The Golden Handcuffs: What Happens to Your Equity When You Change Jobs or Retire

The answer is complex and laden with critical deadlines, varying tax implications, and plan-specific rules that can mean the difference between a windfall and a forfeiture. Understanding the fate of your equity is paramount for anyone planning a career transition. This detailed guide explores what happens to your equity compensation when you change jobs or retire, offering insights to help you navigate this pivotal financial moment.

The First Principle: Vested vs. Unvested Equity

Regardless of the type of equity you hold, the first and most important distinction is whether it is vested or unvested.

• Vested Equity: This is equity that you have earned and own outright. You have met the time-based or performance-based requirements set by your employer. In almost all circumstances, your vested equity is yours to keep when you leave the company, subject to certain rules about when you must act on it.

• Unvested Equity: This is equity that has been granted to you but has not yet met the vesting requirements. The unfortunate but simple truth is that when you voluntarily leave your job, you will typically forfeit all of your unvested equity. This is the "handcuff" aspect of equity compensation—it's a powerful incentive to stay.

Changing Jobs: The Standard Departure

When you resign from your position to join another company, a standard set of rules generally applies to your equity compensation.

Restricted Stock Units (RSUs)

For vested RSUs, the shares are already yours. They sit in your brokerage account like any other stock you own, and you are free to hold or sell them as you see fit (subject to any insider trading policies). The unvested RSUs, however, will almost certainly be forfeited upon your departure. It is crucial to check your vesting schedule before you resign. Leaving just a few weeks before a significant tranche of RSUs vests could mean walking away from a substantial amount of money.

Stock Options (ISOs and NSOs)

Your vested stock options remain yours to exercise, but not indefinitely. Upon leaving your job, a clock starts ticking on your Post-Termination Exercise (PTE) period. This is a critical window, and failing to act within it means forfeiting your right to purchase your vested shares.

The standard PTE period is 90 days from your termination date. This 90-day rule is particularly important for Incentive Stock Options (ISOs), as exercising them beyond this window causes them to lose their favorable tax treatment and be taxed as Non-Qualified Stock Options (NSOs). While some companies are offering more employee-friendly, longer PTE periods for NSOs, the 90-day window remains the most common.

Exercising stock options requires a cash outlay to purchase the shares at your grant price, and it can also trigger a significant tax event. This can create a difficult financial decision for departing employees who may need to come up with a large sum of money in a short period.

Performance Share Units (PSUs)

PSUs are the most complex to handle upon a job change. Since their vesting is tied to both a service period and the achievement of specific company performance goals, leaving mid-cycle usually results in the forfeiture of all unvested awards. Even if you have completed a significant portion of the service period, if the performance period is not complete, you will likely lose the entire grant.

The Golden Years: How Retirement Changes the Game

Retirement is where the rules can become significantly more favorable for employees. Many companies have specific provisions in their equity plans that treat a formal retirement differently from a standard resignation. This is a recognition of long-term service and an incentive for orderly succession planning.

To benefit from these provisions, you must meet your company's specific definition of "retirement," which is typically based on a combination of age and years of service (e.g., age 55 with 10 years of service, or a "Rule of 65" where your age plus years of service equals or exceeds 65).

Here's how different types of equity are often treated in a qualifying retirement:

Restricted Stock Units (RSUs)

Instead of immediate forfeiture, unvested RSUs may receive special treatment. Common scenarios include:

• Continued Vesting: Your unvested RSUs may continue to vest according to their original schedule, even after you've retired. This provides a continuing income stream in your early retirement years.

• Accelerated Vesting: Some plans may fully or partially accelerate the vesting of your RSUs upon retirement.

• Pro-Rata Vesting: It's also common for companies to grant you a pro-rated portion of your unvested RSUs based on the time you worked during the vesting period.

Stock Options (ISOs and NSOs)

One of the most significant benefits of a qualifying retirement is often an extended Post-Termination Exercise period. Instead of the standard 90 days, retirees may be given one to three years, or even until the original expiration date of the option (often 10 years from the grant date), to exercise their vested options. This provides valuable flexibility to time the exercise for optimal market conditions and tax planning.

Performance Share Units (PSUs)

PSU treatment in retirement can also be more generous. While a full payout is less common, many plans allow for pro-rata vesting. This means you may still receive a portion of the shares based on the time you were employed during the performance period, with the final number of shares determined by the actual company performance at the end of the cycle.

Special Circumstances: Layoffs and Mergers & Acquisitions

• Involuntary Termination (Layoffs): In the case of a layoff, companies may sometimes offer more favorable terms for unvested equity as part of a severance package. This could include the acceleration of a portion of your unvested awards.

• Mergers & Acquisitions (M&A): A change of control can trigger what's known as accelerated vesting. Depending on the terms of your equity agreement, an acquisition could cause some or all of your unvested equity to vest immediately. This can be "single-trigger" (vesting accelerates upon the M&A event itself) or "double-trigger" (vesting accelerates if you are terminated by the acquiring company within a certain period after the deal closes).

Your Action Plan: Proactive Steps to Protect Your Equity

You are your own best advocate when it comes to your equity. Here are the essential steps to take:

1. Read Your Plan Documents: The grant agreements and the full equity plan document are the ultimate sources of truth. These documents will detail the specific rules for your equity upon termination, including the definition of retirement and the length of your PTE period.

2. Know Your Dates: Be acutely aware of your vesting dates and option expiration dates. Timing your departure, even by a few days, can have a massive financial impact.

3. Consult with a Financial Advisor and Tax Professional: The financial and tax implications of exercising options or selling shares can be complex. Professional guidance is invaluable in making informed decisions that align with your overall financial plan.

4. Negotiate Your Exit (and Your Entrance): When leaving a job, there may be room to negotiate the terms of your departure, including the treatment of your equity. When starting a new job, you can also negotiate for a sign-on bonus or an initial equity grant that compensates you for the unvested equity you are leaving behind.

5. Plan for the Financial Impact: If you plan to exercise stock options, ensure you have a plan to cover the purchase price and the associated taxes.

Your equity compensation is a valuable asset you have worked hard to earn. By understanding the rules of the road and planning proactively, you can ensure that your career transitions enhance, rather than diminish, your long-term financial success.