How Post-Termination Exercise Windows Could “Terminate” the Value of Your Stock Options

Do you know what a post-termination exercise window (“PTE window”) is? More importantly, are you aware of its effect on the realized value of your stock options?

When negotiating equity compensation, startup employees often focus on the most obvious metric: the number of options. But imagine finding out after leaving your startup that you only have 90 days to find tens—sometimes even hundreds—of thousands of dollars to exercise all your vested options, or let them expire.?

That 90-day period is the PTE window. And neglecting it can be an expensive mistake, as one former Chief Operating Officer found out.

Real Case Study: How Emma Lost 50% of Her Stock Options to a Short PTE Window

After spending six years as COO of a consumer goods startup, Emma was ready for something else. She had worked hard and even negotiated for a lot more stock options than originally offered when she signed on. It was time to reap all the benefits of her years of sacrifice.

The problem? She would have to spend most of her savings to exercise her options, having agreed—like so many others—to a lower base pay amount in exchange for more equity. And she wasn’t thinking about PTE windows back when she negotiated her offer—few people do! She now felt trapped by her company’s PTE window, set at the very commonly seen 90 days.

Eventually, Emma took a gamble, approaching her CEO to state her intentions to move on and to negotiate for a longer PTE window. It paid off—but not without a high cost. Not only did she have to extend her notice period by months, but she also had to give up 50% of her stock options to extend the PTE window, in her case to 10 years.

The lesson: if you don’t understand how PTE windows work—or why they’re so important—you’re putting your equity compensation at risk.

In this article, we will be going over: 1) how PTE windows work, 2) how they can affect the value you can realize from your stock options and your career progression, and 3) what you can do as an employee if you’re faced with restrictive PTE windows.

Understanding Standard PTE Windows

Most stock option agreements have a clause discussing what the post-termination exercise period, or PTE window, looks like. For plenty of companies, the standard is 90 days to exercise your vested options (or they disappear).?

Very likely buried somewhere in your stock option agreement is a clause that will look something like this:

But just because something is standard, doesn’t mean that it’s fair. At Vested, we’ve seen PTE windows of up to 10 years—and some as short as 30 days. We’ve also seen how damaging short PTE windows can be to the realized value of employees’ stock options.

Why are Short PTE Windows so Damaging to the Realized Value of Your Options?

Imagine you’re a startup employee with the following equity compensation package:

• Total number of options: 15,000
• Strike price: $5.00/share
• Vesting schedule: 4 years
• PTE window: 90 days

Assume that you’ve already worked at the startup for 4 years—meaning all your options have vested—and now you’re looking for new challenges. If you had not previously exercised any options, that means you have to spend $75,000 (15,000 x $5.00/share) to exercise all your options within 90 days of leaving your company.?

That’s a tough ask. Not to mention the tax implications, which can add another heavy burden, depending on the current fair market value of the equity (something we will cover in another article).?

And even if you had the cash saved, do you really want to put all your savings into acquiring the stock of a startup that may or may not succeed? Using all your savings to exercise your options means taking on a lot of concentrated risks. So, it’s no surprise a lot of employees end up abandoning a significant part of their options.

On top of that, this short PTE window can also act as “golden handcuffs” that keep you chained to a job you’re no longer passionate about. You don’t have the funds to exercise your options without taking on heavy risk. But you don’t want to give up your options either—not after the years of sweat you’ve put into the company.?

The result? Staying on much longer than you would like—just like Emma—and potentially denting your career progression. So, what should you do if you get an offer with a short PTE window?

What Should You Do If You Get an Offer with a Short PTE Window?

Generally, you have four options in this scenario:

• Negotiate for a longer PTE window. Many of these headaches could be avoided by simply negotiating for longer PTE windows. Imagine if your PTE window was five years instead of 90 days. That means you would have five full years to save up the funds and progressively exercise your options after leaving a company, giving you the space to intelligently plan and manage your risk. But many startup employees neglect to even ask about PTE windows—don’t be one of them!?That said, you should also be aware that after 90 days from leaving the company, any options you have that are tax-advantaged “ISOs” will automatically convert into “NSOs.” You will owe taxes the moment you exercise your NSOs—even if you don’t sell the shares—and at ordinary income rates. There’ll also be another taxable event if you sell the stock.? (Don’t worry—we’ll cover this more in-depth in a separate article.)
• Accept it and save up. If the company is steadfast in only providing the standard 90-day PTE window—but you still want to work for them—then plan accordingly. It would be prudent to save up and set aside funds each month for when you want to exercise. This could also allow you to exercise as your options vest—instead of waiting till the end. And of course, you should also push for a higher base salary to compensate for the shorter PTE window.
• Take a better offer. Not all startups adhere to the standard 90-day PTE window. Companies like Pinterest, Coinbase, and Mixpanel have decided to extend their PTE periods to over five years to attract talent. (In case you’re curious, we here at Vested offer all our employees 10 years.) If a prospective employer is being stubborn, it might be wise to look elsewhere. Always remember to take PTE windows into consideration when comparing job offers.
• Work with a funding provider (like Vested). What if you could get all the money you need to exercise your stock options, including your tax bills? And what if you don’t even need to pay that money back—just send us a portion of the shares you exercise? You can retain most of your upside without taking on any risk or spending any cash.

That’s what we do here at Vested. Four years after leaving her startup in 2017, Emma used our services to exercise her remaining options. And had we been around back then, she might have been able to exercise all of them without forfeiting a portion in exchange for a longer PTE window.??

The Big Question — How Fair is Your Stock Options Plan?

PTE windows are a critical and oft-overlooked part of an equity compensation package. But it’s far from the only one—meaning many startup employees are walking around thinking their stock options plan is more generous than it actually is. By the time they find out the truth, it’s usually too late.

So, the big question is—do you know how fair your stock options plan is? Fortunately, there’s a quick and easy way to find out. At Vested, we created our Equity Fairness Calculator so you can see how your equity grant compares to the market standard. Every employee deserves to be #FairlyVested, and education and transparency are the first steps.

This is the first post in a four-part series covering Equity Fairness. Stay tuned for later articles on Stocks vs. RSUs, What it Means to Exercise, and more.?