RSU and ISO Equity After a Layoff: The 90-Day Rule and What It Costs

This guide covers what happens to each type of equity after a layoff, what the deadlines are, and how to make the calculation.

The Three Types of Equity and What Happens to Each

After a layoff, three categories of equity compensation each have different rules.

Restricted Stock Units (RSUs)

RSUs are shares of company stock that vest on a schedule. After a layoff:

• Vested RSUs (shares that have already vested before your last day) are yours. You own them outright. They are not affected by the termination.
• Unvested RSUs (shares that would vest after your last day) are typically forfeited unless your equity grant or severance agreement specifies otherwise.

For private company RSUs, additional complexity exists. Many private RSUs are double-trigger, vesting only when both a time condition and a liquidity event (IPO or acquisition) occur. After a layoff, the time-based vesting often stops, and any remaining unvested portion is forfeited.

Source: Internal Revenue Service Publication 525, Taxable and Nontaxable Income (irs.gov)

Incentive Stock Options (ISOs)

ISOs are options to buy company stock at a fixed price. After a layoff, the standard treatment is harsh:

• You typically have 90 days from your last day worked to exercise vested ISOs.
• Unexercised ISOs after 90 days lose their ISO tax treatment. They convert to Non-Qualified Stock Options (NQSOs) automatically.
• After the period stated in your equity grant (often 90 days, sometimes longer), unexercised options expire entirely.

Source: Internal Revenue Service Publication 525, Section on Stock Options (irs.gov)

The 90-day rule originates in IRS Section 422, which sets the conditions for ISO tax treatment. To preserve ISO tax benefits, exercise must occur while you are still an employee or within 3 months of separation.

Non-Qualified Stock Options (NQSOs)

NQSOs are options without the tax preferences of ISOs. Their post-termination exercise window is set by your equity grant, not by federal tax law. Common windows:

• 90 days post-termination (most common)
• 1 year post-termination (less common)
• The remainder of the original grant term (rare; usually only for executives or in special situations)

Read your equity grant documents to determine your specific NQSO post-termination window.

The 90-Day ISO Decision: Exercise or Lose

If you have vested ISOs at the time of your layoff, you have a decision with three options.

Option 1: Exercise within 90 days, hold the shares

You pay the exercise price (your strike price multiplied by the number of shares). You now own the shares. You owe potential Alternative Minimum Tax on the difference between the exercise price and the fair market value at exercise (the spread), even though you have not sold.

This is the option that preserves the long-term capital gains tax treatment if you hold the shares for at least 1 year after exercise and 2 years after grant.

Capital required: exercise price plus AMT exposure.

Option 2: Exercise within 90 days, sell immediately (cashless exercise or same-day sale)

You exercise and sell on the same day. The spread between exercise price and sale price is taxed as ordinary income (because the holding period is too short to qualify for long-term capital gains).

You receive cash equal to the spread, minus exercise cost and taxes.

Capital required: minimal if a cashless exercise is available; otherwise the exercise price (refunded from the sale proceeds same day).

Option 3: Let the ISOs expire

Do nothing for 90 days. The options expire worthless. You owe nothing and receive nothing.

This is the right choice if your strike price is higher than the current fair market value (the options are underwater). It is also the right choice if you cannot fund the exercise and the AMT exposure outweighs the potential upside.

How to Calculate Whether to Exercise

Three numbers determine whether exercising makes sense.

Number 1: Total exercise cost. Strike price multiplied by number of vested options. Example: 10,000 ISOs at $5 strike equals $50,000 to exercise.

Number 2: Spread (potential AMT exposure). Current fair market value minus strike price, multiplied by number of vested options. Example: 10,000 ISOs at $5 strike, current FMV $25, equals $200,000 spread.

Number 3: AMT impact. The Alternative Minimum Tax kicks in when the spread plus your other income exceeds the AMT exemption. For tax year 2026, the AMT exemption is $90,100 for single filers and $140,200 for married couples filing jointly.

Per the One Big Beautiful Bill Act (OBBBA), the exemption phases out at 50% of alternative minimum taxable income (AMTI) above $500,000 for single filers and $1,000,000 for married couples filing jointly. This higher phaseout rate means more high-income filers will owe AMT in 2026 than in prior years.

Source: Internal Revenue Service Revenue Procedure 2025-32, Alternative Minimum Tax (irs.gov)

The AMT calculation is genuinely complex. A $200,000 spread often produces $40,000 to $60,000 of AMT for a high-income filer. If you do not have liquid cash to pay both the exercise cost and the AMT, exercising may not be feasible regardless of the underlying value.

The Tax Trap That Catches Tech Workers

A common scenario:

In 2021, a tech employee at a high-growth private company exercised ISOs with a $5 strike price when the company's 409A valuation was $50 per share. The spread was $45 per share, multiplied by 50,000 options, equaling $2.25 million.

The employee owed AMT on the full spread, despite never selling a share. AMT bill: approximately $580,000.

In 2023, the company's valuation dropped to $15 per share. The shares the employee owned were now worth $750,000, but the AMT bill from the exercise remained.

The employee owed $580,000 to the IRS but only had $750,000 of illiquid private stock to show for it. If the company never goes public or stays private at a lower valuation, the AMT credit recovery is slow and may never fully recover.

Source: Internal Revenue Service Form 6251, Alternative Minimum Tax for Individuals (irs.gov)

The Extended Exercise Window Strategy

Some companies offer extended ISO exercise windows in their equity grants. Common extensions:

• 1 year post-termination instead of 90 days
• 5 years post-termination
• Original 10-year option term (rare; primarily seen at companies that emphasize talent-friendly equity terms)

If your company offers an extended window, two things happen:

• You have more time to decide whether to exercise.
• After 90 days, ISOs convert to NQSOs and lose preferential tax treatment.

This means an extended window does not preserve ISO tax benefits past 90 days. It only preserves the option to exercise. The decision math becomes: exercise as ISOs within 90 days for tax preference, or exercise later as NQSOs for the strategic value of the option.

RSU Considerations Beyond the Layoff

For RSUs, the more complex questions arise around taxation rather than expiration.

Tax timing on already-vested RSUs

RSUs are taxed as ordinary income at vesting. By the time you are laid off, vested RSUs have already been taxed. Your former employer has already withheld taxes (usually at the 22% supplemental rate, sometimes at 37% for higher earners).

If your effective tax rate is higher than 22% and your employer used the supplemental rate, you may owe additional tax at year-end. This is a frequent tax surprise for laid-off senior tech workers with high RSU income.

Source: Internal Revenue Service Publication 525 (irs.gov)

Capital gains on RSU sales after layoff

When you sell vested RSUs, the gain or loss is calculated from the price at vesting (your cost basis), not the original grant price.

If RSUs vested at $80 per share and you sell at $100, your taxable gain is $20 per share, plus or minus brokerage costs. If you held the shares for more than 1 year after vesting, the gain is long-term capital gains. If less than 1 year, short-term (taxed as ordinary income).

Selling RSUs to fund living expenses

After a layoff, vested RSUs are often the most accessible source of cash. Consider:

• Tax basis: shares with a higher cost basis produce smaller taxable gains when sold.
• Holding period: shares held more than 1 year qualify for long-term capital gains rates.
• Concentration risk: holding most of your net worth in former-employer stock is risky regardless of tax considerations.

ESPP Considerations

If your employer offered an Employee Stock Purchase Plan, layoff terminates your participation in the current offering period. Two scenarios:

• If your last day is before the next purchase date, contributions made during the offering period are usually refunded.
• If your last day is after the next purchase date, the shares may have been purchased before termination. Those shares are yours, subject to ESPP-specific tax rules.

Disqualifying dispositions (selling ESPP shares within 1 year of purchase or 2 years of offering) trigger ordinary income tax on the discount portion.

Source: Internal Revenue Service Publication 525 (irs.gov)

Frequently Asked Questions

What if my company is private and I do not know the current valuation?

The most recent 409A valuation (the company's official internal valuation) is your reference point. If you have not seen it, request it from finance or HR. By federal law, employees should be able to access information about their equity grants.

Can I roll over ISOs into an IRA?

No. ISOs cannot be rolled into a tax-advantaged account. Once exercised, the resulting shares can be held in a brokerage account, but the ISOs themselves cannot be transferred.

What if my severance includes accelerated vesting?

Read the agreement carefully. Some severance terms accelerate vesting on equity that would have vested in the next 6 to 12 months. If accelerated, the additional vested shares are subject to the same rules as previously vested equity (90-day ISO exercise window, etc.).

Can I negotiate an extended exercise window in my severance?

Yes, this is one of the most common severance negotiation points for senior employees with significant ISO holdings. Extended windows of 1 year are sometimes available, especially at smaller companies where there is no formal severance template.

How Layoff HQ Tracks This for You

Layoff HQ calculates your specific ISO exercise deadline based on your last day worked. We send reminders at 60 days, 30 days, 14 days, and 7 days before the window closes. We also model the AMT exposure for your situation and present the cost in dollars before each decision point.