Your first engineer is leaving after two good years. They have vested options, and the standard grant gives them 90 days after they leave to exercise or lose them. They ask whether you can extend it. Short answer: a longer post-termination exercise window is one of the cheapest retention and fairness tools an early company has, and it is easier to decide as a policy before anyone leaves than as a favor when they do. The catch is tax: incentive stock options exercised more than three months after employment ends are treated as non-qualified options, so a longer window trades some tax benefit for time.
This is about US stock options and is not legal or tax advice. Changing existing grants involves your board and your lawyer.
Why 90 days became the default
It comes from the tax code, not from fairness
Incentive stock options, or ISOs, get favorable tax treatment under Section 422 of the tax code, and one of the conditions is that the option is exercised within three months after employment ends. Most startup plans copy that limit into every grant as the expiry date. So the 90-day window is less a policy choice than an inherited default.
What it does to a departing engineer
To keep vested options, the engineer has to pay the strike price for all of them within 90 days. If the company has grown, exercising may also trigger tax on the spread between strike price and fair market value, and for ISOs possibly alternative minimum tax. They are paying real cash for illiquid private stock, with a deadline set by the day they resigned.
For an engineer who joined at seed and leaves after a Series A, that can mean tens of thousands of dollars on short notice. Many simply let the options expire. The equity they earned over two years disappears, not because they did anything wrong, but because they could not write a check in time.
Why this matters more for your first engineers
Early equity is the main thing you offered
Your first engineers took a lower salary for a meaningful grant. We discuss that trade in what to pay your first engineer. A 90-day window quietly reduces what that grant is worth, and engineers who have been around know it. Some ask about the exercise window in the offer stage now.
It creates golden handcuffs you did not intend
An engineer who has lost interest but cannot afford to exercise may stay anyway, to avoid losing the equity. That is not retention. It is someone waiting out the clock while their work quality drops. We covered the boredom pattern in your first engineer will get bored around month 18. A longer window lets people leave when it is time, which is healthier for both sides.
It shows up in references and reputation
When investors call former engineers, which they do, as described in what investors hear from your former engineers, how you handled their equity on the way out is part of the story.
The options you have
Keep 90 days
Simple and standard. It preserves ISO treatment for those who can afford to exercise. It is defensible, but it should be a deliberate choice, not an accident.
Extend the window for everyone
Some companies give a longer window, from one year to as much as ten years from grant, to everyone who leaves after a minimum tenure. Options exercised after the three-month mark lose ISO status and are taxed as non-qualified stock options, so the spread at exercise is ordinary income. The engineer gets time. They give up some tax advantage. For many people, time is worth more.
Extend by tenure
A common middle ground: 90 days for anyone who leaves in the first year or two, a longer window after that. This rewards people who stayed through the hard early stretch without making the first-year departures expensive to administer.
Extend case by case
Boards can amend an individual's options when they leave. That works, but it puts the departing engineer in the position of asking for a favor, and it invites inconsistency. If you would say yes to your best engineer, consider saying yes to everyone who meets the same criteria in writing.
What it costs the company
Dilution and the option pool
Unexercised expired options return to the pool. A longer window means more of them stay outstanding for longer, so your pool may need topping up a little sooner. At a small team this is usually a small number. Model it before you decide.
Administration and accounting
Changing an existing grant is a modification. It needs board approval, may need the employee's consent where ISO status changes, and can create an accounting charge. Your cap table provider and lawyer can do this cleanly. It is not a weekend project, but it is not a big one either.
Investor questions
Most investors are familiar with extended windows and do not object. A few ask about the overhang of outstanding options held by former employees. A clear written policy answers that better than a collection of one-off amendments.
A practical way to decide
- Find out what your plan and grant template say today.
- Decide the policy for new grants: the window, and any tenure condition.
- Decide whether to offer it to existing employees, knowing that changing an existing ISO may change its tax status and needs consent.
- Put it in writing and mention it at offer time. It is a real selling point in a tight market for senior engineers.
If you are working through equity design alongside your first hires and want a technical leader's view of what engineers actually value, that is a reasonable thing to raise in a call with Fraction. The legal drafting stays with your lawyer.
FAQ
Does extending the window cost the company cash?
Not directly. The main costs are option pool usage, a possible accounting charge, and legal time to amend the plan or grants.
Can we extend the window only for one departing engineer?
Yes, the board can approve an amendment for an individual. Doing it consistently under a written policy is fairer and easier to explain later.
Do the options stay ISOs if we extend?
The extension itself does not convert them, but if the engineer exercises more than three months after leaving, those options are taxed as non-qualified options. Changing an existing ISO can also count as a modification with its own tax effect, so ask your lawyer before amending.
What window do companies usually choose?
There is no single standard. Ninety days remains the most common. Extended windows of several years, sometimes up to the full ten-year option term, are offered by a meaningful minority of startups, often tied to a tenure requirement.