Leaving a company can be an exciting and often nerve-wracking time. Whether moving on to a new job, starting your own business, or simply taking a break, it is crucial to understand the financial benefits you have earned during your time with the company.
Generally, when calculating your vested shares, you must consider a few factors, such as vesting schedules, number of vested shares, market value, total value of vested shares, and tax implications.
In this article, we will guide you through the process of calculating your vested shares when leaving a company, so you can feel confident and empowered as you move on to your next adventure.
What Are Vested Shares?
Vested shares are shares of stock that you have earned through a stock option or equity compensation plan, which you are able to fully own and sell without restriction. On the other hand, unvested shares are shares that have been granted but which you do not yet fully own or have the right to sell.
Vested shares represent an important component of your compensation package and can provide an opportunity for you to benefit financially from the success of the company you work for. Hence, it’s essential to understand how to calculate the value when leaving the company.
How Do I Calculate My Vested Shares When I Am Leaving The Company?
To calculate your vested shares when leaving a company, you will need to follow these steps:
1. Determine Your Vesting Schedule
Vesting schedules typically range from immediate vesting to multi-year vesting schedules with graduated vesting, and each schedule will have a different impact on the number of shares you own. The most popular vesting schedule vests over a period of four years with one year cliff. Hence, it is important to review your employment contract or equity compensation plan to determine the applicable vesting schedule for your shares. This will help to determine when the shares becomes yours.
2. Calculate The Number Of Vested Shares
Once you have determined the vesting schedule, calculate the number of shares that have vested up to the date of your departure.
For example, if you were granted 1,000 shares that vest over four years with a one-year cliff, and you are leaving after two years, then you would have vested 500 shares (250 shares after one year and 250 shares after two years).
3. Determine The Fair Market Value
The next step is to determine the fair market value (FMV) of your vested shares. This can be done by reviewing recent stock prices or by obtaining a formal valuation from a financial advisor.
4. Calculate The Total Value Of Your Vested Shares
Multiply the number of vested shares by the fair market value to determine the total value of your vested shares. For example, if you have 500 vested shares and the FMV is $10 per share, then your total vested shares value would be $5,000.
5. Consider Tax Implications
Finally, consider the tax implications of selling your vested shares. Depending on the type of equity compensation plan and how long you held the shares, you may be subject to different tax rates, including capital gains tax.
Consult with a tax advisor to determine the most advantageous tax strategy for your situation.
Example Of How To Calculate Vested Shares
Let’s take a hypothetical example to illustrate how to calculate the value of vested shares:
Suppose that John received 1,000 shares of his company’s stock as part of his compensation package. The vesting schedule for the shares was four years, with 25% vesting each year. After three years, John has vested 75% of the total shares granted to him, which is equal to 750 shares.
Assuming that the current market price of the company’s stock is $50 per share, the total value of John’s vested shares would be:
750 shares x $50 per share = $37,500
This means that if John were to sell his vested shares at the current market price, he would receive $37,500 in proceeds.
However, if John were to sell his vested shares immediately, he would be subject to short-term capital gains taxes, which are typically the same as his ordinary income tax rate. If John were in the 24% tax bracket, for example, he would owe $9,000 in capital gains taxes on the $37,500 proceeds.
Alternatively, if John were to hold onto his vested shares for at least one year before selling them, he would be subject to long-term capital gains tax rates, which are generally lower. If John were in the 15% tax bracket, for example, he would owe $5,625 in capital gains taxes on the $37,500 proceeds.
It’s important to note that these calculations are hypothetical and may not reflect the specific circumstances of your situation. It’s always advisable to consult with a tax professional to understand the specific tax implications of selling vested shares.
What To Do After Calculating Your Vested Shares
Once you have calculated the value of your vested shares, you have several options to consider. Here are some next steps you can take:
- Hold onto your shares: If you believe in the long-term growth potential of the company, you may want to hold onto your shares for the time being. However, be aware that holding onto shares can expose you to risks such as fluctuations in the stock market.
- Sell your shares: If you need the money or prefer to cash out your investment, you can sell your shares. Remember to factor in the potential tax implications of selling your shares.
- Seek the advice of a financial professional: If you’re uncertain about what to do with your vested shares, consider speaking with a financial professional. They can provide you with tailored advice based on your specific financial goals and circumstances.
- Diversify your portfolio: Consider using the proceeds from selling your vested shares to diversify your investment portfolio. This can help reduce your overall risk exposure and increase your potential returns over the long term.
What Happens To Stock Options If You Get Fired
What happens to your stock options if you get fired will depend on the specific terms of your employment agreement and the company’s equity compensation plan. In some cases, your stock options may immediately become fully vested and exercisable upon termination, allowing you to purchase the shares at the strike price.
In other cases, your stock options may be subject to a vesting schedule, and you may only be entitled to exercise the vested portion of your options upon termination.
However, it’s also possible that your stock options may be forfeited upon termination. This could happen if your employment agreement or equity compensation plan includes a provision that your stock options will be canceled upon termination or if you were terminated for cause.
Negotiating Unvested Stock Options
Negotiating unvested stock options can be a complex and delicate process, but there are a few key strategies you can use to increase your chances of success:
- Know your value: Before entering into any negotiations, it’s important to have a clear understanding of your value to the company. This includes your skills, experience, and any unique contributions you’ve made. Use this information to make a compelling case for why you deserve unvested stock options.
- Understand the company’s position: It’s also important to understand the company’s perspective and constraints. For example, they may have limited resources available for equity compensation or may be hesitant to grant unvested stock options to employees who are still relatively new to the company.
- Be flexible: Negotiating unvested stock options may require some degree of flexibility on your part. Consider alternatives such as accelerating the vesting schedule or structuring the options in a way that aligns with the company’s goals and objectives.
- Seek advice: It can be helpful to seek the advice of a financial advisor or attorney who specializes in equity compensation. They can provide you with guidance on the potential risks and benefits of negotiating unvested stock options, as well as help you structure a compelling proposal.
How Long To Exercise Options After Leaving Company
The length of time you have to exercise your stock options after leaving a company will depend on the specific terms of your equity compensation plan.
In some cases, your options may expire immediately upon termination of your employment. However, many equity compensation plans provide for a grace period during which you can exercise your options.
This grace period can vary widely, but it’s typically between 30 and 90 days from the date of termination.
Therefore, it’s important to review your equity compensation plan and any associated documents to understand the specific terms that apply to your options.
Conclusion
Calculating the value of your vested shares can help you make informed decisions about your finances. Whether you decide to hold onto your shares, sell them, or seek professional advice, it’s important to weigh your options carefully and consider your individual financial goals.
By acting based on your calculated vested shares, you can take control of your financial future and make the most of your investments.