What Happens to Unvested Stock When You Quit?

Employees often receive a portion of their compensation in the form of company stock or equity, which is intended to align their interests with the company’s long-term success. This equity frequently comes with specific conditions, meaning it does not immediately become the employee’s property. A common question arises regarding what happens to this equity, particularly the portion not yet fully owned, if an individual decides to leave their employment voluntarily. Understanding the fate of this unvested stock is important for employees considering a career transition.

Understanding Unvested Stock

Unvested stock refers to equity compensation that an employee has been granted but does not yet fully own. The concept of “vesting” is central to this form of compensation, representing the process through which an employee gains complete ownership rights over their awarded shares or options over a specified period. This process is designed to incentivize employee retention and continuous contribution to the company.

Companies utilize various vesting schedules. A “cliff vesting” schedule requires an employee to remain with the company for a specific initial period, often one year, before any portion of their granted equity vests. After this initial period, a percentage of the grant, or sometimes the entire grant, becomes vested.

Another common approach is “graded vesting,” where ownership accrues gradually over several years. Under a graded schedule, a certain percentage of the granted shares vests annually or quarterly over a period such as three to five years, rather than all at once after an initial cliff. Until the stock fully vests, it remains under company control, and the employee does not have full ownership rights or the ability to sell or transfer it.

What Happens Upon Quitting

When an employee voluntarily resigns, the standard outcome for any unvested stock or equity compensation is forfeiture back to the company. This means that any shares or options not yet vested at the time of departure are lost by the employee. The company reclaims these unvested assets, and the employee does not receive compensation for their value.

This practice serves as a mechanism for companies to encourage employee loyalty and long-term commitment. By tying full ownership of equity to continued employment, companies aim to align the financial interests of their workforce with the company’s sustained growth and performance. The forfeiture rule reinforces the incentive for employees to remain with the organization for the duration of their vesting period.

While forfeiture is the prevailing rule, there can be specific exceptions outlined in certain equity plans. For instance, some plans may include provisions for “retirement vesting,” where an employee who meets certain age and service requirements may retain or accelerate the vesting of some unvested equity upon retirement. These clauses are specific to qualified retirement events and are not for a general voluntary resignation.

These exceptions are not standard for most voluntary departures and are defined within the terms of an employee’s grant agreement and the company’s equity plan. For most employees who quit, any equity not yet vested by their final day of employment will be returned to the company. This principle underlines the importance of understanding vesting schedules when evaluating the total compensation package.

Key Factors Determining the Outcome

The outcome for unvested stock is not uniform; it is determined by several factors. The most important source of information is the company’s equity plan document and the individual grant agreement issued to the employee. These legally binding documents outline all terms and conditions related to the equity award, including provisions for what occurs upon various types of employment separation.

These documents specify the vesting schedule, the type of equity granted, and the rules governing forfeiture or retention under different circumstances, such as voluntary resignation, termination without cause, or retirement. Employees should consider these documents the definitive guide to their equity compensation. The type of equity granted also influences what happens. For example, while forfeiture applies to unvested Restricted Stock Units (RSUs) and stock options, the process for options might involve an exercise window for any vested portions.

Performance shares, which vest based on the achievement of specific company or individual performance metrics in addition to time, also follow forfeiture rules for unearned portions if employment ends prematurely. The company’s internal policies, while aligned with the official plan documents, can offer clarity or administrative procedures that affect the process. The reason for separation plays a role; quitting results in forfeiture of unvested equity, which differs from scenarios like involuntary termination without cause, where plans may have different provisions for unvested equity.

Actions to Take

For employees with unvested stock considering a voluntary departure, understanding their financial situation is important. The first action is to review all relevant equity plan documents and individual grant agreements. These documents contain the terms of the equity award, including information about vesting schedules and the treatment of unvested shares upon separation from employment.

These documents are accessible through the company’s human resources portal, an employee benefits website, or a designated third-party brokerage platform. After reviewing the written terms, employees should contact their company’s human resources department or the designated plan administrator. These individuals or teams can provide answers related to an individual’s vesting schedule and the amount of equity that would be forfeited or retained upon a particular departure date.

Understanding any timelines associated with vested equity, especially stock options, is also important. While unvested options are forfeited, any options that have already vested have a limited exercise window, often 30 to 90 days, following the last day of employment. Failure to exercise vested options within this period results in their forfeiture.

While unvested stock that is forfeited has no immediate tax implications for the employee, any vested stock or exercised options will be subject to taxation upon vesting, exercise, or sale. The tax implications can vary depending on the type of equity and how it is handled. Employees should consult a qualified tax professional to understand the potential tax consequences of their vested equity and to plan accordingly before and after their departure.