Startup Equity in Your SF Severance: What Happens to Stock Options

You joined an SF startup because of the equity. Maybe it was a pre-seed company in the Mission, maybe a Series B company that just moved into new offices South of Market. Either way, a meaningful chunk of your compensation came in the form of stock options, and now you're being let go. The cash severance they're offering is probably modest. The real question is what happens to your equity.

Vested vs. Unvested: The Basic Split

Vested options are yours. You earned them. Your employer cannot claw them back through a severance agreement. But "yours" doesn't mean "free." You still need to exercise them (buy the shares at the strike price), and you typically have just 90 days after your last day to do it.

Unvested options disappear. If you're on a standard four-year vesting schedule with a one-year cliff and you leave at month 20, you have eight months of post-cliff vesting. The remaining 28 months of unvested options? They're gone unless you negotiate something different in your severance agreement.

For a lot of SF startup employees, the unvested portion represents tens or hundreds of thousands of dollars in potential upside. That number might be theoretical right now, but if the company goes public or gets acquired, it becomes very real. Don't let it vanish without a conversation.

The 409A Valuation Problem

Before you make any decisions about exercising your options, you need to understand the company's current 409A valuation. This is the independent appraisal of the company's fair market value that determines the strike price for new option grants. It also tells you what the IRS considers the current value of the shares.

Here's where it gets tricky. The last 409A valuation might be six or twelve months old. If the company has raised a new round, hit revenue milestones, or lost a major customer since then, the actual value of your shares could be significantly higher or lower than what the 409A reflects.

If the current fair market value is below your strike price (your options are "underwater"), exercising doesn't make financial sense right now. If the value is above your strike price, exercising locks in a gain, but you need to come up with the cash and deal with the tax consequences.

When negotiating your severance, ask for the most recent 409A valuation. You're entitled to enough information to make an informed decision about whether to exercise. If the company resists, that's a red flag.

Exercise Windows: 90 Days Is Not Enough

The standard post-termination exercise window for stock options is 90 days. For early-stage startup employees, this is often an impossible timeline. You just lost your income, and now you need to come up with $15,000 or $50,000 or $200,000 to buy shares in a company that might not have a liquidity event for years.

Push for a longer window. Bay Area companies have set meaningful precedents here. Some have adopted exercise windows of one to two years, and a few (like Coinbase and Pinterest before their IPOs) went as long as seven to ten years. Your company may not match those numbers, but there's a strong argument that 90 days is unreasonably short, particularly for early employees who were granted options when the strike price was pennies.

An extended exercise window is one of the most valuable things you can get in a startup severance negotiation. It costs the company very little (it doesn't dilute anyone else's ownership), but it gives you time to arrange financing, wait for a liquidity event, or simply make a decision when you're not in crisis mode.

Early-Stage vs. Late-Stage: Different Negotiations

The stage of the company changes everything about how you approach equity in severance.

Early-stage (pre-Series A, seed). The equity might be worth very little on paper right now. But the upside potential is highest. Your strike price is probably low, making exercise affordable. The negotiation here is about preserving your right to exercise if the company succeeds later. Push for the longest possible exercise window and ask for information rights so you can track the company's progress after you leave.

Mid-stage (Series A through C). The equity has real, if illiquid, value. Your strike price may still be low relative to the latest preferred stock price (though the gap between common stock and preferred stock value matters here). Negotiate for accelerated vesting, an extended exercise window, and clarity on any secondary sale opportunities. Some companies facilitate tender offers or secondary market transactions that could let you sell your shares before an IPO.

Late-stage (Series D and beyond, pre-IPO). The equity is potentially worth a lot. The strike price may be substantial. Exercise costs can run into six figures. The key negotiations are accelerated vesting, an extended exercise window, and whether the company will facilitate a cashless exercise. At this stage, the company may also be willing to buy back your vested shares at fair market value.

Accelerated Vesting: What You Can Ask For

Asking for accelerated vesting is standard in tech severance negotiations. The company will almost never volunteer it, but it's a recognized and reasonable request. Here are the typical asks:

Partial acceleration. An extra 3, 6, or 12 months of vesting credited to you at termination. This is the most common outcome. If you're close to a vesting milestone (like the one-year cliff), partial acceleration can make a big difference.

Full acceleration. All your unvested equity vests immediately. This is a major ask and is usually reserved for founders, executives, or situations where the company has significant legal exposure. But if you have leverage (a strong wrongful termination claim, for instance), it's on the table.

Double-trigger acceleration. This is more common in acquisition scenarios. Your equity accelerates only if two things happen: the company is acquired AND you're terminated within a certain period after the acquisition. If your offer letter or equity agreement already includes double-trigger language, make sure the severance agreement doesn't override it.

Tax Considerations

Exercising startup stock options has real tax consequences. ISOs (Incentive Stock Options) may trigger Alternative Minimum Tax (AMT) at the time of exercise if the fair market value exceeds the strike price. NSOs (Non-Qualified Stock Options) create ordinary income at the time of exercise. Talk to a tax advisor before exercising, especially if the amounts are large.

One more thing: if you received early-exercised restricted stock and filed an 83(b) election, your tax situation is different and potentially more favorable. Make sure your severance agreement doesn't interfere with the terms of that election.

Protect What You Earned

In San Francisco's startup ecosystem, equity is not a bonus. It's a core part of your compensation, and you likely accepted a lower salary in exchange for it. When you're being let go, don't treat the equity as an afterthought. It may be worth more than months of cash severance.

Before you sign anything, have an attorney review your severance agreement with a focus on the equity provisions. Contact our employment team for a free consultation. We work with startup employees throughout San Francisco and the Bay Area.