Startup Equity: Severance and Vesting Considerations
Key Takeaways
- 1Understanding startup equity: severance and vesting considerations is crucial for financial success
- 2Professional guidance can save thousands in taxes and fees
- 3Early planning leads to better outcomes
- 4GTA residents have unique considerations for severance planning
- 5Taking action now prevents costly mistakes later
Quick Summary
This article covers 5 key points about key takeaways, providing essential insights for informed decision-making.
Quick Answer
When facing severance from a startup, immediately review your stock option agreement for exercise deadlines (often 90 days), vesting acceleration provisions, and post-termination restrictions. Negotiate for extended exercise periods and partial acceleration. Exercise decisions require weighing exercise cost against exit probability and potential value.
Startup equity can represent significant wealth - or nothing at all. When you're facing termination from a startup, your equity becomes a critical negotiation point with potentially life-changing implications. The GTA's thriving tech ecosystem means thousands of workers hold startup options they may not fully understand. Here's how to protect and maximize your equity when facing severance.
Understanding Your Equity Position
Types of Startup Equity
Common Equity Instruments
| Type | You Own At Grant? | Exercise Required? | Termination Impact |
|---|---|---|---|
| Stock Options | No | Yes, pay strike price | Unvested forfeit, exercise deadline |
| RSUs | No | No (but vesting required) | Unvested typically forfeit |
| Restricted Stock | Yes (with restrictions) | No | May be subject to repurchase |
| Phantom Equity | No (cash value tied to equity) | No | Check plan for treatment |
Vesting Schedule Review
Standard startup vesting is four years with one-year cliff:
- Year 1: Nothing until cliff, then 25% vests
- Years 2-4: Monthly or quarterly vesting of remaining 75%
- Your position: How much is vested vs. unvested?
- Cliff timing: If close to cliff, this is negotiation leverage
What Happens at Termination
Unvested Equity
Default treatment for unvested equity:
- Stock options: Unvested portion typically forfeits immediately
- RSUs: Unvested units typically forfeit
- Exception: Check for "acceleration" provisions in your agreement
Acceleration Provisions
Some stock plans include acceleration clauses:
- Single trigger: Vesting accelerates on acquisition or termination without cause
- Double trigger: Acceleration only if BOTH acquisition AND termination occur
- Partial acceleration: Some portion vests early on certain events
Vested Stock Options
For options that have vested, the critical question is the exercise deadline:
- Standard deadline: 90 days post-termination
- Some plans: 30 days (very aggressive)
- Extended periods: 6-12 months (more employee-friendly)
- No extension: Missing deadline = permanent forfeiture
Critical: Mark Your Deadline
The moment you receive termination notice, calculate your exercise deadline. Put it in your calendar with reminders at 60 days, 30 days, 14 days, and 7 days. Missing this deadline is irreversible and can cost significant value.
Key Takeaways
- 1Unvested options typically forfeit at termination - check for acceleration provisions
- 2Exercise deadlines are usually 90 days post-termination - mark your calendar immediately
- 3Acceleration and extended exercise periods are often negotiable in severance packages
- 4Exercise decisions require balancing cost, tax implications, and liquidity probability
- 5Get independent valuation if considering significant capital for exercise
Quick Summary
This article covers 5 key points about key takeaways, providing essential insights for informed decision-making.
Negotiating Equity in Severance
What to Request
- Extended exercise period: 6-12 months instead of 90 days gives more time to assess company trajectory and arrange financing
- Partial or full acceleration: Request vesting credit for notice period or additional months
- Acquisition window: If acquisition is pending, request that options survive until close
- Clarity on valuation: Get 409A or independent valuation to assess exercise decision
- Cash in lieu: In some cases, company may buy out options
Leverage Points
- Termination without cause: Stronger negotiating position
- Key employee/founder status: Company wants smooth transition
- Pending acquisition: Buyers often want clean cap tables
- Close to cliff: "I was about to vest significant equity"
- Competitive information: Non-compete may be leverage for equity treatment
The Exercise Decision
Factors to Consider
Exercise Decision Framework
| Factor | Favors Exercise | Favors Letting Expire |
|---|---|---|
| Exercise cost | Low (early options) | High relative to potential value |
| Company trajectory | Strong growth, clear path | Struggling, no exit in sight |
| Liquidity timeline | IPO or acquisition likely | Years away or uncertain |
| Your finances | Can afford to lose exercise cost | Need the cash, can't risk loss |
| Tax situation | Favorable treatment available | AMT or significant tax bill |
Tax Implications of Exercise
Canadian tax treatment depends on option type:
- CCPC stock options: Tax deferred until shares sold (generally)
- Non-CCPC options: Taxable at exercise on the "spread"
- US company options: Complex cross-border implications
- AMT risk (US options): Can create significant tax without cash
Get Tax Advice
Before exercising significant options, consult a tax professional who understands stock compensation. The tax implications can be substantial and may affect whether exercise makes financial sense.
Frequently Asked Questions
Q:What happens to my unvested stock options if I'm laid off?
A:Typically, unvested options are forfeited upon termination unless your agreement or severance package provides acceleration. Some plans accelerate vesting for termination without cause. If the company is being acquired within a certain period, double-trigger acceleration may apply. Review your stock option agreement carefully - this is often negotiable in severance discussions.
Q:How long do I have to exercise vested options after termination?
A:Most plans give 90 days post-termination to exercise vested options, though some are shorter (30 days) or longer (1 year). This deadline is typically non-negotiable and missing it means permanent forfeiture. If exercising requires significant cash, plan immediately - don't wait until the deadline approaches.
Q:Should I exercise my startup options even if I'm not sure they're worth anything?
A:This requires cost-benefit analysis: What's the exercise cost? What's the potential upside? What's the probability of a liquidity event? If exercise cost is low (early grant, low strike price), exercising may be worth the gamble. If exercise requires significant capital and exit probability is low, it may not be worth the risk. Consider the 83(b) election timing if applicable.
Question: What happens to my unvested stock options if I'm laid off?
Answer: Typically, unvested options are forfeited upon termination unless your agreement or severance package provides acceleration. Some plans accelerate vesting for termination without cause. If the company is being acquired within a certain period, double-trigger acceleration may apply. Review your stock option agreement carefully - this is often negotiable in severance discussions.
Question: How long do I have to exercise vested options after termination?
Answer: Most plans give 90 days post-termination to exercise vested options, though some are shorter (30 days) or longer (1 year). This deadline is typically non-negotiable and missing it means permanent forfeiture. If exercising requires significant cash, plan immediately - don't wait until the deadline approaches.
Question: Should I exercise my startup options even if I'm not sure they're worth anything?
Answer: This requires cost-benefit analysis: What's the exercise cost? What's the potential upside? What's the probability of a liquidity event? If exercise cost is low (early grant, low strike price), exercising may be worth the gamble. If exercise requires significant capital and exit probability is low, it may not be worth the risk. Consider the 83(b) election timing if applicable.
Special Situations
Pending Acquisition
If an acquisition is imminent:
- Negotiate for options to survive until deal closes
- Understand how your options will be treated (cashed out, converted, assumed)
- Check for double-trigger acceleration provisions
- Consider whether exercising now vs. waiting affects treatment
Company Struggling
If the startup is in trouble:
- Your options may genuinely be worthless
- Consider the exercise cost vs. realistic exit probability
- Underwater options (strike price above current value) have no exercise value
- Focus negotiation on cash severance instead of equity
Mass Layoffs
During mass layoff events:
- Company may offer blanket equity treatment (extended exercise, partial acceleration)
- Still negotiate individually for better terms if warranted
- Document any promises made during reduction discussions
- Layoffs often precede acquisitions or shutdowns - monitor company news
Documentation Checklist
Gather these documents immediately upon termination:
- Original stock option agreement(s)
- Stock option grant notices
- Company stock plan document
- Current vesting schedule/status
- Recent 409A valuation or fair market value statement
- Any amendments to your equity agreements
- Emails or documents about equity treatment in severance
- Cap table information if available
Common Mistakes to Avoid
- Missing exercise deadline: Forfeit everything
- Not reading agreements: Assuming terms you don't have
- Ignoring tax implications: Exercise creating surprise tax bills
- Over-optimism: Most startups fail - be realistic
- Not negotiating: Equity terms are often more flexible than companies suggest
- Going it alone: Equity is complex - get professional advice for significant amounts
Protect Your Startup Equity
Startup equity can be worthless or worth a fortune - and the decisions you make at termination significantly impact the outcome. Our severance planning specialists work with GTA tech professionals to evaluate equity situations, negotiate favorable treatment, and make informed exercise decisions. We connect you with tax and legal professionals as needed.
Contact our Mississauga office for a confidential consultation about your startup equity and severance situation.
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