Why you only have 90 days to exercise your options when you leave a startup — and why that’s changing

Imagine spending four years at a startup, getting offered your dream job at another company, and not being able to afford your vested stock options. Typically, employees only have 90 days to make a decision and hand over the money to buy their options when they leave a job. If you can’t pull together that much cash that quickly (and plan for the tax impact of the exercise), you’re out of luck. All those vested options representing years labor simply disappear — and go back into the option pool for additional employees.

Over the past 20 years, the standard post-termination exercise (PTE) window and high cost of exercising have made these “golden handcuffs” a common scenario. Forcing employees to exercise options within a 90 day window after leaving a company — or lose them — favors people who are already wealthy and can afford to shell out thousands of dollars for an asset they may be locked up from selling for years.

We dug into where the 90-day window came from and how companies are rethinking their policy. Organizations that adjust their policy signal that care about employees as shareholders — and it can help them attract and retain talent in a highly competitive market.

What is a PTE window and where did the 90-day PTE windows come from?

A PTE window is the period during which a person who is leaving a company can buy shares at the strike price outlined in their compensation package. For most employees, this means that if you want to leave (or are asked to leave) a private company, you have 90 days to exercise (i.e. pay for) your vested stock options. If you can’t afford to exercise your options (and plan for the tax impact of the exercise, including setting aside funds to address the resulting tax liability), or are unable to sell them on a secondary market (some companies restrict this), you may have to sacrifice your equity.

The vast majority of startups use the same 90-day PTE window — it’s basically become the de facto option. For all terminated option grants on Carta’s platform, 91.4% have PTE windows of 90 days or less.*

A 90-day PTE window is a boilerplate solution based on IRS regulations. The IRS disqualifies employee options as incentive stock options (ISOs), which qualify for special tax treatment, 90 days after employment ends. For an employee to have the flexibility to exercise their stock options beyond 90 days, the company needs to convert each departing employee’s ISO grant to a non-qualified stock option (NSO) grant, which requires the employee to pay taxes both when they buy their shares and also when they sell them.

How startups are rethinking the 90-day window

Companies are recognizing the 90-day PTE window can be unfair to employees. They understand that it may keep employees at the company who no longer want to be there but are collecting the cash needed to exercise their options — or worse, that it may mean employees can’t cash in when a company is successful, despite their contribution.

As companies recognize this burden, some are taking the lead — Pinterest, Coinbase, Buffer, and Asana have longer PTE windows to more closely reflect their company cultures and give employees more flexibility.

• Coinbase and Pinterest both changed their PTE windows to seven years for employees who stay for at least two years. Coinbase published a blog post outlining its belief that if an employee has vested some part of their equity, it’s unfair to lose the remainder due to their current financial situation. Pinterest’s head of people also wrote that the company believes employees should have the flexibility to leave whenever they’d like, and that if they made a meaningful contribution to the company, they should be rewarded accordingly. Square similarly decided to extend the window for employees who had been with the company for at least two years.
• Buffer and Asana have ten-year windows. Buffer also gave new employees the option of either a $10,000 higher salary or a 30% higher equity stake as long as they finish an initial trial period, though the organization recently announced that it is rethinking this policy. Importantly, when offering new hires equity, Buffer makes an effort to educate employees on how equity works and what they might expect from their options in the future.
• Carta re-evaluated our own PTE window several years ago. Our new PTE matches our vesting schedule and the time an employee spends at the company, which means employees accrue additional PTE over time. We like this model because it matches an employee’s contribution to the company.

What should I know about PTE windows as an employee?

The length of a company’s PTE window is a critical part of your equity package. If you’re looking for a new job and don’t expect to have enough cash to purchase your options when you leave, joining a company with a longer exercise window could make a huge difference. To find companies with longer PTE windows, check out this list of companies on the cutting-edge of the new trend.

If you’re already employed at a privately-held company, make sure you know your company’s PTE window (detailed in your equity grant paperwork) so you can plan accordingly. You may want to consider saving a little of each paycheck to purchase your options so you aren’t hit with a big expense all at once. And don’t forget about the impact of year-end taxes of any exercise. It’s also a good idea to look up how long you can enjoy the tax benefits associated with early exercise to decide if you want to buy during your employment. And if you think your company’s PTE window doesn’t match the company’s values, ask why company leadership decided on it in the first place. Maybe they haven’t questioned the default, and someone needs to point that out.

* Companies who have contractually requested that we not use their data in anonymized and aggregated studies are not included in this analysis.

DISCLOSURE: This communication is on behalf of eShares Inc., d/b/a Carta, Inc. (“Carta”). This communication is not to be construed as legal, financial or tax advice and is for informational purposes only. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.