How Options Expire

4 minutes, 15 links
Holloway Guide ToEquity Compensation

How Options Expire

Common questions covered here
How do stock options expire?
What is an exercise window?
If I quit my job, how long do I have to exercise my options?
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Definition The exercise window (or exercise period) is the period during which a person can buy shares at the strike price. Options are only exercisable for a fixed period of time, until they expire, typically seven to ten years as long as the person is working for the company. But this window is not always open.

danger Expiration after termination. Options can expire after you quit working for the company. Often, the expiration is 90 days after termination of service, making the options effectively worthless if you cannot exercise before that point. As we’ll get into later, you need to understand the costs, taxes, and tax liabilities of exercise and to plan ahead. In fact, you can find out when you are granted the options, or better yet, before you sign an offer letter.

important Longer exercise windows. Recently (since around 2015) a few companies are finding ways to keep the exercise window open for years after leaving a company, promoting this practice as fairer to employees. Companies with extended exercise windows include Amplitude,* Clef,* Coinbase,* Pinterest,* and Quora.* However, the 90-day exercise window remains the norm.

controversy The exercise window debate. Whether to have extended exercise windows has been debated at significant length. Some believe extended exercise windows are the future, arguing that a shorter window makes a company’s success a punishment to early employees.

Key considerations include:

  • Everyone agrees that employees holding stock options with an expiring window often have to make a painful choice if they wish to leave: Pay for a substantial tax bill (perhaps five to seven figures) on top of the cost to exercise (possibly looking for secondary liquidity or a loan) or walk away from the options.

  • Many familiar with this situation have spoken out forcefully against shorter exercise windows, arguing that an employee can help grow the value of a company substantially—often having taken a lower salary in exchange for equity—but end up with no ownership because they’re unable or unwilling to stay for the several years typically needed before an IPO or sale.

  • On the other side, a few companies and investors stand by the existing system, arguing that it is better to incentivize people not to leave a company, or that long windows effectively transfer wealth from employees who commit long-term to those who leave.

  • Some focused on the legalities also argue that it’s a legal requirement of ISOs to have a 90-day exercise window. While this is technically true, it’s not the whole story. It is possible for companies to extend the exercise window by changing the nature of the options (converting them from ISOs to NSOs) and many companies now choose to do just that.

  • Another path is to split the difference and give extended windows only to longer-term employees.

  • Taken together, it’s evident many employees have not been clear on the nuances of this when joining companies, and some have loginsuffered because of it. With the risks of short exercise windows for employees becoming more widely known, longer exercise windows are gradually becoming more prevalent. As an employee or a founder, it is fairer and wiser to understand and negotiate these things up front, and avoid unfortunate surprises.

confusion Options granted to advisors typically vest over a shorter period than employee grants, often one to two years, and may have have different exercise windows. The FAST templates give some typical guidelines about this.

Kinds of Stock Options

Definition Compensatory stock options come in two flavors, incentive stock options (ISOs) and non-qualifying stock options (NQOs, or NQSOs). Confusingly, lawyers and the IRS use several names for these two kinds of stock options, including statutory stock options and non-statutory stock options (or NSOs), respectively.

In this Guide, we refer to ISOs and NSOs.

TypeAlso called
StatutoryIncentive stock option, ISO
Non-statutoryNon-qualifying stock option, NQO, NQSO, NSO
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Stock options, RSUs, job offers, and taxes—a detailed reference, including hundreds of resources, explained from the ground up, for employees and managers.

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Length: 80 pages
Edition: e2.1.0
Last Updated: 2021-03-17
Language: English
ISBN (Holloway.com):
978-1-952120-03-9

Equity Compensation

by Joshua LevyJoe Wallin
Stock options, RSUs, job offers, and taxes—a detailed reference, including hundreds of resources, explained from the ground up, for both employees and managers.

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