Making the Switch From Startup to FAANG? Don’t Forget About Your Options

In this blog, we are going to discuss why you should not leave behind the employee stock options you earned at your old company

August 30, 2022
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Congratulations! That prestigious job you applied to has panned out, and you now have a huge decision to make: accept or decline the new job offer. You like your current job at the small, friendly startup and don’t feel desperate to leave, but the new gig offers you a higher salary at a promising, established company.

You dream of owning your own home one day, and know that you’ll need this salary bump to do so. Plus, adding this well-known company to your resume will really give your career a boost. You feel like you have to take this job.

With that decided, you give notice to your old job! You’re excited to embark on this new adventure, but before you move on, make sure you’re not leaving behind the employee stock options you earned at your old company.

Unvested Options

When you started working at your current job, you received a stock option grant. You didn’t really know what this meant and haven’t paid much attention to the finer details, mostly because they didn’t matter to you until now. But now is the time to pay attention and look into them a bit more! Of course, if you have any deeper questions about your options, we recommend you reach out to Equitybee - they have tons of great resources available for startup employees.

When you received your option grant, you were most likely also given a vesting schedule for your options. A vesting schedule is a financial term that describes when your options become vested, or available for exercise

For most employees, the industry standard is graded vesting, which typically includes a four-year vesting period with a one-year cliff. This means you don’t earn any of your options until your first work anniversary, when a portion of your options vest at once. From that point on, your remaining options continue to vest gradually each month (or every quarter)until four years of employment, when the vesting would be complete.

Now that you’re leaving your job, any options that haven’t vested will be forfeited and returned to the company’s stock option pool. Unfortunately, this is a nonnegotiable term and is a risk of leaving your job on the earlier side.

But what happens to the options you’ve already earned?

Vested Options

You’re leaving your company, but you’ve worked there long enough that a significant portion of your options have vested. Now, you have to decide whether or not to exercise these options and officially become a shareholder in the company you worked so hard to build.

Of course, there are lots of pros and cons to consider when faced with this decision, and we’re here to lay them out for you:

Pros:

If you decide to exercise your vested options, they will be converted into shares, and you will officially become a shareholder! That’s exciting! Once you own these company shares, you get to sit back and wait for the company to have a successful exit. If your company hits this major milestone, you’ll be able to sell your shares and, hopefully, make a nice profit from them. Maybe you can actually buy that house you’ve been dreaming of!

Cons:

However, keep in mind that as a shareholder in a private company, you may have to wait a long time for a successful exit to take place, so you can make a profit on these shares. And, even in this case, you’ll likely have a lockup period on your shares, or a period of time where you are prohibited from selling them. In addition, you can’t possibly know if the company will actually have a successful exit, making your choice to exercise your options risky.

That said, if you choose not to exercise your options, you’ll definitely lose them and any potential future profit. Instead, your options will simply return to the company’s employee option pool and be given to others. We recommend researching your options, and Equitybee can be an excellent resource for that - check it out!

When considering whether or not to exercise your options, you need to figure out exactly how you feel about your startup and the potential success it might achieve. Many startup employees fall into these three categories when making this decision:

  1. Non-believers: an employee might think the company is not doing well or is skeptical of their long-term ability to succeed. These employees don’t want to waste their money on the exercise cost and don’t think the shares will be worth anything in the future.
  2. Believers: an employee believes in the company and its mission, but either doesn’t have the money on hand to exercise, or they have the money but think it’s too risky to spend so much on future potential.
  3. Unaware: an employee hasn’t given their options any thought and is surprised to learn about the hefty costs associated with exercising their options. These employees simply have no knowledge or education about their options, and if they are made aware of it, they’re too overwhelmed and therefore decide to forfeit the options instead.  

You’ve Decided to Exercise Your Options! Now What?

You’ve taken the leap of faith and decided to exercise your options! Now, you’re on the clock. After you leave a company, you have a fixed amount of time to exercise your options. This is called the period post-termination exercise period, or PTEP, usually around 90 days long. If you fail to exercise your options within this window, your options will expire, return to the company option pool, and can be reissued to new employees.

You must move fast and decide how you’ll pay the exercise cost. Here are three options you have to do so:

  1. Exercise on your own: You come up with the funds to exercise your options and purchase your shares. This method is the priciest, but often the simplest as you’ll immediately become the owner of shares - and if the company has a successful exit, you won’t have to share your gains with anyone.
  2. Sell into a secondary market: You sell your options to a third party for cash. This means you are transferring the rights to your shares for monetary gain - and if your company goes public, you will not be privy to any potential gains from the shares.
  3. Get funding: While this option is lesser known, it can also be considered the sweet spot for exercising your options. You can use a funding platform like Equitybee to tap into a global investor network and get the capital you need to exercise your options. Then, if there is a successful exit, you’ll share a percentage of your total proceeds with investors. This way, you can own the shares you worked so hard to earn without paying out of pocket!

Conclusion

Starting a new job is extremely exciting! However, it’s essential to make sure you take care of your options before moving on to your next adventure. Understanding the nuances of your option grant and knowing precisely what it entails to become a shareholder can really change your life. Be on top of your options so you start your new job with zero regrets!

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