The 90-Day Clock: Post-Termination Exercise Windows and Extended Windows Explained
Leaving a startup starts a timer on your vested options. Knowing how long you have, and what the tax code does at three months, can prevent an expensive surprise.
When you leave a private company, your unvested options are gone, but your vested options survive for a limited time called the post-termination exercise period, or PTEP. For decades the standard has been 90 days. According to Carta's research on post-termination exercise periods, 82% of companies on its platform have a median window of between 89 and 92 days. In a year in which Bay Area layoffs have touched Meta, Oracle, LinkedIn, and Cisco, among others, the clock is starting for a lot of people.
Why 90 days became the default
The three-month figure comes from the tax code, not from company generosity. The statute governing incentive stock options requires that the holder be an employee at all times from grant until three months before exercise. An option exercised later than that cannot be an ISO. Companies that wanted their grants to qualify as ISOs simply wrote a 90-day window into the plan, and the practice spread.
The consequence is stark. If you do not exercise within the window, the options expire worthless, no matter how much time and effort went into earning them. Carta's data for 2022 found that nearly 50,000 employees at unicorn-valued companies walked away from fully vested options worth more than $1.8 billion in total, an average of more than $47,000 per person.
The cash problem
The reason so many people let options lapse is that exercising costs money at exactly the moment it is scarcest. Consider a hypothetical product manager with 15,000 vested ISOs at a $3 strike and a current 409A valuation of $18. Exercising costs $45,000 in cash, and the $225,000 spread is an alternative minimum tax preference item reported on Form 6251. With the 2026 AMT exemption of $90,100 for single filers, per the IRS inflation adjustments, a meaningful AMT bill is likely, all for shares that cannot be sold. Doing this while unemployed, with COBRA premiums running for up to 18 months under the rules summarized by the Department of Labor, is a serious financial decision rather than a formality.
Extended windows
A growing number of companies have extended their windows, some to several years and some to the full remaining term of the option. Carta notes that Pinterest gives former employees up to seven years, and that Carta's own policy matches the window to the employee's tenure. Extended windows relieve the pressure to exercise immediately and let a former employee wait for more information about the company's prospects.
There is a trade-off embedded in the tax code. Because an ISO exercised more than three months after leaving cannot qualify, options exercised under an extended window are taxed as NSOs: the spread is ordinary income at exercise, reported as compensation per IRS Topic 427, with federal supplemental withholding of 22% or 37% above $1 million under IRS Publication 15. In exchange, there is no AMT exposure. For many people the loss of ISO treatment is a reasonable price for the ability to wait, but it is a real cost worth understanding before you assume an extended window is purely a benefit.
Questions to answer before you leave
What exactly does your option agreement say about the exercise period, and does it differ for resignation, termination without cause, disability, or death?
Are your options ISOs or NSOs, and how would the tax differ under each method of exercise?
Can you afford the strike price and any AMT without touching your emergency reserve during a job search?
Is there any prospect of a tender offer or other liquidity that would let you sell some shares to cover the cost?
Some employees negotiate an extended window as part of a separation agreement, particularly in a layoff. Others use outside financing arrangements, which carry their own costs and risks and deserve careful review. Still others decide the odds do not justify the cash and let the options go, which can be a perfectly rational choice.
This article is educational only and does not constitute investment, tax, or legal advice. Please consult a qualified tax or legal professional about your own option agreement before the window closes.
Important Disclosures
Important Disclosures: Propulsion Capital Management is an investment adviser registered with the State of California Department of Financial Protection and Innovation. Registration does not imply a certain level of skill or training. This article is provided for general informational and educational purposes only and does not constitute investment, tax, legal, or accounting advice, nor an offer or solicitation to buy or sell any security or to adopt any particular investment strategy. The information is believed to be accurate as of the date of publication but is subject to change without notice; tax laws and regulations change frequently and their application depends on individual facts and circumstances. Nothing herein should be relied upon as a substitute for personalized advice from a qualified professional. Investing involves risk, including the possible loss of principal, and past performance is no guarantee of future results. Diversification does not ensure a profit or protect against loss. Any examples are hypothetical, are for illustrative purposes only, and do not reflect the experience of any client. Links to third-party websites are provided for convenience; Propulsion Capital Management does not endorse, and is not responsible for, the content of third-party sites. Propulsion Capital Management does not provide tax or legal advice; please consult your tax adviser or attorney regarding your specific situation.
