Stock Options After Layoff: The Complete 2026 Guide

Make smart decisions about your equity when time is running out

Understanding Your Equity Package

Before making any decisions, you need to fully understand what you have. Gather these documents from your company immediately:

• Stock Option Grant Agreement: Your original grant letter with strike price and vesting schedule
• Vesting Schedule: Confirmation of how many shares have vested
• 409A Valuation: The current fair market value (FMV) of common shares
• Cap Table Summary: Understanding your percentage ownership (if available)
• Exercise Window Terms: How long you have to exercise post-termination
• Any Extension Agreements: Some companies extend the exercise window

Key Terms Defined

ISO vs. NSO: Critical Tax Differences

The type of stock options you have dramatically affects your tax situation. Most employees have Incentive Stock Options (ISOs), but Non-Qualified Stock Options (NSOs) are also common.

Your Post-Termination Exercise Window

Your post-termination exercise window is defined in your stock option agreement. Standard windows are:

Common Exercise Window Terms

• 90 days (standard): Most common for traditional grants
• 3-12 months: Some modern startups offer extended windows
• 5-10 years: Increasingly common at employee-friendly companies
• Until option expiration: Rare but becoming more common

Calculating Your Exercise Cost

Understanding the true cost of exercise is crucial. It's not just the strike price—you need to account for taxes too.

Tax Implications of Exercise

The tax treatment depends on whether you have ISOs or NSOs, and when you sell the shares.

NSO Tax Treatment

1. At Exercise: The spread (FMV - strike price) is taxed as ordinary income
2. Your company withholds: Federal, state, Social Security, and Medicare taxes
3. At Sale: Any gain above the FMV at exercise is capital gains
4. Holding period: 1+ year for long-term capital gains rate

ISO Tax Treatment (Best Case)

1. At Exercise: No regular income tax (but may trigger AMT)
2. At Qualifying Sale: Entire gain taxed as long-term capital gains
3. Requirements: Hold 1 year after exercise AND 2 years after grant date

The AMT Trap: Avoid a Tax Nightmare

The Alternative Minimum Tax (AMT) is a parallel tax system that can create devastating tax bills for ISO holders. The AMT treats your ISO spread as income, even though you haven't sold the shares and can't access the money.

How the AMT Trap Works

1. You exercise ISOs with a large spread (FMV much higher than strike price)
2. The spread becomes "AMT preference income"
3. If this pushes you into AMT, you owe taxes on the paper gain
4. If the stock price drops, you still owe the AMT
5. You may owe taxes on gains that no longer exist

AMT Avoidance Strategies

• Exercise and sell same day: No AMT risk, but no ISO benefit
• Limit exercise amount: Stay below AMT threshold (consult a tax pro)
• Exercise across calendar years: Spread AMT exposure over multiple years
• Exercise low-spread options only: Lower spread = lower AMT impact
• Calculate AMT before exercising: Use tax software or a CPA

Analyzing Company Valuation

Your equity is only worth something if the company succeeds and has a liquidity event (acquisition or IPO). Before exercising, honestly assess your company's prospects.

Questions to Ask

• What is the company's current runway (months of cash remaining)?
• Are they actively fundraising? At what valuation?
• Is revenue growing or declining?
• What is the liquidation preference stack?
• How much would the company need to sell for to give common shareholders value?
• Are there any acquisition discussions happening?
• What's the path to profitability or exit?

The Preference Stack Problem

VCs typically have liquidation preferences—they get paid before common shareholders in an exit. If the preference stack is high, common shares (your shares) may be worth nothing in many exit scenarios.

Exercise Strategies by Scenario

Your exercise strategy should depend on your specific situation. Here are common scenarios and recommended approaches:

Negotiating Extended Exercise Windows

One of the most valuable things you can negotiate in your exit package is an extended exercise window. This gives you more time to make the decision and potentially avoid AMT.

What to Ask For

• Extended window: 1-2 years instead of 90 days
• Full ISO period: 10 years from original grant (requires company cooperation)
• Conversion to NSO: If you want a longer window and are okay with NSO treatment

How to Negotiate

1. Request the extension as part of your severance negotiation
2. Explain that it costs the company nothing (no cash outlay)
3. Emphasize your tenure and contributions
4. Get it in writing as an amendment to your stock option agreement
5. Have an attorney review the amendment before signing

RSUs: How They're Different

If you have Restricted Stock Units (RSUs) instead of stock options, the rules are different—and generally simpler.

RSU vs. Stock Option Comparison

What Happens to RSUs When Laid Off

• Vested RSUs: You already own these shares—they're yours
• Unvested RSUs: Typically canceled upon termination
• Pending vesting: Some companies accelerate the next vest date
• Negotiation: Ask for acceleration of unvested RSUs as part of your exit package

The 83(b) Election Explained

An 83(b) election is a special IRS filing that lets you pay taxes on stock at grant rather than at vesting. It's only relevant if you have:

• Restricted stock (not options) that's subject to vesting
• Early-exercised options (exercised before vesting)

When 83(b) Is Beneficial

• You exercise options early at a very low strike price
• The current value (FMV) is close to your strike price
• You believe the company value will increase significantly
• You can afford to lose the money if the company fails

Your Decision Framework

Here's a structured approach to making your stock option exercise decision:

Step 1: Gather Information

• Confirm your exercise window deadline
• Get exact numbers: vested shares, strike price, current 409A
• Determine if you have ISOs or NSOs
• Calculate total exercise cost

Step 2: Assess Company Health

• Research recent funding, runway, growth metrics
• Understand the preference stack
• Evaluate realistic exit scenarios
• Talk to former colleagues if possible

Step 3: Calculate Tax Implications

• For ISOs: Calculate potential AMT exposure
• For NSOs: Calculate ordinary income tax at exercise
• Consider exercising across tax years if beneficial
• Consult a tax professional for large amounts

Step 4: Make Your Decision

• Can you afford to lose the exercise cost entirely?
• Is the risk/reward ratio favorable?
• What's your alternative use for this money?
• Would you invest this amount in this company today?

Step 5: Take Action

• If exercising: Complete paperwork before your deadline
• Have funds ready (check, wire, or cashier's check typically)
• Get written confirmation of your exercise
• Set up estimated tax payments if needed
• Keep all documentation for tax filing

Resources for Help

• Carta: Many companies use Carta for equity management
• Secfi: Stock option financing and advice
• ESO Fund: Non-recourse option exercise financing
• Tax professional: Essential for large exercises
• Employment attorney: For negotiating extensions