Do You Lose Vested Stock When You Leave a Company?

Equity compensation, including various forms of company ownership, is a common component of employee reward packages. Many individuals receive stock options, restricted stock units, or other equity grants. A frequent concern is understanding what happens to these grants upon leaving an employer, as their value can represent a substantial portion of an individual’s financial outlook.

Understanding Vested Stock

“Vested stock” refers to equity compensation an employee has earned and gained full ownership rights over. Vesting is the process by which these rights are acquired. Until equity is vested, an employee does not have full control or ownership. Vesting incentivizes employees to remain with the company or achieve specific performance milestones before gaining full ownership.

Vesting typically follows a pre-determined schedule, outlining when ownership rights are transferred. “Time-based vesting” is common, where equity becomes available based on an employee’s continued tenure. A “cliff vesting” schedule means no equity vests until a specific period, often one year, has passed. After this cliff, the remaining equity typically vests incrementally, such as monthly or quarterly, over subsequent years.

“Graded vesting” is another method, where ownership is gained in intervals, with a fixed percentage vesting each year over a multi-year period, such as 20% annually over five years. “Performance-based vesting” schedules tie ownership to the achievement of specific business or individual milestones, such as revenue growth or profitability targets.

Common Types of Equity Compensation

Employees encounter several forms of equity compensation that can become vested stock. Each type has distinct characteristics regarding how it is granted and what “vested” means for that award.

Restricted Stock Units (RSUs) are a promise from an employer to deliver company shares to an employee once certain conditions are met. RSUs commonly vest based on time, meaning shares are delivered after a specified period of employment. Once RSUs vest, the employee receives the actual shares, which are then treated like any other company stock.

Stock Options grant an employee the right, but not the obligation, to purchase company stock at a predetermined price, known as the exercise or strike price. Vesting for stock options signifies the employee has earned the right to exercise these options. Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) are two common types, differing primarily in their tax treatment and who can receive them.

Employee Stock Purchase Plans (ESPPs) allow employees to purchase company stock, often at a discounted price, through payroll deductions. These plans typically involve offering periods during which employees contribute, and at the end of the period, shares are purchased. Once purchased, the employee owns the shares outright, meaning traditional vesting schedules do not apply.

Employee Stock Ownership Plans (ESOPs) are a type of qualified retirement plan that invests primarily in the employer’s own stock. Shares are allocated to individual employee accounts, and employees acquire rights to these shares over time through a vesting process similar to other retirement benefits. ESOPs often feature either cliff vesting, where full ownership is gained after a set period, or graded vesting, where ownership accrues gradually.

What Happens to Vested Equity Upon Departure

When an employee leaves a company, the treatment of their equity compensation depends on whether the equity is vested or unvested. Generally, vested equity is retained by the employee, while unvested equity is typically forfeited. This distinction is important as vesting signifies earned ownership.

For Restricted Stock Units (RSUs), once they have vested and the shares delivered, the employee owns those shares outright. These shares generally remain with the employee upon departure. If the company is private, there might be limitations on selling these shares until a liquidity event, such as an initial public offering (IPO) or acquisition.

For Stock Options, vesting means the employee has earned the right to purchase shares at the predetermined exercise price. Upon leaving a company, employees with vested stock options usually enter a “post-termination exercise period” (PTEP) during which they must exercise their options or forfeit them. This period is commonly 30 to 90 days, though it can vary by company and option type. Failure to exercise within this window means the employee loses the right to buy the shares.

Unvested equity is almost universally forfeited when an employee leaves, whether the departure is voluntary or involuntary. The purpose of vesting is to incentivize continued employment, so if that condition is no longer met, the unearned portion of the equity is returned to the company.

While vested equity is generally protected, specific circumstances can impact its treatment. For example, termination for cause, such as gross misconduct, may, in some cases, lead to the forfeiture of even vested options or shares. The terms are always governed by the individual’s equity grant agreements and the company’s equity plan documents.

Managing Your Vested Equity After Leaving

After leaving a company, individuals need to take specific actions to manage their vested equity. Reviewing all relevant documentation is essential. This includes equity grant agreements, plan summaries, and company policies, as these documents outline the terms governing your vested equity. They specify details like post-termination exercise periods for options and restrictions on selling shares.

Exercising vested stock options must be completed within the specified post-termination exercise period, typically 30 to 90 days. This process usually involves contacting the plan administrator or a designated brokerage firm. There are different methods for exercising options, such as a “cash exercise,” where you pay the exercise price in cash, or a “cashless exercise.” A cashless exercise allows you to purchase shares without upfront cash by simultaneously selling a portion of the exercised shares to cover the exercise cost, taxes, and fees, with the remaining net shares delivered to you.

Selling shares obtained from vested Restricted Stock Units (RSUs) or exercised options also involves a specific process. These shares are typically held in a brokerage account. Before selling, be aware of any company-specific trading policies, such as “blackout periods.” Blackout periods are defined timeframes, often around earnings announcements, during which certain individuals are prohibited from trading company securities. Companies may also require pre-clearance for trades.

Exercising stock options or selling vested shares will trigger tax events. For instance, when RSUs vest, their fair market value is generally treated as ordinary income subject to withholding tax. Similarly, exercising non-qualified stock options often results in the difference between the market price and the exercise price being taxed as ordinary income. While this article provides general information, tax implications vary based on individual circumstances and equity type. Consulting with a qualified tax professional is advisable.