This article tackles a very high class problem in the venture capital and startup world: what exercise periods are most appropriate for options following termination of employment. Over the last several years, startups and growth companies have reevaluated the standard approach to exercise periods for stock options, which typically expire 90 days after departure. As startups have increasingly become far more valuable pre-IPO, the cost to exercise those options can become prohibitively expensive, and employees who leave before an acquisition or IPO may be leaving millions or even tens of millions of dollars on the table.
It has been ‘market’ to have a 90-day post-termination exercise period (PTEP) on stock options, but companies like Quora and Pinterest have, in the last three years, been shifting that practice. Many employers today, especially in tech, are considering extending beyond that standard three-month post termination exercise deadline. Typically, startups consider extending PTEP during the growth stage rather than earlier in the startup’s life.
We – a deal lawyer and a compensation and benefits lawyer with more than 50 years of practicing law, almost evenly split between us – intend to cover in this article the current business, tax and legal issues involved as venture-backed startups and growth companies consider whether (or not) to extend PTEP.
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