How much time do I have for exercising vested stock options after my employment ends?
The period for exercise depends on both your employer's plan design and the reason for your termination. If the options are not exercised by the specified date, they expire and are canceled.
Length Of Post-Termination Exercise Period May Depend On Termination Reason
Many employers provide a relatively long period for an option to be exercised if termination occurs through disability or death and a short period if termination is caused by poor employee performance or layoff. Be sure you know what your official termination date is considered to be, as this will start the post-termination exercise period. In addition, this post-termination exercise period cannot go beyond the natural term of the option. Very few companies allow you to exercise during the full remaining length of the option term after you leave your job.
Alert: Review your stock plan documents to learn the post-termination exercise procedures and rules. When these are unclear, ask the department responsible for your stock plan to clarify them. After you have gathered this information, compile it and keep it with your other important financial documents. Pass the information to a trusted relative, friend, or lawyer who would assist you if you became disabled or who would help your family if you were to die. In addition, when you end your employment with the company, be certain about your official termination date, as this is essential for calculating the exercise deadline.
Example: Below is a set of provisions from a stock plan chosen at random. Options are canceled on the earlier of either the expiration date (i.e. the end of the term) or the preset cancellation date, depending on the reason for the termination. When the expiration date falls on a weekend or a holiday, your company's plan may move the expiration date to the last business day before the stated date.
Reason Cancellation date Normal retirement
plus 10 years of service
Expiration date Death or disability 12 months from termination For cause Termination date All other terminations 90 days from termination
According to the 2019 Domestic Stock Plan Design Survey by the National Association of Stock Plan Professionals (NASPP), 60% of the responding companies give optionholders three months (90 days) to exercise after involuntary termination of employment, except in cases of death or disability, after which the time for exercise is sometimes extended to one year (see a related FAQ for details). However, at a small minority of the companies surveyed by the NASPP, the options must be exercised on or before the last day of employment.
Alert: ISOs may not be exercised later than three months after an individual's termination of employment (except in cases of death or total disability). Otherwise, the option will be treated as an NQSO at exercise.
An article from the law firm DLA Piper looks at a design feature adopted by some technology companies, including Pinterest and Quora. These companies modified their stock option grants to let employees exercise options up to seven years after job termination if the employees worked at the company for at least two years before leaving.
Court Cases Show The Need For Vigilance And Clarity About Expiration Dates
Companies follow these rules, procedures, and deadlines very strictly. Court cases reinforce the fact that these concerns are completely your obligation:
- Porkert v. Chevron Corporation (US 4th Circuit Court of Appeals, No. 10-1384, Dec. 2011)
- Mariasch v. Gillette (US 1st Circuit Court of Appeals, No. 07-1549, Mar. 2008)
- Sheils v. Pfizer (US 3rd Circuit Court of Appeals, No. 04-3724, Sept. 2005)
Alert: It does not matter if you made an honest mistake or missed the deadline by only a few days.
Furthermore, you should not rely on spoken information about your post-termination exercise period: your stock plan documents and related statements are the only reliable and binding sources that determine how long you have to exercise options after termination. See, for example, Vague v. Bank One Corporation (Delaware Court of Chancery, No. 18741, February 2006). In this case, an executive relied on unintentionally inaccurate spoken information about the post-termination exercise period. The court ruled that it was not reasonable for him to rely on this orally communicated information while ignoring readily accessible written information from the company that correctly stated the expiration date of the options.
Another case surrounds a misguided reliance on written information other than the stock plan (First Marblehead Corp. v. House, US District Court of Massachusetts, No. 04-11263-PBS, November 2005). The company sent an executive a memorandum and a worksheet about his stock options that mentioned their 10-year term but not the post-termination exercise period of 90 days provided by the stock plan. After losing the options by failing to exercise within three months after he quit his job, the executive unsuccessfully tried to claim that the memo and worksheet superseded his stock plan. As the court's ruling points out, the stock plan, "not the terms of a memorandum and worksheet with arguably conflicting terms, govern the exercisability of options." Above all else, your stock plan controls.