What Happens to Unvested Stock Options When You Quit?

Stock options are a common form of employee compensation, offering the right to purchase company stock at a predetermined price. These options are often granted with specific conditions, including a “vesting” schedule, which dictates when an employee gains full ownership. Understanding what happens to unvested stock options when employment ends is important, as the rules impact an individual’s financial outlook. This article explores the general treatment of unvested stock options upon departure.

The Concept of Vesting for Stock Options

Stock options provide an employee the opportunity to buy a specified number of company shares at a pre-set price, known as the strike price, within a defined period. This right does not typically become immediately available upon grant. Instead, employees earn the right to these options over time through a process called vesting. Vesting ensures that employees remain committed to the company, aligning their long-term interests with the company’s success.

Vesting schedules commonly follow a time-based model. “Cliff vesting” means no options vest until an initial period, often one year, has passed, after which remaining options vest gradually over several years. “Graded vesting” allows a percentage of options to vest incrementally from the start. Performance-based vesting ties vesting to specific company or individual milestones. Unvested options are generally forfeited if an employee leaves before vesting conditions are met.

Key Factors Affecting Unvested Options Upon Departure

The fate of unvested stock options when an employee leaves a company is primarily determined by factors outlined in the company’s specific equity documents. The overarching authority for these terms lies within the company’s stock option plan and the individual stock option grant agreement. These documents contain precise clauses regarding termination, which can vary significantly from one company to another.

The reason for an employee’s departure is a major determinant of how unvested options are treated. In most cases, voluntary resignation results in the forfeiture of all unvested options, as they are considered compensation for future service. However, if an employee is involuntarily terminated without cause, such as during a layoff or company restructuring, some plans may offer leniency. This could include accelerated vesting of a portion of unvested options or a continued vesting period as part of a severance agreement.

Conversely, termination for cause, such as misconduct or breach of company policy, typically leads to the forfeiture of all unvested options. Many plans include “good leaver” and “bad leaver” clauses. A “good leaver” (e.g., retirement, disability, death) might receive more favorable treatment, potentially allowing for accelerated vesting or an extended exercise period for vested options. A “bad leaver” (e.g., termination for cause or resignation to join a competitor) typically loses all rights to their options, including those already vested.

Some stock option plans also incorporate specific forfeiture or “clawback” provisions. These clauses allow the company to reclaim previously granted compensation, including stock options, under certain circumstances. Common triggers for clawbacks include post-employment competition, breach of confidentiality agreements, or discovery of fraud.

How to Determine Your Specific Situation

Understanding the precise terms that govern your stock options requires a thorough review of your company’s official documents. The primary sources of information are your individual stock option grant agreement and the company’s overarching stock option plan document. These documents, which you typically receive when granted options, detail the specific conditions of your award.

When reviewing these documents, look for sections addressing “termination of service” or “cessation of employment.” Identify your specific vesting schedule and language defining different types of termination, such as “voluntary resignation,” “termination for cause,” or “termination without cause,” and how each affects unvested options. Search for definitions of “good leaver” and “bad leaver” and their consequences. Examine any clauses related to forfeiture, repurchase rights, or clawback provisions. If documents are unclear, contact your company’s Human Resources department, benefits administrator, or the plan administrator.

Actions Regarding Vested Stock Options After Quitting

While unvested stock options are typically forfeited upon an employee’s departure, the situation differs for options that have already vested. Vested stock options represent an earned right to purchase shares and are generally not lost when you leave a company. However, holding onto these vested options indefinitely is usually not an option.

Most stock option plans impose a limited “exercise window” after termination, during which a former employee can purchase vested shares. This period is often short, commonly 30 to 90 days following your last day of employment. For Incentive Stock Options (ISOs), the IRS generally requires exercise within 90 days post-termination to retain their tax-advantaged status; otherwise, they convert to Non-Qualified Stock Options (NSOs). It is important to consult your specific grant agreement and company documents for the exact deadline. Failing to exercise vested options within this window will result in their forfeiture.