Use It or Lose It: What Happens to Your RSUs and Stock Options When You’re Laid Off

For a lot of professionals, the salary is only part of the deal. The rest is equity: RSUs that vest every quarter, or stock options you’ve been quietly collecting for years.

It feels like money you’ve earned. Legally, most of it isn’t yours yet.

This week, that difference got real for a few thousand more people. Canva said on November 4 that 1,271 people, 22% of its staff, would lose their jobs, relocate or change roles (TechCrunch). Two days earlier, Squarespace announced it was cutting about 19% of its workforce (TechCrunch). Many of those people now face the same questions: What happens to my unvested shares? How long do I have to exercise my options? And where does the cash come from?

Here’s how it usually works, and what to do about it.

The Basic Rule: Vested Is Yours, Unvested Usually Isn’t

Equity grants come with a vesting schedule, the timeline on which you actually earn the shares. A typical schedule is four years with a one-year cliff, then monthly or quarterly vesting.

When your employment ends, the schedule usually stops on your termination date:

• Vested RSUs are already yours. The shares were delivered (and taxed) when they vested. You keep them.
• Unvested RSUs are usually forfeited, gone, as of your termination date.
• Vested stock options are yours to exercise, but only for a limited time (more on that below).
• Unvested stock options are usually forfeited too.

The exceptions are spelled out in your grant agreement and the company’s equity plan document. Some plans accelerate vesting if you’re let go without cause, or after a merger followed by a termination (often called “double-trigger” acceleration). Search those documents for “acceleration,” “termination without cause” and “change in control.” If the language isn’t there, assume unvested equity ends on your last day.

The Vest-Date Trap

Here’s where timing really matters. Your equity stops vesting on your termination date, which isn’t always the day you got the news.

If you’re laid off three weeks before a quarterly vest, those three weeks can cost you a full quarter of equity. The reverse can also be true: if your company keeps you on payroll through a notice period (for example under the WARN Act’s 60-day notice rule, or on “garden leave”), you may keep vesting until your official separation date.

Find out three dates right away:

1. Your official termination date, the date that will appear in your paperwork
2. Your next vest date
3. The date your option exercise window closes

If the next vest is close to your termination date, that’s your first negotiating point.

RSUs: Already Taxed, but Maybe Not Enough

Restricted stock units are taxed as ordinary income when they vest. The value of the shares on that day shows up on your W-2, just like salary (IRS Publication 5992).

The catch is the withholding. Employers usually withhold federal tax on vested RSUs at the flat 22% supplemental rate, or 37% on supplemental wages above $1 million in a year (IRS Publication 15). If you’re in the 32% or 35% bracket, 22% isn’t enough. Plenty of high earners only find that out in April.

A layoff year makes this trickier. Severance is usually treated as supplemental wages too. Your income may drop overall, which can help, but if you had a big year of vesting before the layoff, set money aside for the tax bill before you spend your severance.

And the shares you already own? Once they’ve vested, they’re just stock. Whether to hold or sell is an investment decision, but many advisors point out that having your job and a big chunk of your savings tied to the same company is a concentration risk, and a layoff is exactly when that risk shows up.

Stock Options: The 90-Day Clock

Options are where a layoff gets expensive fast, because keeping them costs money.

When you leave, vested options don’t last forever. You get a post-termination exercise period (PTEP) to buy the shares at your strike price. If you don’t, the options expire. Carta found that 85% of option grants have a 90-day window (Carta 2022 Employee Stock Options Report). Some companies give less. A growing number give more, but don’t assume yours does.

Ninety days goes fast when you’re also job searching, filing for unemployment and sorting out health insurance.

ISOs and the three-month rule

If your options are incentive stock options (ISOs), there’s a second deadline written into the tax code. To keep ISO tax treatment, you generally have to exercise within three months of leaving (26 U.S.C. § 422). Even if your company gives you a longer window, ISOs exercised after three months are treated as non-qualified options for tax purposes (NASPP). The three months becomes 12 if you left because of disability.

Exercising costs cash, and maybe taxes

• Non-qualified options (NSOs): the “spread” (the share value minus your strike price) is taxed as ordinary income when you exercise (IRS Topic 427).
• ISOs: no regular income tax at exercise, but the spread counts toward the alternative minimum tax (AMT). For 2026, the AMT exemption is $90,100 for single filers and $140,200 for married couples filing jointly, and it starts phasing out faster than it used to (IRS 2026 inflation adjustments).

At a private company you also can’t sell shares to cover the cost. You pay the strike price and any tax out of pocket, and you hope the company eventually goes public or gets acquired.

The Math: Meet Dana

Dana is a senior product manager at a late-stage startup. Her pay is a $200,000 base plus equity. She has:

• RSUs from a later grant worth about $20,000 per quarterly vest
• 10,000 vested ISOs with a $4 strike price. The company’s latest 409A valuation puts the shares at $12.

She’s laid off on November 10. Her next RSU vest is December 1.

What she loses on day one: the December vest (about $20,000) and every RSU tranche after it. The vest was three weeks away.

What she has to decide within 90 days: whether to exercise her ISOs.

• Cash to exercise (10,000 × $4): $40,000
• Spread counted for AMT (10,000 × $8): $80,000
• Can she sell shares to cover it? No, the company is private
• Deadline to keep ISO treatment: ~February 10 (three months)

So in the same three months that her paycheck stops, Dana has to find $40,000 in cash, possibly plus an AMT bill, to keep equity she spent years earning. Or she lets it expire.

Without a plan, people in Dana’s spot tend to do one of three things: let the options lapse, put the exercise on a credit card or margin loan, or pull money from a 401(k), which can cost far more than it looks once taxes, penalties and lost growth are counted. None of them are great.

What to Negotiate Before You Sign

There’s no federal law that requires severance, and the Department of Labor calls it “a matter of agreement” between you and your employer (U.S. Department of Labor). That works both ways: the company doesn’t have to give you anything extra, and nothing stops you from asking. Equity requests are common, and they often cost the company less than cash.

Ask for:

1. A separation date after your next vest. If you’re weeks away, ask to stay on payroll (even on leave) through the vest date.
2. Accelerated vesting of the next tranche, or a set number of months.
3. An extended exercise window for your options, for example one to five years instead of 90 days. (Remember: ISOs exercised after three months lose ISO treatment, so get tax advice.)
4. Cash in place of forfeited equity, if the company won’t change the grant itself.

Get any agreement in writing, in the severance agreement itself.

Your Equity Checklist for Layoff Day

• Download your grant agreements, the plan document and a vesting schedule from your equity platform before you lose system access
• Write down your termination date, next vest date and exercise deadline
• Check for acceleration or extended-exercise terms
• Figure out the cash needed to exercise and the possible tax (regular or AMT)
• Check whether your RSU withholding covered your actual tax bracket
• Talk to a tax advisor before exercising ISOs
• Ask for equity terms in your severance negotiation

The Real Squeeze: Equity Decisions With No Paycheck

Look at Dana’s situation again. Her biggest equity decision of the year shows up in the same 90 days that her salary stops. State unemployment won’t help much. Most states pay roughly $235 to $500 a week, which covers less than 15% of monthly expenses for many professionals.

That’s the gap Cushion was built to fill.

Cushion is private layoff insurance for professionals. If you’re laid off, it works alongside state unemployment to replace 40%, 50% or up to 60% of your verified gross income (combined with your state benefit), up to $10,000 a month for 2–5 months.

• It’s unrestricted cash. Spend it on rent, groceries or health insurance, so the savings you set aside for an option exercise can stay where they are.
• It’s yours. Cushion is individually owned and portable, and we never contact your employer or HR.
• It has to be in place first. Coverage begins after a 120-day vesting period (yes, insurance vests too), and benefits are paid once your state unemployment claim is approved.

Equity rewards you for staying. Cushion helps protect you when staying isn’t your choice.

You can’t buy coverage after the layoff notice arrives. The best time to protect your income is while you have it.

Get Cushion →

This article is for educational purposes only and isn’t tax, legal or investment advice. Equity terms vary by company and grant, so read your plan documents and talk to a qualified tax or legal professional before making decisions. Coverage options, limits, waiting periods, and policy availability vary by jurisdiction and are subject to underwriting approval and individual policy declarations.

Cushion provides private supplemental involuntary unemployment insurance. Coverage is subject to eligibility, underwriting and policy terms; a 120-day vesting period applies. Surplus lines policies are not protected by state guaranty funds. Cushion Insurance Agency, LLC acts as general agent and surplus lines broker (Resident CA Surplus Lines License #6019626; non-resident surplus lines broker licenses in its operating states). Coverage is underwritten on a non-admitted basis by an eligible surplus lines insurer, identified in your policy declarations. Claims are administered by Reserv on behalf of the insurer. Licenses & disclosures: needcushion.com/licensing