ESOP and equity after a layoff — what happens to your unvested shares

Equity compensation is one of the most misunderstood parts of a job offer and one of the most consequential parts of a layoff. Here is what actually happens to your ESOPs and unvested shares when your employment ends.

The difference between vested and unvested

Vested shares or options are ones you have already earned — the vesting cliff has passed and the time conditions have been met. Unvested shares are ones you were promised but have not yet earned. In almost all cases, unvested shares are forfeited when you leave a company, regardless of whether you resigned or were laid off.

This is standard. It is written into your ESOP agreement. Read it carefully to confirm, but do not expect exceptions.

What happens to your vested options

If you hold vested ESOPs — options to purchase shares at a predetermined price — you typically have an exercise window after your employment ends. This window is specified in your grant agreement and is commonly 30 to 90 days, though some companies offer longer periods.

After this window closes, unexercised options typically lapse. This means you lose them permanently. Find out your exercise window on your last working day and act before it closes.

The exercise decision — when it makes sense

Exercising options means buying shares at the exercise price. Whether this makes sense depends on the exercise price versus the current fair market value, your personal tax situation, and whether there is a realistic path to liquidity — an IPO, acquisition, or secondary sale.

If the exercise price is higher than the current fair market value, exercising makes no sense. If the shares are in an early-stage startup with no near-term liquidity event, think carefully before spending real money on illiquid stock.

Tax on exercise

In India, the exercise of ESOPs is a taxable event. The difference between the fair market value at the time of exercise and the exercise price is treated as a perquisite and taxed as salary income. When you eventually sell the shares, you pay capital gains tax on the difference between the sale price and the fair market value at exercise. This can result in a large tax bill on money you have not yet received. Factor this in before exercising.

RSUs — a different structure

Restricted Stock Units are different from options. RSUs are grants of actual shares that vest over time. Unvested RSUs are forfeited on termination. Vested RSUs that have been delivered to you are yours. If your RSUs were vested but not yet delivered at the time of your layoff, check your agreement — some companies complete delivery within a short window after termination, others do not.

What to ask your company before your last day

Get a complete statement of your equity position in writing — grant date, number of shares, exercise price, vesting schedule, shares vested to date, and exercise window post-termination. Ask whether there is any accelerated vesting clause for involuntary termination. Some agreements include this. Most do not, but it is worth asking.

Do not leave without this information. Equity disputes after employment ends are difficult to resolve.