Brenda Vingiello, Sand Hill’s Chief Investment Officer, joined Squawk Box to discuss her thoughts on the latest market trends and market outlook for 2025. This
Leaving a Start-Up Company: What to Do With Your Stock Options?
Published Date : October 25, 2016
The decision to leave a start-up carries with it a host of considerations that differ significantly from the choice to depart from an established public company. Specifically, if you are considering leaving your start-up company, there are important issues surrounding your stock option plan that should be addressed. It is easy to focus solely on the future value of the start-up company when evaluating your options; however, you should not overlook the personal financial implications of exercising your options, nor the terms embedded in your company’s plan. Electing to exercise your options, to the extent that they are vested, is a tricky decision particularly if the shares are illiquid due to a distant IPO or lack of a private secondary market. Furthermore, there are financial risks to paying out-of-pocket for an option exercise that leaves you holding illiquid shares, with depleted cash holdings and a potential outstanding tax bill.
Whether you choose to exercise your vested options or not, pay close attention to the time allotted to make such a decision, which is typically between 60 and 90 days from your date of separation. If you left under the terms of a layoff, you may receive a severance package that lasts six months or more, but be careful to not confuse the terms of that package with the expiration date on your stock option grants.
Another important step is to review your document for the company’s repurchase right. A repurchase right gives the company an “option” to buy shares back from the shareholder under certain circumstances and most typically upon our termination from the company. The company is not required to exercise this right, but if it does, it must repurchase the shares from the shareholder. This repurchase would apply to all vested options, as unvested options do not vest once employment termination has occurred. If this clause is in your compensation agreement and the company exercises this right, these options revert to the company automatically.
Taxes are a potentially large and costly consideration when reviewing your stock option decision. Options come in two forms – Incentive Stock Options and Non-Qualified Stock Options – with differing impacts on your taxes. Prior to any option decision, you should request that your tax advisor review the implications and timing of any exercise. Depending upon your personal situation, the Alternative Minimum Tax (AMT) can further complicate the tax circumstances of your decision. Ultimately, any tax burden from a stock option exercise is a drain on your liquid asset base – the same asset base that will also need to pay for the immediate cost of the options.
Taken together, these factors – the cash cost of the option and any resulting tax burden – can impose a significant drain on your personal finances. A lack of investable cash for liquid and diversified assets can challenge your overall ability to accumulate wealth over time, and to the extreme, can jeopardize your ability to meet your standard living obligations. The cost of exercising your options could also mean foregoing or depleting retirement savings, which is always a risky proposition. Holding a concentrated and illiquid stock can make sense if appropriately sized and within the context of a greater asset base, but considering an option exercise that threatens your ability to pay living expenses and fund retirement requires a closer look.
Weighing the out-of-pocket expense, opportunity cost in the use of cash assets, risk of loss and potential benefits becomes the priority in your planning. Of course, life circumstances and other opportunities often dictate decisions beyond the financial implications. Each individual’s situation should be handled carefully with the help of investment and tax advisors.
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Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
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All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
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