Typically, most stock option plans allow departing employees to exercise their options within 90 days of employment termination. If the options are not exercised before that date all vested but unexercised options lapse. This 90-day window becomes critical, particularly for early stage startups, where the departing employee may not wish to exercise their options just yet as there is no ready market available to trade such shares and the value of shares is mostly "on-paper" but not exercising them would also mean that the employee is giving up the right to purchase a potentially valuable stock at a cheap rate.
To remain competitive and to attract top talent, startups should consider extending this post-termination exercise window beyond 90 days. Some well-known companies have already chosen to diverge from this usual path. Companies like Pinterest, Square, and Coinbase offer employees who have worked for a minimum period of time an extended window in which they can choose to exercise options. Triplebyte, a tech recruiting website, recommends that companies implement a 10-year exercise window instead, which may become the next industry standard.
From the company's perspective, choosing to extend this exercise period is a serious and tricky decision. There are quite a few things to consider when making such a decision as it involves both legal and financial/tax implications.
With the technology industry growing so rapidly and their market for employees being in such high demand, there will always be need for more and more incentives to retain the most talented workers. However, there must be a balance between keeping the workforce happy and running a successful operation. Every startup is different, and every approach as to how best to incentivize their team must also be unique.
This post is for informational purposes only, does not constitute legal advice, and does not create attorney-client relationship between us. Please contact us for specific legal advice.
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This blog is maintained by IndUS Counsel, a Silicon Valley law firm. The authors are either members of IndUS Counsel or guest contributors.