Managing Your Equity Through a Layoff

It’s no secret that the dramatic rise in interest rates over the last few years has been putting a big strain on the Tech industry. With the cost of capital incredibly high and the dramatic over-hiring that happened during COVID, it’s leaving a lot of incredibly smart and capable employees in a tough position when out of the blue layoffs happen. 

Spotify was the most recent example of this, laying off 17% of their staff or 1,500 people the other day. If you find yourself in this position you can find solace knowing that you are certainly not the only one this has happened to. Your experience and wealth of knowledge gained having worked at some of these large Tech companies will make you a top candidate for another firm.

What to do with your equity?

Every company for the most part has slightly different rules around the severance package you’ll receive what you can do with your vested or unvested RSU’s/ISO’s/NSO’s/ESPP’s (or in Spotify’s world - At the Money ESO’s and Out of the Money ESO’s). 

Vested RSU’s

RSU’s or Restricted Stock Units are a little more straightforward than Stock Options. Any vested RSU’s you have when you are laid off are considered owned by you regardless of what happens. You can hold them, you can sell all of them, you can sell a portion of them and keep the rest, etc. The decision really lies in what other goals you’re looking to accomplish and whether you need the capital, where the stock price is currently at, and where you think it will be in the future. This is unique to everyone’s specific situation so there is no one size fits all approach. 

Unvested RSU’s

Unvested RSU’s simply represents the portion of your RSU’s that haven’t met the time period yet set by the company where you actually get control over them. Unfortunately, those unvested shares will most likely be absorbed back by the company at your termination date. However, in some circumstances companies will actually allow you to collect some portion of the unvested RSU’s, say the RSU’s that were set to vest within the next month or two as an example. It’s important to check with HR to see what options you have there so you don’t leave money on the table. 

Stock Options

Stock Options, or ESO’s at Spotify, are slightly different than RSU’s. RSU’s are essentially treated like a bonus/cash when they vest, regardless of whether you choose to exercise them or not. Stock options aren’t actually considered “yours” until you elect to exercise them. The decision of when to exercise them, how much to exercise, the tax consequences of doing so and when to sell them is a topic for another post. However, when an employee is laid off, the options already exercised are considered owned by you and the remaining vested options you have that aren’t exercised will have to be exercised within a 90 day period of leaving the company. Any vested, unexercised options you have when you leave will be considered forfeited back to the company. 

In Spotify’s situation, the ATM ESO’s and OTM (Out of the Money) ESO’s are treated like NSO’s or non qualified stock options. This means that there is no special tax treatment upon exercise of these options and you’ll have to buy the shares out at that exercise price if you want to keep them. This can be a hefty price to pay for most employees, especially if you think the price of the stock has a high likelihood of decreasing in value after you buy them. If the current stock price is above the exercise price though, it could make sense to buy them over because you can then immediately sell them and collect the spread. 

With current stock prices for tech companies being at very low levels in comparison to previous years, this could be a good time to consider paying to exercise your vested options if you have the money to do so.

Cashless Exercises

Most employees don’t have enough cash on hand to fully exercise their vested NSO’s given the high cost of acquiring them. One way around this is something called a Cashless Exercise. A Cashless Exercise means the company or a brokerage firm offers you a loan to buy your vested options for say $100/share, with no money coming out of your pocket. Then after you exercise the options, you immediately turn around and sell the shares for say $125/share. Once you receive the proceeds, you’ll use them to pay off the loan and net the difference after all fees have been paid. Not every company offers this but it’s certainly worth asking about because this can be a lot of money for most employees. 

ESPP’s

ESPP’s or Employee Stock Purchase Programs allow you to purchase shares of your company stock at a discount (usually 15%) during a specified period every year. Like stock options, if you decide to participate in this program and buy the shares for a discount, you now own the options. One nuance though is that you can put money into this program all year but the company only uses those funds to purchase them for you during a short window throughout the year. If you just got laid off and had a bunch of money in this program, but never actually got the shares yet, the company owes you that money back. Lastly, any shares you did actually acquire through the program will be treated like options in the sense that you can choose to either sell them, or hold them beyond your employment period if you believe in the future of the company. 

In Closing…

It’s important that you consult an advisor or a CPA before making any decisions here. Everyone’s situation is different and a recommendation for one person might not make sense for another. 

Lastly, we’re here to be a sound board if you need us so don’t hesitate to reach out. There’s a lot of uncertainty/anxiety that can take over when you’re laid off, but there are better days ahead!