Exercise windows and what happens when people leave

1. The core idea#

When someone leaves, three questions decide what their equity is worth to them:

1. What happens to unvested options? Almost always, they lapse and return to the pool.
2. How long do they have to exercise vested options? This is the post-termination exercise period (PTEP), or exercise window. The US default is 90 days, a figure that comes from the ISO tax rules rather than from fairness.
3. Does the reason for leaving matter? Good leaver and bad leaver rules can let the company take back vested options, or buy back shares, if someone is dismissed for cause or joins a competitor.

A short window forces a hard choice: pay the strike price, and often a tax bill, within weeks, for shares in a private company with no market, or lose them. Many people walk away. That feels cheap for the company, since options return to the pool, but it undermines equity as a reward, creates resentment among alumni who become customers, investors and referrers, and pushes employees to stay only to avoid losing options.

The better default for most deeptech startups is a longer window for good leavers (one to ten years), combined with the right tax planning and periodic liquidity, and clear, narrow bad leaver rules.

Who this is for: founders writing their option plan or leaver policy; anyone handling a departure, layoff or dismissal; anyone tidying up the cap table before a round or acquisition.

Pairs with: 3.12 (founder leaver terms), 5.02 (plan design), 5.06 (vesting), 5.08 (tax), 5.10 (buybacks).

2. What the evidence says#

90 days is the default. In a Carta sample, 82% of companies had a median posttermination exercise period of between 89 and 92 days. The window comes from the US tax rule that ISOs lose their status if not exercised within three months of leaving; it

requires no extra tax for anyone, so it became boilerplate. Some companies give only 30 days.

Most vested options are never exercised. Carta reported that startup workers exercised just 23% of their vested options before expiry in Q4 2023, down from 31% a year earlier. The rate tracks the economy: it was 44% in Q1 2022 and 46% in late 2021, when valuations and savings were high. At 386 private companies valued above $1 billion, almost 50,000 workers walked away from fully vested options in 2022 alone.

Extended windows are spreading, especially in downturns. Companies offered an extended window on 20% of options held by terminated employees in Q1 2023, the second-highest rate in five years, often as part of layoffs. Buffer, Carta, Coinbase, Mixpanel and Pinterest are among companies that have extended their windows; Pinterest gives former employees up to seven years. Carta's own policy matches the window to tenure: someone who leaves after three years has three years to exercise.

The trade-offs are real but manageable.

• Tax: for US employees, options exercised more than three months after leaving are taxed as NSOs, not ISOs. Companies must still handle withholding on those exercises.
• Dilution: options stay outstanding longer instead of returning to the pool, so the pool may need to be a little larger.
• "Rest and vest": some worry long windows reduce the incentive to stay. In practice, unvested options and refresh grants provide that incentive; vested options are already earned.

Early exercise helps. Carta has found that employees who can exercise early tend to exercise more of their options, and about 15% of options on Carta could be early exercised, a share that has been stable for years.

3. The method: a leaver policy#

Step 1: Define good and bad leavers narrowly#

Keep "cause" specific and objective. A vague definition ("poor performance", "any breach") invites disputes and is seen as unfair by candidates.

Step 2: Choose the exercise window#

A common choice for deeptech startups: 12 months or tenure-matched for good leavers with at least two years' service; 90 days otherwise.

Step 3: Plan the mechanics#

• Exercise process: an online form or cap table tool, with payment by bank transfer, and tax computation and withholding where needed (5.08).
• Shareholder rights: small ex-employee holders usually sign up to the SHA or a holding arrangement with drag-along and voting proxies, so they don't complicate future rounds or sales.
• Communication: at exit interviews, give each leaver a written summary: vested options, strike price, window end date, estimated tax, and how to exercise.
• Liquidity: buybacks or secondary sales give former employees a way to realise value without exercising first (5.10).

Step 4: Apply it consistently#

Use the same policy for everyone, including in layoffs. Ad hoc extensions for some leavers create claims of unfairness from others. If you want to extend windows in a layoff, extend them for the whole group.

Worked example#

A 40-person Indian materials company with a Singapore parent changes its option plan before a Series A.

• Old plan: 90-day window for all leavers; "cause" defined as "any breach of company policy".
• New plan: good leavers with 2+ years' service get a window equal to their tenure (up to 5 years); others get 6 months. Cause is limited to fraud, gross misconduct and material breach of confidentiality or IP terms. Ex-employees who exercise sign a deed of adherence to the SHA, with a drag-along and a voting proxy to the board.
• Amendment process: because the change benefits option holders, the board approves it, and the company confirms with counsel that no shareholder vote is needed under the Singapore plan, and that Indian employees' tax position is unchanged.
• First use: when two senior scientists leave after three years, they get three years to exercise. One exercises during a company buyback 14 months later, selling 30% of her shares to fund the tax on the rest. The other keeps her options until the Series B secondary.
• Result: in the Series A diligence, the lead investor asks only that the window be capped at 10 years from grant, which the company accepts.

4. Country notes: India, US, UK#

India.

• The scheme decides. The Companies Act rules let the ESOP scheme set the exercise period and leaver treatment. The rules require that options vest immediately on death or permanent incapacity, and that legal heirs (on death) can exercise.
• Resignation and termination are handled by the scheme; many Indian schemes allow vested options to be exercised within a set period (often 3–12 months), or only at a liquidity event.
• Tax on leaving: for employees of eligible startups using the tax deferral, leaving is a trigger: tax on exercised shares becomes payable within 14 days, even if the shares are still illiquid (5.08). Factor this into the timing of exercises.

• Bad leaver buybacks: if the company wants to buy back exercised shares from a bad leaver, it needs a contractual right (in the SHA or articles) and must comply with buyback rules under the Companies Act (5.10).

• Post-employment non-competes are void (4.09), so "joining a competitor" cannot be enforced as a restraint, but it may still be possible to treat it as a condition of keeping unexercised options. Take advice.

US.

• ISO three-month rule: ISOs exercised more than three months after leaving (one year for disability) are taxed as NSOs. The plan can allow a longer window; the employee simply loses ISO treatment.
• Modifying windows: extending the window for existing ISOs is a modification that can convert them to NSOs, even if not exercised later. Plan extensions carefully and tell employees.
• Section 409A: extending the exercise period of an option granted at FMV is generally permitted up to the earlier of the original term or 10 years from grant.
• Former employees as shareholders count toward Exchange Act holder limits (2,000 holders, or 500 non-accredited); Rule 12g5-1 excludes holders under employee compensation plans, but check as the company grows.

UK.

• EMI: leaving employment is a disqualifying event; options keep their EMI tax advantages only if exercised within 90 days. The plan can allow longer, but exercises after 90 days are taxed like unapproved options.
• Good and bad leaver provisions for shares are normally in the articles of association, with compulsory transfer of shares at fair value (good leaver) or the lower of cost and fair value (bad leaver). Courts generally uphold these in startups if clearly drafted.
• Exit-only EMI options avoid the 90-day problem: leavers keep vested options until a sale, when they are exercised and sold at once. With the 15-year EMI term from April 2026, that can be a long time.

5. Scripts, mistakes, related playbooks, sources#

Scripts#

At an exit interview:

"You have [n] vested options at [strike price]. Under our plan, as a good leaver you have until [date] to exercise. Exercising would cost [amount] plus estimated tax of about [amount] (please check with an adviser). We'll let you know about any buyback or secondary sale before then. Here is the form and the process."

Announcing a longer window:

"We've changed our option plan so that people who leave on good terms after two years get as long to exercise as they worked here, up to five years. We don't want anyone to lose options they earned because they couldn't find the cash in 90 days."

In a layoff:

"Everyone affected keeps their vested options, with the exercise window extended to [12 months]. [For US staff: this means your ISOs will be treated as NSOs if exercised after three months.] We'll include you in any liquidity programme during that period."

Common mistakes#

1. Keeping the 90-day default without thinking about whether employees can afford to exercise.
2. Vague "cause" definitions that let the company claw back vested options arbitrarily.
3. Extending windows ad hoc for some leavers and not others.
4. Not telling US employees that longer windows convert ISOs to NSOs.
5. Ignoring tax triggers on leaving in India's deferral scheme and the UK's EMI rules.
6. No holding mechanism for ex-employee shareholders, complicating later rounds and sales.
7. No written summary for leavers, so they miss deadlines.
8. Clawbacks of vested equity for joining competitors in India, where such restraints are void.

Related playbooks#

• 3.12 Co-founder breakups: buybacks and good/bad leaver terms
• 4.09 Employment contracts, NDAs and invention assignment
• 5.02 ESOP plan design: India (Companies Act rules) vs US (ISOs and NSOs)
• 5.06 Vesting schedules, cliffs and back-loaded vesting
• 5.08 ESOP tax: Indian perquisite tax and the deferral for DPIIT startups; US ISO and AMT
• 5.10 ESOP buybacks and liquidity programmes

Sources#

• Carta: post-termination exercise period guide (82% median PTEP of 89–92 days); UK PTEP guide (23% exercised in Q4 2023; ~50,000 workers at $1B+ companies in 2022); Q1 2023 exercise data (20% extended PTEP); Q1 2023 blog (44% in Q1 2022); 90-day window explainer (Carta's tenure-matched policy); Pinterest seven-year window; State of employee exercise 2020.
• India: Companies (Share Capital and Debentures) Rules 2014, rule 12. US: IRC s.422(a) (2); Treas. Reg. 1.409A-1(b)(5)(v)(C). UK: ITEPA 2003 Sch.5 paras 44–47 (disqualifying events).