember that both ISOs and NSOs can be extremely valuable when you manage them correctly
We plan to publish articles detailing what happens to other equity types if you quit and we’ll be sure to link them here. Again, thank you for reading and if you have questions about your specific situation we’re happy to help however we can.