So, you want to change jobs, eh?
Career development is a noble quest, but a lot of tech and startup employees can feel stuck in their current companies. Especially when they’ve got stock options in a place that hasn’t been acquired or gone through an IPO yet.
Because what are they supposed to do?
Just leave and let all that wealth go to waste?
Yeah, don’t think so.
Fortunately, there is a way to keep developing your career AND not have to say goodbye to all the wealth you’ve built up in stock options when you quit. And that’s exactly what I’m going to teach you in this post. ????????♂️
Step 1: Review Your Grant Documents
Each time after stock options are granted, you’ll have a set amount of time (as outlined in your grant documents) that you have to wait between leaving your job and exercising your stock options. The standard is 90 days, but making assumptions with a big financial move like this is never a good idea, so check those documents to know your timeframe.
Step 2: Calculate the Cost of Exercising Your Stock Options When You Quit
And here, there are two costs you need to plan for: the cost of the exercise itself, and the cost of taxes triggered by the options you exercise.
The cost of the exercise is pretty simple to calculate: How much will it cost to buy the number of shares you want to buy?
It’s simple math: multiply the number of shares you want by your cost per share, and you get the total amount.
The cost of taxes, though, is a little more complex.
This is not easy to calculate, especially in a year when you may or may not be cashing out other supplemental wages, are changing jobs, and are likely seeing a salary increase from one job to another.
That, and if you have incentive stock options, you could be faced with also having to pay the Alternative Minimum Tax.
It’s a headache to figure out, and as cheesy as it may sound for me to say, it’s honestly best to work with your tax advisor on this. ???????? If you don’t have a tax advisor, or in the past have only worked with a tax preparer, you can set up a call with me or one of our other advisors, and we’d be happy to talk to you.
3. Timing: When You Quit & When You Exercise Stock Options
When you’re making massive career moves you’re excited about, it’s tempting to rip it off like a bandaid; to do it all fast and quick. And I get the excitement, but financially speaking, it can be a lot better to hold your horses for a little while.
Here’s why:
If you’ve got the standard 90-day expiration period and you leave your job in September, it means you’ll have to exercise your stock options in December to get them in before the 90 days are up. When this happens, the exercise falls within the current calendar year, and you’ll have to pay taxes on this financial move in April.
BUT, if you wait to leave your job in October, that 90-day exercise period moves into January, a new calendar year, so you won’t have to pay taxes on the exercise until April of the following year. You’ll have more than a year to prepare for that tax bill, instead of having to come up with the cash to pay it in just 4 months.
4. Decide How You’ll Fund Buying the Shares & Paying the Taxes When You Quit
There are a few ways you can go about this, so let’s talk about them:
Option One: Cash
In my opinion, paying for the exercise yourself is the best way to go about it. It forces you to stick to a budget while you’re in the process of leaving your job, so you make sure you don’t get too financially stressed in the meantime.
Option Two: Contract Negotiations
These are contract negotiations with your new employer.
If you haven’t yet signed an employment agreement with a new company, you can use stock options from your old company as a negotiating tool. You may be able to ask for a sign-on bonus that’ll cover the cost of exercising your old stock options, or help you cover the tax bill of doing so.
Alternatively, if exercising stock in your old company won’t be very easy for you, you can use your current stock options as leverage to negotiate more equity in the new company. This will help replace what you’ll have to give up to switch jobs and come work for them.
Option Three: Friends and Family
I know, I know. Mixing friends, family, and money can get sticky, so if this one doesn’t feel good to you, don’t do it.
But if you do decide to go this route, talk about the terms in advance, and put it in writing. And keep it simple, like a simple percentage split at the time of IPO or acquisition.
For example, one person could give you a certain money amount to exercise your options and pay taxes on them, and then after the IPO, you give them a set percentage of your shares.
Option Four: Credit from Lenders
Believe it or not, there are lenders out there who specialize in lending money to people who want to exercise stock options. You can take out a loan from them or borrow money against your house in a HELOC (home equity line of credit.)
5. Execute Your Plan of Exercising Stock Options When You Quit Your Job
Now that you know what your trading window is, when you’ll leave your job, how many shares you’ll buy, what you’ll owe in taxes, and how you’re going to fund the whole thing, it’s time to take action.
Prepare your notice to give to your current employer, make negotiations with your new employer, budget your cash or secure your funding for the exercise, and move on to your new job!
Just make sure you keep good records while you’re executing this plan, especially of the FMV (fair market value) on the day you exercise. Cost basis is crucial when calculating taxes, and will save you some massive headaches.
A Smart Plan Makes Managing Stock Options When You Quit Your Job Fairly Easy
Thinking about your stock options within the context of quitting your job can be stressful, because along with all this financial planning, you’re up against a massive life change.
However, most companies make exercising your stock options in the time frame of you quitting your job fairly easy and straightforward. Just make sure you check your grant documents for the exercise time frame, and calculate your current and future costs before you make any moves.
And, if you want help with the calculations and advice on how much to exercise to make the most of your stock options before you switch jobs, talk to one of our advisors.
