The 90-Day Post-Termination Exercise Window: A Critical Guide for Employee Stock Options

When you leave your company, whether voluntarily or involuntarily, one of the most important considerations is what happens to your stock options. Most companies implement a 90-day post-termination exercise window, which can have significant financial implications if not properly understood and planned for.

What Is the 90-Day Exercise Window?

The 90-day post-termination exercise window is a standard provision in most stock option plans that gives former employees 90 days after their last day of employment to exercise their vested stock options. If you don't exercise within this window, you forfeit your options permanently.

Why 90 Days?

The 90-day window exists primarily because of IRS rules regarding incentive stock options (ISOs). To maintain preferential tax treatment, ISOs must be exercised within 90 days of termination. Companies typically apply this same window to non-qualified stock options (NSOs) for consistency and administrative simplicity.

Financial Implications

Example 1: The High-Cost Scenario: Let's say you're leaving a successful startup with the following situation:

• 50,000 vested options
• Strike price: $1 per share
• Current fair market value (FMV): $10 per share
• Total exercise cost: $50,000 (50,000 × $1)
• Paper value: $500,000 (50,000 × $10)

To exercise these options within 90 days, you would need:

• $50,000 in cash for the exercise cost
• Potentially additional funds for tax obligations
• Willingness to take on the risk of illiquid shares

Example 2: The Tax Surprise: Consider Sarah, a software engineer who left her company after four years:

• 75,000 vested ISOs
• Strike price: $0.50
• Current FMV: $15
• Exercise cost: $37,500
• Paper value: $1,125,000

If Sarah exercises, she might trigger the Alternative Minimum Tax (AMT) on the paper gain of $1,087,500 ($15 - $0.50 × 75,000), even though she hasn't sold the shares. This could result in a significant tax bill due the following April.

Strategic Considerations

Early Exercise Planning: Best practice: Start planning for potential exercise costs well before leaving. Consider:

• Building a dedicated savings fund for exercise costs
• Understanding your company's secondary sale policies
• Investigating exercise financing options

Partial Exercise Strategy: If you can't afford to exercise all options, consider a partial exercise approach. Example:

• Total vested options: 40,000
• Available funds: $20,000
• Strike price: $1
• Strategy: Exercise 20,000 options now, accepting the loss of the remaining 20,000

Tax Planning Opportunities: Time your departure strategically if possible:

• Leaving early in the calendar year provides more time to plan for tax obligations
• Consider exercising across two tax years if the 90-day window spans December/January

Common Pitfalls to Avoid

Waiting Until the Last Minute: The exercise process often takes longer than expected due to paperwork and fund transfers. Start at least 30 days before the deadline.

Forgetting About Taxes: Always calculate your total cost including:

• Exercise price
• Federal and state taxes
• AMT implications for ISOs
• Professional advisor fees

Assuming Extensions: While some companies may grant extensions in special circumstances, never count on this possibility in your planning.

Action Steps Before Departure

Request your current option statement showing:

• Number of vested and unvested shares
• Strike prices
• Option types (ISO vs. NSO)
• Exact exercise window dates

Calculate your total exercise costs:

• Base exercise cost
• Estimated tax obligations
• Transaction fees

Consult with financial and tax advisors to:

• Develop an exercise strategy
• Understand tax implications
• Plan for liquidity needs

Special Circumstances

Extended Exercise Windows: Some companies offer extended post-termination exercise windows (e.g., 5-7 years or even 10 years). If your company offers this, understand:

• The tax implications (ISOs convert to NSOs after 90 days regardless of the extended window)
• Any special conditions or requirements
• How this affects your exercise strategy

Company Acquisitions: If your company is acquired, your exercise window might be affected. Example scenario:

• Company announces acquisition closing in 120 days
• You leave 60 days after announcement
• Your 90-day window might be shortened to end at acquisition closing

The 90-day post-termination exercise window creates a critical decision point for employees with stock options. Success requires careful planning, understanding of the financial implications, and often significant capital. Start planning well before your departure date, and always consult with financial and tax advisors for your specific situation.