Leaving a Startup? Why Buying Your Stock Options Now Can Save Money on Taxes

Sean O’Keefe
Sean O’Keefe

Sep 18, 2020

2 min read
Leaving a Startup? Why Buying Your Stock Options Now Can Save Money on Taxes

If you leave a startup company, whether by choice or you are asked to leave, it’s important to know what happens to your employee stock options (ISO, NSO).

When leaving a startup, employees generally fall into 3 broad categories in relation to their stock options.

  1. Unvested stock options: If you haven't vested your stock options before you leave your startup then there's nothing here for you to do. Your startup will cancel your unvested stock options and return them to the option pool to be reissued.
  2. Vested stock options | Buy in 90 Days or Canceled: For startup employees with vested stock options they haven't purchased yet, this is a different situation. Some startups only give their employees 90 days from departure date to buy their vested stock options or they are canceled and after 90 days (a.k.a. 90 day post-termination window) can no longer be purchased. This trend is changing as more employers are extending the window of time employees have to purchase their shares beyond 90 days. More here.
  3. Vested stock options | > 90 day window to buy your stock options: DANGER! DANGER! DANGER! Although it is really generous of your employer to extend the window of time you have to buy your incentive stock options (ISOs), this is the situation where most startup employees are blind sided by a huge tax bill in the future. Even though you have more time to buy your stock options, the tax impact of buying them changes significantly after 90 days. Ninety days after your departure date from your startup your incentive stock options (ISOs) turn into non-incentive stock options (NSOs)

Tax Savings: Buy ISO Stock Options Before and After 90 Days

Let's say that a startup employee, Mary Stuart, works at a startup. She's a Software Engineer. She made a decision to leave her startup after 4 years. Yesterday was her last day. Fortunately, she fully vested her incentive stock options (ISOs) before she left.

Tax Impact of Decision to Buy Stock Options 90 Days Before and After Departure Date

In this example, if Mary had bought her stock options earlier she would have saved $9,000 by buying her stock options while they were still ISOs instead of NSOs.

Note: This information is for educational purposes only and is based on the above financial assumptions. The tax outcome of exercising stock options may vary by employee and situation. Please consult a YearEnd tax professional to before acting on this information.

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