Author
Milo Poplar
Founder & Attorney (SF)
Your lead engineer resigned on Friday. She joined at seed, she has 40,000 options at a $0.30 strike, and your last 409A came back at $2.40. On paper she is up $84,000.
Her option agreement gives her 90 days from her last day to exercise. To exercise she has to wire the company $12,000 in cash for shares she cannot sell, in a company that may not exit for six years. If she does not, the options are gone. Not deferred, not paid out at exit. Gone.
She will find this out in week two, usually from a friend rather than from you. Then she will email you asking why nobody mentioned it, and the honest answer is that nobody has opened the plan document since the day it was signed.
The clock lives in a document you have probably never read
The 90 day post termination exercise window is not a law. It is a default sitting in almost every stock plan template, and it is there for a tax reason.
Incentive stock options (ISOs) generally keep their favourable tax treatment only if they are exercised within three months of employment ending. Past that point an ISO stops being an ISO and is treated as a non qualified option (NSO). The 90 day window exists to line up with that three month limit. It was never a considered decision about what is fair to your team.
If you are still deciding which award type to use, our breakdown of NSOs, ISOs and RSUs walks through what each one does to the employee on the way out, not just on the way in.
The number your engineer is actually looking at
The strike price is the small part. Run the real arithmetic before you tell anyone the window is generous.
Exercise cost: 40,000 options at $0.30 is $12,000, payable in cash, now.
The spread: the difference between the $2.40 valuation and the $0.30 strike is $84,000. For an ISO that spread is not ordinary income, but it is an alternative minimum tax adjustment item, which is how people who thought they owed nothing end up with a bill in April.
If she exercises on day 91: the ISO has become an NSO, and the spread is ordinary income and payroll withholding on the spot.
So the choice you are handing a departing employee is: find roughly $12,000 in cash, accept a tax exposure on paper gains, and hold illiquid stock in a company you are leaving. Or walk away from $84,000. Most people walk away. That is the part founders do not expect.
Your board has three real options
This is a board decision, not an HR decision, and it is worth making before someone resigns rather than during their notice period.
1. Leave the 90 days alone. It is the market default and it recycles unexercised options back into the pool, which keeps dilution down. It also means the people who built the early product mostly get nothing, and they will tell other engineers that.
2. Extend the window for everyone. Some companies move to a five or seven year window, or to the full remaining term of the option. The cost is real: extended options stay outstanding on your cap table for years, they are NSOs for tax purposes past the three month mark, and your pool does not refill. Investors will ask about it in diligence, so decide it deliberately and document the reasoning in the board consent.
3. Extend case by case. The most common approach and the most dangerous one. Extending for one leaver and not the next is how you end up explaining your decision criteria to a lawyer. If you go this route, write the criteria down first (tenure, reason for departure, seniority) and apply them without exception.
What early exercise changes
If your plan allows early exercise, the whole problem looks different, because people can buy the stock while it is nearly worthless and start their holding clock immediately. That has its own risks and its own 30 day filing deadline attached to it. We covered the mechanics and the consequences in detail in early stock option exercise and what it does to your startup.
Early exercise does not remove the 90 day question, but it means far fewer of your people ever hit it.
If someone has already resigned
Do these four things this week, in this order.
Open the plan document and the individual grant. The window can differ between them. The grant usually wins.
Calculate the exact last day to exercise and put it in writing to the employee. Do not leave them to work it out.
Send them the current 409A price and the exercise cost. They cannot make a decision without both numbers.
Decide the extension question at board level before you answer them, not in a reply sent at 11pm.
The firms that get this wrong are not the ones that chose 90 days. They are the ones that never chose anything, and found out what their plan said on the day it mattered.
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