What happens if an option holder leaves the company?
Takeaway: When an employee leaves your startup, their unvested options are forfeited immediately, and they enter a limited, time-sensitive window—typically 90 days—to purchase their vested shares before those options expire forever.
An employee's departure from the company, whether voluntary or involuntary, triggers a critical and time-sensitive series of events related to their stock options. The company's stock plan and the individual's stock option agreement will have specific, legally binding provisions that dictate what happens to both their vested and unvested options. Understanding this process is essential for both the company administering the plan and the employee making a decision about their equity.
The Fate of Unvested Options
This part is simple and universal: the moment an employee's service to the company terminates, all of their unvested options are immediately forfeited and returned to the company's option pool. Vesting is a mechanism to reward continued service; once that service ends, all future vesting stops instantly.
The Post-Termination Exercise Period (PTEP)
For the options that the employee has vested, a new clock starts ticking. The employee does not have an indefinite amount of time to decide whether to purchase their shares. They must exercise their vested options within a specific timeframe known as the Post-Termination Exercise Period (PTEP).
The 90-Day Standard: The overwhelming industry standard for a PTEP is 90 days from the date of termination. This is a "use it or lose it" window. If the former employee does not exercise their vested options by the end of this 90-day period, those options expire and are returned to the company's option pool.
The Rationale: This limited window serves the company's interest. It forces a clean break and provides certainty about the company's capitalization. The company does not want to have thousands of former employees holding unexercised options for years into the future, which creates an administrative and communication burden.
Different Scenarios, Different Timelines
The 90-day period is the standard for a typical voluntary or involuntary termination. However, the stock plan will specify different timeframes for other scenarios:
Termination for Cause: If an employee is terminated for "cause" (e.g., fraud or gross misconduct), their vested options often expire immediately upon termination.
Termination due to Death or Disability: In these cases, the PTEP is typically extended to a longer period, often one year, to allow the individual or their estate adequate time to manage their financial affairs and make a decision about exercising the options.
The departure of an employee triggers a clear and formal process. The company is responsible for notifying the departing employee of their vested option amount and the exact date their exercise window expires. It is then up to the employee to make a significant financial decision within that limited, and final, window of opportunity.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.