What Happens to NSOs if You’re Laid Off

Jun 27

Non-Qualified Stock Options (NSOs) are granted to both employees and non-employees. NSOs are considered to be the second most common form of equity compensation and they can provide holders with incredible value if the company’s stock price goes up significantly.

In markets like we’re in now, lay-offs are common and employees and independent contractors alike are being affected by the cutbacks. This can put individuals who hold NSOs in a little bit of a bind and leave them wondering, “What will happen to my NSOs if I get laid off?”

The purpose of this article is to explain exactly what would happen to your NSOs if you were to get laid off. We hope it doesn’t happen, but just in case it does, we think it’s important to equip you with the knowledge you will need to take the appropriate steps.

We won’t be diving into the Basics of NSOs here, so if you want a quick refresher on NSO basics, we recommend reading the linked article.

Understanding NSO Status When You’re Laid Off

When considering the potential consequences of a layoff on your NSOs, it's important to first understand more about the NSO grants you've received from your employer. Gathering this information can be done relatively easily by going to your equity plan administrator's website.

Once you have a clear picture of your grants, it's helpful to organize them into three distinct categories:

Unvested NSOs
Vested but Unexercised NSOs
Vested and Exercised NSOs

We’ll dive into the specifics of each of these groups, but it's crucial to determine the exact number of NSOs you have in each of these categories.

Being Laid Off With Unvested NSOs

If you are laid off with Unvested NSOs, they’ll typically be deemed expired on your last day of work.

Some companies will give employees a heads-up before being laid off. In this case, NSOs will continue to vest until your last official day of employment. At that point, any unvested NSOs will be forfeited.

This is an unfortunate situation because you could potentially be leaving a sizable chunk of equity on the table. Although it’s painful to do, we recommend calculating how much value you’ll be giving up because having that number handy can potentially help you in future salary negotiations with other employers.

Some companies, as a gesture of goodwill, will accelerate the vesting of NSOs as part of being laid off. They usually won’t accelerate the vesting of the entire grant, but sometimes they’ll accelerate what would have vested over the next 3 months. Still not ideal, but at least it’s something.

Being Laid Off With Vested But Unexercised NSOs

This is probably the NSO scenario that you will want to attend to most carefully as it will require some action and planning on your part.

If you’re laid off with vested but unexercised NSOs, you’ll be given some period of time in which you’re allowed to exercise your NSOs - even though you’re no longer employed by the company.

Most companies provide at least 30 days, some companies provide up to 180 days, and some companies provide even longer than that. The length of time you’re given to exercise post being laid off will depend on your ex-employer.

Because of this wide range, we strongly encourage you to do some research on your own by reading the fine print of both your grant agreement and your company’s equity plan. We also recommend reaching out to HR or the equity team at your company to be sure you know exactly how long you have to exercise.

Once you exercise NSOs after being laid off, you go from owning an NSO to owning company shares. And once that happens, you’ll be able to sell the shares whenever you see fit (i.e. you won’t be subject to the post-termination exercise window anymore.)

Exercising NSOs results in immediate taxation. We’ve written an article covering how NSOs are taxed, and we’ve built an NSO tax calculator in Google Sheets to help you with some rough estimations. We highly recommend reviewing both.

Being Laid Off With Vested and Exercised NSOs

As mentioned briefly in the section above, once you’ve exercised vested NSOs, you’ve now officially received shares in place of those NSOs. These shares are yours. If you’re laid off, you’ll get to keep them.

We’ve worked with many tech employees who have exercised NSOs before quitting or being laid off, then have ended up selling those shares for substantial profits. Usually with NSOs, the taxes tend to drive more immediate selling than they would if you have Incentive Stock Options (ISOs), but stock in the right company can be worth a lot.

What to do if You’re Laid Off With NSOs

Losing your job is never easy. In our article, "What Happens to RSUs When You’re Laid Off," we extended our support and offered to send a "Hang In There Baby" cat meme. We're sharing that offer again here.

You didn't choose to be let go, but you can choose how you handle your equity. Here's a summary of our recommendations:

Understand the timing of your layoff. Are you let go immediately? Do you have a couple of weeks? Knowing the exact date is important.
Understand how long you'll have to exercise your NSOs. Is the company accelerating any vesting dates? Is the company extending your post-termination exercise period?
Make an inventory of all your vested but unexercised NSOs. Create a plan to exercise them if there’s value there. Be sure to incorporate tax consequences and tax projections into your plan. Once you exercise NSOs, you’re going to owe taxes and you’ll want to make sure you have a way to pay them.
Calculate the value of all the NSOs that you'll be forfeiting as a result of your layoff. This can be painful, but it can also be helpful when looking for a new job.
Consider filing for unemployment. Every employer you've ever worked for has paid something called FUTA taxes and you're likely eligible for benefits. Filing varies from state to state, but we recommend doing some research.

If you have any questions, please reach out to us. Being laid off with NSOs can be stressful and we're here to help you through it.

EquityFTW